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by John Kaatz

When a company makes and sells a product, it’s absolutely critical to know how much the product costs to produce. The entire concept of pricing, discounting and yield management relies on the knowledge of product cost.

In the public assembly industry, it’s very common and relatively straightforward to estimate the building revenue (food & beverage, electrical, telecommunication, etc.) that an event can generate. It’s also a relatively simple matter to estimate the level of room tax that a non local event can generate. This information is useful in deciding whether (or how much) to offer as a discount on rent, and in making decisions as to which events to pursue or accept into the facility. It is less common to produce estimates of the actual expense incurred by a facility in hosting an event. In reality, this per-event cost varies greatly depending on the type of event, season, size, attendance level and related factors.

On the surface, estimating costs may seem like a simple concept, and for most product-oriented companies it can be. For public assembly facilities, the question is, “What will it cost to host a particular event compared to sitting dark?” Simple enough, but it seems as if the concept of event cost gets more and more complicated the more you look at it.

Why is Event Expense Accounting Important?
There are at least two important conditions that exist within the public assembly facility industry that seem to be drawing attention to the concept of event expense accounting, particularly for convention and conference centers. First, we are in an era of increasing focus on discounting of building rental. When a CVB or event promoter approaches a building manager with an event needing a discount, it would be useful for that building manager to be able to consider a business case as to the level of revenue needed simply to break even. In general, sports and entertainment venue managers already pay a lot of attention to event expenses as these calculations can be integral to agreements with event promoters.

Secondly, building management will often be required to decide between various short-term pieces of business to fill particular dates or whether to even accept an event booking based on economics. Accounting for the specific costs to host these events could be an important element during this decision process. In effect, understanding event costs can help the building manager benefit from a form of the yield management process that hotel management encounters on a daily basis.

In smaller markets and buildings, a convention or assembly facility can host upwards of 500 or 600 events annually, many of these of a local nature. It’s common for the local event producer to pressure management for a discount to rent. With high event levels from diverse demand segments, combined with a great deal of pressure to maintain a financial bottom line, the concept of yield management can be of particular importance for smaller facilities with diverse event patterns.

Some Issues Associated With Event Expense Accounting
Let’s look at event expense accounting on two ends of a spectrum. On one end, a facility manager can estimate the purely incremental costs of hosting an event versus remaining dark. These costs are largely utility related, with perhaps some non-base building event labor that would not otherwise have been used (i.e. contract labor for security or set-up staff). For the most part, all other costs, including base building salaries, maintenance, insurance, etc. will largely remain unchanged with or without the event in the building. This concept can be characterized as a “pure incremental cost” method.

You could also call this the “all discount, all the time” method when viewed in the context of a discount-seeking CVB. If event expense is relied on to help set a reasonable level of facility discounting, this method leads to minimized costs and a justification for larger discounts. Any event with enough food & beverage and other ancillary revenue to cover utility costs could receive a 100 percent discount on rent, or so the argument goes. For larger convention and trade events, the straightforward, “pure incremental cost” method may put the facility manager at a disadvantage when discussing a fair level of facility rent to be paid.

On the other end of the spectrum, event costs can be measured as both actual incremental costs plus a full allocation of prorated building expenses. For example, the costs for building salaries can be prorated based on events, square footage, attendance or some other measure and counted as an event cost. Very simplistically, if a facility hosts 100 events, 1/100 of all facility salary could be allocated on an event by event basis. Other facility costs could also be allocated similarly. In practice, some accounting for event size, attendance and type would also have to take place.

This “fully loaded cost” method would certainly lead to a presentation of higher per-event cost. But is this a reasonable basis under which to evaluate whether or not to pursue or accept an event at a facility, or to offer discounts to facility rent?

Some Things to Consider
In reality, building managers have a general sense as to which events would be more or less costly to host. Perhaps this could be considered more than just back of- envelope knowledge, but short of a more quantified approach to event expense accounting. The accuracy of the manager’s sense isn’t questioned here, but the ability to back this up with data may be lacking in some cases. Useful data may be missing that could assist in discussions with CVB’s and event producers. So, if an effort is to be made to put some numbers to the concept of event expense accounting, there are several things to consider.

• Take the middle ground – As a general rule, it may be useful to allocate pure incremental costs plus a pro-rated share of event related salaries (event coordinators, set-up, janitorial, security). You could exclude administrative related salaries, but every department that directly works with an event planner/promoter could be counted. In practice, you might take the previous year’s salary total, and divide this by various measures such as total attendance, or square footage, or number of events. The challenge here is to arrive at some allocation of event related salaries on a per-unit basis so that an allocation to a prospective event could be made.

• Take a real world approach to future data collection – It would seem unreasonable to track costs for every event in the facility. It may be useful to work with event coordinators to track the approximate hourly effort for selected events in various event categories and sizes. This can yield benchmark data as to event costs that can be applied to similar events in the future for purposes of assessing pricing or discounts. Utility costs can generally be monitored relatively easily to generate data as to incremental expenses.

• Don’t go overboard in search of data – It would certainly be possible to accurately track the activities of building staff on an hourly basis as they work various events. At least one building had code readers installed throughout the facility with instructions for staff to register their hours worked on each event. While this can create a mountain of useful data as to actual hours and costs to host an event, the time and dollar investment in data collection may be counterproductive.

Factors beyond event expenses such as room night generation and building revenue will always be critical in evaluating potential pricing, discounting and booking issues on a case by case basis. What we’re suggesting here is that generating a modest level of backup for event expenses and setting benchmarks for various event types and sizes should also be of consideration, perhaps more so than is common today. The value of this to a building manager may lie in a greater ability to communicate the financial realities of running a public assembly facility, particularly within a framework of expected budgetary performance as is often dictated by public sector facility owners.

John Kaatz is vice president of CSL International and is based in Minneapolis, MN. He can be contacted at jkaatz@cslintl.com.

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