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Chapter 7 Contract ManagementOperators:The organization that manages lodging or foodservice operations for owners are called operators The Process: Usually an investment company:Buys the real estateThen builds a lodging (or restaurant) property on the landThen hires a different company (operator) to run the property •Operator has the appropriate expertise to run it correctly.*The agreement between owners and operators is a contract; thus this segment of the industry is called Contract Services Management. There are two types of operators:o 1.Chain operatorso 1.Independent contractorsChain operators:Chain operators are affiliated with major hotel chains Examples: Marriott, Starwood, Hilton There have been many mergers between chain brands which has created mega-brands Therefore this group of major chains is becoming smaller each yearIndependent Contractors:Independent contractors are not affiliated with any specific brandThey purchase brands and locations based on their assessment forcompatibility with their objectivesHotel Contract Management:The concept of separating ownership and operation of a lodging property came with the expansive growth of the hotel industry in the 1970s and 1980sInvestors could buy land all over the country and not worry about the challenges of running a lodging companyAlso, successful management companies were able to grow their brand names and expand into new markets without huge capital expendituresWin -win situation for both parties*The Contract Parties:There are 3 parties involved in hotel management contracts:  1.Operators 2.Lenders 3.Owners Operators: desire an increase in both market presence and market share, maintaining control over the day-to-day management decisions, and long-term stability The most significant recent change in contract negotiation is the increased involvement of lenders and an increase in power of ownersLenders are interested in: Generating a rate of return Protecting the investmentOwners are interested in: Generating cash flow Ensuring their investment grows in value The increase in # of hotel operators has given owners bargaining power over the operatorsThe Contract timing:One key provision in contracts today is operator loan and equity contributionsAll contracts include a length of a contractChain operators: Initial: 8-10 yearsRenewals: one or two 3-5 year renewalsIndependent contractor: Initial: 1-3 yearsRenewals: one or two 2 year renewalsOwners want shorter termsOperators like longer terms for stabilityThe Contract: FeesManagement fees Paid to the operators Basic management fees have decreased in recent years Incentive fees are more challenging to achieveBasic management fees of full-service hotels average:Chain operators : 2.25% of gross revenues without operator equity contribution 2.50% of gross revenues with operator equity contribution Independent contractors : 1.5% of gross revenues without operator equity contribution 2.5% of gross revenues with operator equity contribution The Contract – Incentive Fees:Incentive fees are based on cash flow after debt service or return on equityIn the past, operator incentives were determined by gross operating profitThis shift indicates that owners expect operators to contribute to the bottom line profit, not just the revenueThe Contract – Reimbursable:An important area in the contract is the operator system reimbursableexpensesOwners pay these feesSystems are provided by the operator’s corporation Property benefits from use of systems Chain operators Expenses range 2 to 4% of the gross revenueIndependent operators Expenses range 0 to 1% of the gross revenueThe Contract- Performance Standards:Usually performance is evaluated each year Measures include year-to-year growth, based on the initial 3-5 year gross operating profit projection. Grace period Hotel first opens: 1-2 years where performance criteria can be changed New operator in existing property: 6-months If the operator does not meet the performance criteria, they are usually required to pay the owner the difference.Owners usually include options for terminating the contract based upon continued poor performance. The Contract- TerminationSpecific conditions upon which a contract can be terminated for the operator and the owner is a crucial part of the contract. Owners must pay the operators a termination feeChain operators: 2-4 times the management feeIndependent contractors: 0.5-2 times the management feeThe Contract:The final component of the contract is the degree of input the owner has in decision making related to running the hotel.Owners are beginning to negotiate:–The right to have input on the annual budget–Input in hiring the executive staff *Executive staff are Operator employees With all contracts—each provision is negotiated Choosing a hotel management company:If the owner has other hotel properties—look at performance of the current contracted companiesIf no other hotel properties—Owners should try to determine:-Accessibility of Operator’s senior management –Overall integrity of Operators –Measure the marketing strength and penetration of the operator–Listen to feedback from clients with existing management contractsContract Food Service Management: Initially called “institutional foodservice” Most contracts were with:HospitalsIndustrial plantsCorrectional facilities Focus was on quantity of food, not quality Today this segment is “on-site foodservice management”–The quality of food and service rivals that of top restaurants–Foodservice is provided “on-site” at schools, businesses, etc. –This segment is $230 billion of the $800 billion global foodservice industryThe players:Contractor: the company that provides foodserviceHost: the organization that hires the contractorClient: the person within the host organization that is responsible for monitoring the contractor’s performanceSelf-operated organizations: the host organization decides to operate their own foodserviceOn-Site Foodservice Management Companies :Sodexho Alliance:Largest on-site foodservice management companyBased in France$19 billion in revenue expectedOperates in 80 countriesEmploys 332,000+ peopleCompass Group:–The next largest on-site foodservice management company –Based in Britain–$10 billion in revenue expected for 2007–Operates in 70 countries–Over 400,000 employeesOn-Site Foodservice Management Companies: ARAMARK


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FSU HFT 1000 - Chapter 7 Contract Management

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