Management Contract

A management contract is defined as an agreement between a firm or investor and a management company that enables the latter to coordinate and oversee all operational functions of the former. It helps to lower the burden of operating a firm, which otherwise would have to expend additional staffing and capital for the same.

It also provides a best-suited channel to help the business achieve economies of scale, brand recognition, and global scaling. Usually, the contracts have a period of more than ten years. It may also entail a fee of up to 10% of the total revenue. As a result, the hotel and airline industries extensively use the method in their business activities.

• A management contract is a legal agreement that allows a firm to take over the responsibility of managing certain aspects of another company as bound by the agreement in place of a certain percentage of the revenue.
• It allows the owner of the company to handle core business more efficiently and by saving costs, but the risk of losing business privacy and confidentiality looms over them.
• It provides an opportunity to serve international clients in the absence of foreign staff without any foreign direct investment, like in the hotel and airline industry.
• A franchise uses the complete business model and brand to earn revenue by paying fixed royalties. In contrast, management contract firms only charge for managing the operational aspect assigned to it by the parent firm.

Management contract refers to a system of outsourcing the operational control of a firm to a different firm for it to perform all the managerial functions in exchange for certain fees under a legal agreement. For example, an organization hires a management company to hand over certain functions of the company to it. The management company then overtakes the function assigned and operates it in lieu of certain fees up to 10% of the revenue generated. The first ever recorded management contract was between Duncan Upton & Qantas in 1978.

It finds its usage mostly in those industries where the local skills do not match the skillset required to run the business. Plus, it involves the service provider to many international and high-class clients that require best-in-class services, amenities, and infrastructure. Moreover, one can see it as an alternative to foreign direct investments without involving huge investments and high risk, but it gives good returns.

Various such contracts exist, such as defense management contract agencies, project management contracts, property management contracts, and social media management contracts. The contract handling company needs an adept manager to handle the contract management process. The managers, before signing the contract, must ensure the inclusion of the three below-mentioned important components within it:

Let us look at the components of a management contract:

#1 - Duration

It specifies the period for which the contracted company will remain in charge of the management of the firm that it hired. It has to have certain terms and conditions to continue the contract. Failure to abide by them may get the contract terminated before the duration of the contract.

#2 - Conditions

It forms the most critical, detailed, and extensive section of the management contract. It contains:

• The identity of the parties involved
• The aspects of the company handed over
• The functions getting transferred to the management company
• Operational responsibilities of the management company

#3 - Fees

The last but most important component of the agreement is the fees. The contract must contain the payment system and method employed for the entire duration of the contract to the managing company. It can either be a percentage or a fixed amount of the revenue generated by the management company.

Let us go through some examples to understand the topic better:

Example #1

Walmart signed a fresh two-year agreement with Rubicon Technologies on Nov 2, 2022, to ensure proper waste management. Rubicon Technologies agreed to conduct waste diversion besides daily waste collection and recycling at retail shops. In addition, the agreement expanded the scope of the existing management contract and included green waste collection and landscaping collection within it as well.

Example #2

San Diego County, in 2022, announced that it entered into an emergency management contract with Genasys Inc. to allow it to handle and operate its regional notification system. Genasys Inc. was roped in to manage the critical notification services and emergency management of San Diego County, California. The contract covers an estimated 5.8 million population residing in two million housing units.

The communication solutions of Genasys Inc. offer more enhancement for the preparation against natural calamities and other safety hazards. There is timely deployment of alerts and warnings to the people in case of emergencies on top of upgraded leverage of the current infrastructure.

Let us look at the advantages & disadvantages of a management contract from the table below:

Let us check the differences between management contracts and franchises using the comparative table below:

This article has been a guide to what is Management Contract. Here, we explain its examples, advantages, disadvantages, components, and comparison with franchise. You may also find some useful articles here -

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