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A management contract can be a great way to reduce risk, maximise time and maybe even increase profit. This article shows what a management contract is and how it might benefit your business.
What is a management contract?
A management contract is an agreement by an enterprise owner. The agreement is usually with a management company hired to run the enterprise. The goal of a management contract is the successful running of a business. An example of this would be if someone bought a hotel without having hotel management experience. In order to run the business it becomes necessary to contract the management of the hotel to a separate company.
The terms of the management contract set the responsibilities of the property manager and also the fee for their service in managing the business. The written contract gives the operational control of the company to the management company.
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When should I use a management contract?
A common example of a management contract might be in the case of an investment property. For example, it would be difficult to manage a small rental property interstate or even overseas. In that case, the business may benefit using a management contract to hire a property manager. Some of the benefits of this include saving your time, reducing stress and potentially increasing your profit. A management contract can be used when there is a lack of management expertise and it will be more cost effective than self-management.
Management contract vs franchising
The key difference between a management contract and franchising is the way business risk is distributed in the partnership.
Under contract management an organisation hires a company to perform a specific task. It effectively gives operational control of a specific department like marketing, production or technology. Then the hired company makes all necessary decisions for that particular department to maximise profit and minimise risk.
Franchising is a licensing contract between the owner or agent of a company and a buyer of the brand name company. McDonald's is an example of franchising. Here the franchisee gets the right to use the trademark and name of the franchisor. The franchisee can be required to pay a percentage of sales in royalties to the company as a franchise fee.
What is included in a management contract
- Type and level of control a management company will have on the organisation
- Fee to be paid to the management company and how often it will be paid
- How performance will be evaluated
- Management contract duration
- Penalties in case of breach of contract
- Cooling off or probationary periods at the commencement of the contract
How effective is a management contract?
Management contracts give two immediate benefits:
- The business may be run more efficiently under a management contract.
- It frees up time in the organisation.
What this means is that hiring a business that specialises in management contracts can make your business run more efficiently and more profitably.
Do I need a lawyer for a management contract?
Management contracts give the right to the managing company to handle a particular department of your business. With the business operations contracted to another business it is important to make sure your business's legal position is strong. Though you can draft a contract by yourself you should consider contacting a lawyer before finalising the contract as the cost of litigation can be significant. Paying for appropriate legal advice when drafting the contract could end up saving many thousands of dollars should an unforeseen problem occur.
Get access to customisable management contract templates online
Legal documents templates like a management contract can be found on the following websites.
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How do I write a management contract?
While writing a management contract you should at least consider the following points:
- A management contract should contain the level of control or what responsibilities the management company has
- The contract length and potential renegotiation periods
- The service fee and any penalties for potential breach of contract
- If the management contract relationship starts with a trial period then the scope of the work should be mentioned
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