Management

contract
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A management contract is an
arrangement under which operational
control of an enterprise is vested by
contract in a separate enterprise that
performs the necessary managerial
functions in return for a fee.
Management contracts involve not just
selling a method of doing things (as with
franchising or licensing) but involve
actually doing them. A management
contract can involve a wide range of
functions, such as technical operation
and of a production facility, management
of personnel, accounting, marketing
services and training.

In Asia, many hotels operate under

management contract arrangements, as
they can more easily obtain economies
of scale, a global reservation systems,
brand recognition etc. It is not unusual
for contracts to be signed for 30 years,
and having a fee as high as 3.5% of total
revenues and 6-10% of gross operating
profit. Management contracts have been
used to a wide extent in the airline
industry, and when foreign government
action restricts other entry methods.
Management contracts are often formed
where there is a lack of local skills to run
a project. It is an alternative to foreign
direct investment as it does not involve
as high risk and can yield higher returns
for the company. The first recorded
management contract was initiated by
Qantas and Duncan Upton in 1978.[1]

Difference between
management contract and
franchising
In business management, franchising is
a contractual relationship between
franchiser (owner of the company) and
franchisee (buyer of a brand name). The
franchiser allows the franchisee to use
its trademark along with certain business
systems and processes in exchange for a
fee.[2]

Business students usually get confused

between the concepts of management
contracts and franchising. Although they
have much in common, such as they
both earn by selling intangibles[3] and are
both affiliated with another company, but
where a management contract acts as a
framework and provides formation and
structure to the company and its
members, franchisee remains an
independent businessman.[4]
Advantages and
Disadvantages of
Management Contracts
A businessman who owns several
companies, cannot distribute his
attention amongst every minute detail of
his companies. He needs some expert
assistance with his work so he can
concentrate on more broader aspects.
This assistance can be provided by the
contract management companies. On
hiring such companies, the owner will
have more time to concentrate on the
expansion of the business rather than
day-to-day working of the companies.
The businessman can distribute some of
his basic responsibilities to these
management companies such as
recruitment, deployment and retention.

There are several companies who cannot

reach the peak of success due to lack of
expertise in one field or another. Such
companies should hire contract
management teams. This way they
would not just be hiring an experienced
employee but an entire team of efficient
and experienced employees in technical
fields of management, accountancy,
marketing etc.

Management contracts gives

businessman an assurance of the
continuity of his business. This can be
illustrated through an example. A
manager or any employee may terminate
his job, leaving the business a hole in its
team for the smooth functioning of the
operations. A contract management
company can easily change few
employees without stirring the constancy
of the business model.[5]

Through management contracts, a

businessman can venture international
business opportunities without taking a
huge risk of putting his own physical
assets at stake. For example, the
Heathrow Airport Holdings Limited of
Britain retains general airport
management skills. In the EEUU
Heathrow serves the Indianapolis Airport
under a 10 years management contract.
It also provides retail management at the
air mall in the Pittsburgh Airport.[6]

Government uses management

contracts for the progress and
development of the skill of the local
managers and workers. They also
accolade management contract
companies to upgrade and operate
public utilities.[7]

Entering into a management contracts

might lead to difficulties and problems
for the business owners. By entering into
such agreements businesses are risking
their privacy. When a businessman
handover his company’s management to
a third party, he may enter into
confidential disputes. These contracts
makes the business expose to ethical
breaches, fraud and public exposer. The
information of the other contracts made
by the business is also available to the
management contract companies. Since
there responsibilities ranges from price
negotiation to stock control they have full
information about the vendors.
Management responsibilities includes
record of all employees, their personal
information and payments procedures.
Management contract companies have
the information of the business finance
also. This puts the business in a
vulnerable position.

Hiring an outside contractor makes it

difficult for the business to foresee the
number of conflicts that can occur. For
example, businessman hires a contract
management company for the
operations of the company. The
management company may in turn take
on the management of the supplier’s
company too. This can lead to several
compromises in the discounts, price
negotiations and suppliers way of
working. There can be even more
conflicts even the same management
company handles the management of
several competitors at same time.[8]

International management can be very

risky for the management companies. If
a country is going through a political or
social turmoil, the manager’s life is put at
risk to carry on the business in such a
situation.[9]

Some popular types of

management contracts
Hotel management contracts

Overview
Hotel management contract is a written
agreement between the owner and the
operator of the hotel. The base of this
relationship is that the operator handles
the day-to-day working of the hotel and
takes up all the additional responsibilities
such as maintenance, front office,
housekeeping, handling food and
beverages and sale. The management
contract company has the power to
recruit and fire the employees. The owner
will authorize and pay for the capital
project of the hotel but the responsibility
of it is assigned to the operator. The
hotel management contracts can be
lengthy and complicated. The negotiation
of this agreement focusing the power of
the owner and the rights of the operator.
The initial draft is offered by the
prospective operator. It usually is in favor
of the operator so that operator can seek
a long term contract. It doesn't want any
interference from the owner but at the
same time wants continuous supply of
investment for the expansion and growth
of the project.[10]

