If management decides to postpone a necessary repair, the savings will save expenses, but only postpone them to a later date. If a hotel has been operated with a lower-than-normal maintenance budget, it is likely that it has accumulated a considerable amount of deferred maintenance costs. In the end, an insufficient reserve of FF-E has a negative effect on the standard or classification of a property and can also lead to a decline in hotel performance and its value. The Business Dictionary helps define a management contract. According to the Business Dictionary, a management contract is “an agreement between investors or owners of a project and a management company that has been hired to coordinate and track a contract.” When negotiating compensation for a management company, an owner should ensure that the management company is encouraged to improve the profitability of the hotel. If the management company is paid too much a fixed fee or a royalty on the basis of gross revenue, the ultimate profitability of the hotel is ignored as a barometer for measuring the performance of the management company. If a management company`s royalty is linked to profitability, the company has an incentive to increase its turnover while controlling expenses. Remember that hotel fees are paid by the owner; The only incentive for the management company to keep these expenses low, in addition to professional liability to the owner, is a compensation formula that rewards the management company for improving the owner`s profits and cash flow. Under a management contract, the management company obtains the full framework in which it will work under the agreement. As part of a franchising agreement, the franchisee acts as a stand-alone company. The franchising agreement establishes a relationship between the franchisor and the franchisee. The franchisor owns the business, while the franchisee buys the right to use things like the company name and its trademarks.
Most management agreements provide for either fixed compensation as base compensation or a basic administration fee, based on gross revenue or the hotel`s gross operating margin. For some services provided by the management company, such as accounting services. B, salary processing services and marketing services, there may also be a separate fixed fee.