European Project Costs Can be a Hard Lesson in Margin Profits or Losses

When doing international market research many of US researchers find it annoying when the international vendor provides us costs in a currency other than US dollars. It takes time to find the currency conversion sites and switch all those numbers into a currency we can relate to. However time loss is not the biggest loss US researchers can incur.

In support of my international brother and sister researchers I support that they want and deserve to be paid in the currency of their choice. After all, it is the currency with which they pay their own expenses, right? What would most of us do with a million YEN? I don’t’ know about you but my telephone company only wants US dollars for payment on its service.

We all know the various economies are in flux these days, and maybe the currency most in flux (aside from our own US dollar) is the EURO. Depending on what source you use to track it, it changes daily, multiple times a day or hourly. Any number of things affects the value of a currency. It could be domestic politics, or international politics. It could be who was elected/crowned as President or King or Chairman, or who was NOT elected/crowned. It could be weather, or war or nearly anything. Because of this volatility, on any given day there is a 60% chance that the currency conversion rate that you find at 9am for an international project will be different at 4pm.

To simplify my point, below is a chart of the amount of US dollars that would have been taken out of your account on 5 different dates over the past 5 months for the same 50,000 EURO invoice.

Notice that if you asked your bank to wire the 50,000 EURO payment for the invoice on June 10, 2010 your bank would have taken $61,500 out of your account. However if you waited to pay the invoice on October 10, 2010 $70,000 would have been taken from your account. That is a $8,500 difference in cost for the exact same invoice. A hit like that could eat up profit margin we hope to make on our projects.

So how can you protect yourself?

There are a few ways to try and take the uncertainty out of the project estimates to invoice payment differences.

1 Buy Low Sell High
If you know you are going to be doing a considerable amount of work within one (or more) currencies, buy that currency when the conversion rate is low (why did I not buy a bunch of EURO when I saw it was way down this summer!!?? DRAT!) Then when you pay your international partner, you pay them in kind, dollar for dollar, yen for yen, ruble to ruble.

2 Define the Playing Field
I’ve not had much luck with this but others have. Agree beforehand what the project costs will be in US dollars. Your international supplier may cover themselves by proffering higher costs but at least you know what you get is what you will end up paying.

3 Advise and Alert
One Planet proposal all include the following caveat regarding project costs.
"As a convenience, the costs for the project are in USD. However due to volatile currencies exchange rates please consider our costs +/- 10% directly due to currency conversion rates posted today, the date of invoices and the date of payments.
Costs below are calculated from currency rates found today (insert date) on XE.com 1 EURO (or GBP or PLZ) = $x.xx USD."
Feel free to pirate this if you wish.