Management Contracts: Everything You Need to Know
Management contracts are legal agreements that enable one company to have control of another business' operations. 3 min read
2. Advantages of Management Contracts
3. Disadvantages of Management Contracts
4. Frequently Asked Questions About Management Contracts
5. How to Write Management Contracts
Updated November 3, 2020:
What are Management Contracts?
Management contracts are legal agreements that enable one company to have control of another business's operations. Business owners often sign these written agreements directly with the management company. This typically gives the management company operational control for an established period of time, usually for two to five years. Most management contracts are task-specific and focused on the work itself, not established outcomes.
Advantages of Management Contracts
1. Using a contract management company can give business owners more time to focus on growing the business instead of daily operational tasks.
2. Contract management companies can complete a wide range of tasks, including hiring, firing, and recruiting.
3. A contract management company can help business owners manage more than one business.
4. An outside manager often has expertise in working with many different companies.
5. Unlike employees who quit and go on to other ventures, the operations the management contract firm offers will be consistent, regardless of the tenure of one specific person.
6. Management contracts typically have a high degree of accuracy and efficiency.
Disadvantages of Management Contracts
1. Unlike when you hire an employee into your company, using a management company means that you will have to give up some privacy by letting another company know about your company's internal operations.
2. The management company will be exposed financially, which can make your company more vulnerable to exposure and fraud.
3. You may end up with a conflict with a contract management company that is unexpected.
4. Using a contract management company can change financial forecasts and outcomes.
5. If the management contract is industry-specific, the management company may also manage the operations of your competitors.
Frequently Asked Questions About Management Contracts
What is the goal of a management contract?
When drafting a management contract, the main goal is to establish the guidelines by which the management company will assume control of another business. The contract enables the management company to take control of part of the company's operations so that it can run the daily operations in exchange for payment.
How does the contract enable management companies to get things done?
The management contract gives the management company the authority to manage the company as it sees fit, as long as it is meeting set goals and completing agreed-upon tasks. That means that the company can have its workers do the work or outsource it to contractors.
What kind of tasks do management contracts include?
Management contracts can include nearly all of the business functions including providing technical support, personnel management, marketing, sales training, and accounting.
How do management contracts set up payment structures?
That depends on the contract, but most management contracts establish a flat fee for services. That way, payments are not based on collecting fees for actions other than achieving goals. Establishing such a pay structure also limits the risk to both parties as neither party can manipulate it in their favor.
What if I want to have a contract that is based on performance rather than the end result?
You can structure a management contract to focus on a pay-for-performance model. In this case, the operator's risk will be higher, which includes the asset condition risk as well as maintaining equipment and other possible costs.
How to Write Management Contracts
1. The management contract details just how much control the management company is to have over the company.
- Include how much the management company is to be paid and how often.
- Detail job expectations so both parties know what is expected and how performance will be evaluated.
2. Determine how long the management contract is to be in place.
- Most management contracts last for one year, with options for renegotiation and extension.
3. Clearly identify what happens if either party is in breach of contract.
- This includes how to suspend the contractor if fines are to be paid to the business owner.
4. Some companies choose to start a relationship with a management contract as a trial period. The specifics and scope of the work should be included.
5. All members need to sign the document and get their own copy.
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