Purpose of this contract

The main purpose of this agreement is

that the investors of some hotels lack the
skill and knowledge of operating them.
They are mere businessman with good
financial status. They lack experience or
expertise in such field. Therefore, they
need the assistance of such
management companies who can get the
output of their investment.[11]

Major Elements of the Contract

- Terms and conditions of the agreement

- Length and durability of the agreement

- Procedure for early termination by either

party of the contract

- Insurance policies of the hotel and its

fixed assets

- Management company ownership or

investment required
- Contract terms in the event of sale of
the hotel

- Incentive fees earned or penalties

assessed related to operating
performance

- The exclusivity of the management

company

- Status of the employees[12]

Construction Management
Contracts

Overview

Construction management contract is

between the investor and the builder.
This is for use on construction projects.
This contract is usually appointed by the
client (investor) in the early stage. The
relationship between the client and the
management contractor usually covers
both the work of pre-construction and
construction activities.[13] The
management contractor is responsible
for all the administrative and operational
work of the construction project. The
investor is usually comes in the picture to
hire the management contractor and
then when the building of the project is
complete. The entire work in between
these two event is done by the
management contractor.[14]
The Managing Contractor is responsible
for sub-contract claims arising from its
own inadequate performance. It the
elements to be included in a project, and
the design of those elements, with the
management expertise of a contractor
organization to assist and advise in
developing the design, coordinating the
interface between design and
construction, undertaking the
construction and planning for and
remaining within a target cost and target
time for delivery of the project. [15]

Advantages

Advantages of construction agreements

are:
This agreement is most beneficial
when little guidance or information is
available in the initial stage of the
project while the project is
complicated and complex.
The management contracts acts as a
consultant in the early stage of
building.
The investor has to pay a single
management team rather than several
contractors and workers.
Management contracts fixes the price
of building the project enabling the
investor to calculate its finance and
profit
 This enable experts to control the
design, quality, cost of material used in
early stages.
The scope of making the project in
accordance to the preference of
customers are high.

Disadvantages

Disadvantages of construction
agreements are:

High risk of conflicts between the

manager and the investor.
The price is fixed in advance which
may change from time due to change
economy resulting in conflicts between
the investor and manager.[16]
See also
Outsourcing

References
1. http://www.iaccm.com
2. "franchising" .
http://www.businessdictionary.com/defin
ition/franchising.html . Retrieved
29 October 2014. External link in
|website= (help)
3. Lacoma, Tyler. "Differences Between an
Operating Agreement & a Franchise
Agreement" .
http://smallbusiness.chron.com/differenc
es-between-operating-agreement-
franchise-agreement-25768.html .
Demand Media. Retrieved 29 October
2014. External link in |website= (help)
4. Zhou, Zongqing. "The Differences
between Franchising and Management
Contract" .
http://purple.niagara.edu/zhou/franchise
.htm . College of Hospitality and Tourism
Management. Retrieved 29 October 2014.
External link in |website= (help)
5. Ray, Linda. "Advantages and
Disadvantages of Management
Contracts" .
http://smallbusiness.chron.com/advanta
ges-disadvantages-management-
contracts-18886.html . Demand Media.
Retrieved 31 October 2014. External link
in |website= (help)
6.
http://www.heathrowairport.com/about-
us/partners-and-suppliers . Missing or
empty |title= (help); External link in
|website= (help); Missing or empty
|url= (help); |access-date= requires
|url= (help)
7. Fundamenta's of international
business.
8. Ray, Linda. "Advantages and
Disadvantages of Management
Contracts" .
http://smallbusiness.chron.com/advanta
ges-disadvantages-management-
contracts-18886.html . Demand Media.
Retrieved 31 October 2014. External link
in |website= (help)
9. International business.
10. "Hotel management agreements" .
http://www.out-
law.com/topics/property/hotels/hotel-
management-agreements/ . External link
in |website= (help)
11.
http://www.4hoteliers.com/features/articl
e/7493
http://www.4hoteliers.com/features/articl
e/7493 . Retrieved 31 October 2014.
Missing or empty |title= (help);
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12.
http://wps.prenhall.com/wps/media/obje
cts/1010/1034988/ch12.ppt . Missing or
empty |title= (help); External link in
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|url= (help)
13.
http://www.jctltd.co.uk/category/constru
ction-management-contract
http://www.jctltd.co.uk/category/constru
ction-management-contract . Missing or
empty |title= (help); External link in
|website= (help)
14.
http://www.designingbuildings.co.uk/wiki
/Management_contractor
http://www.designingbuildings.co.uk/wiki
/Management_contractor . Retrieved
31 October 2014. Missing or empty
|title= (help); External link in
|website= (help)
15. Kumar Neeraj Jha (2011).
Construction Project Management:
Theory and Practice. Pearson Education
India,. ISBN 9788131732496.
16.
https://consultations.rics.org/consult.ti/c
omparative.construction/view?
objectId=2425172
https://consultations.rics.org/consult.ti/c
omparative.construction/view?
objectId=2425172 . Retrieved 31 October
2014. Missing or empty |title= (help);
External link in |website= (help)

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