A management agreement involves a business enterprise appointing a management company to perform managerial tasks for the business in return of a fee. The business enterprise may hire a management company for marketing tasks, managerial functions, operational functions, etc. In return, the management company is compensated and the method of computing the management fee is included in the contract.
By assigning operational functions into the hands of a management company (an expert in its specific field), the business enterprise relieves itself of the burden of running the business. Functions assigned in a management agreement can range from single functions such as management of human resources) to multiple functions such as running the entire business.
Purpose of Management Agreement
A management agreement is a contract which helps a company take care of its diverse functions by outsourcing some of them. A management agreement serves the purpose of lightening the burden of companies. They may outsource their administrative, human resources or accounting functions to a management company who will then take care of the same.
Inclusion in Management Agreement
A management agreement includes the names of the parties, effective date, commencement date, duration, scope of the work to be managed, payment process and amount, rights and obligations of the parties, termination etc. Apart from the commercial and operational terms as mentioned above, it also contains standard boilerplate terms such as dispute resolution, waiver, notices and severability.
Key Terms in a Management Agreement
Following are the key terms in a management agreement:
- Appointment of Manager: This clause is the most important and should contain the start date and end date of the appointment. Typically, the registered address and full name of the managing company is also provided.
- Relationship: A statement to the effect that the relationship is that of a consultant and not agency should also be included.
- Duties of the Manager: The scope of services being outsourced and the specific duties to be performed regarding that need to be outlined in the contract.
- Payment: The process of calculating and the quantum to be paid should be included in the agreement. The timeline of payment should also be mentioned in the contract.
- Indemnification: It is essential to obtain a third-party indemnity from the manager company. An indemnity for non-compliance with applicable law should also be included.
Drafting of a Management Agreement
Following guidelines must be followed while drafting an effective management agreement:
- The relationship of manager company and the company outsourcing its services should always be explicitly stated as that of consultancy and not agency.
- The contract should include deliverables, timelines in accordance with which such deliverables will be delivered and the manner of delivery.
- A provision for quality assessment may also be included.
- Risk mitigation clauses such as indemnity and limitation of liability should be included.
- A management contract should inter alia include the scope of services in a detailed manner. For example, just stating that the company shall manage operational activities will not suffice. An itemized list should be preferably provided.
- Both default based and no-fault termination options should be provided.
- Location where these services shall be delivered should also be specified.
Types of a Management Agreement
A management agreement may be entered for any of the following purposes:
- For taking care of operational requirements.
- For managing human resources.
- For managing administrative tasks.
- For managing sales activity.
- For marketing the products or services.
- To manage financial assets.
Pros of a Management Agreement
Following are the pros of a management agreement:
- Time saving: By assigning the managerial operations to a management company, the enterprise saves time and can better focus at important areas of business.
- Division of responsibility: Management contracts divide responsibilities and thus facilitate specialization of labor. When a management agreement is well drafted, it allocates work as per specialization of the enterprise as well as the management company.
- Expertise: When a specific role is assigned to a management company, the company has expertise and experience in that area and is able to deliver better results in lesser time. This increases efficiency and saves time as an enterprise can assign an area of business which it does not specialize at, to the management company. And since the management company has experience in the particular area, it does a better job with fewer resources.
Cons of a Management Agreement
Following are the cons of a management contract:
- Loss of confidentiality: There may be certain confidential information which the manager company has access too, for this purpose robust confidentiality clauses or non-disclosure agreements are required.
- Lack of supervision: It is difficult to supervise someone who has been externally engaged.
- Fragmentation of work leads to evasion of responsibilities.
Sample for Management Agreement
A sample of the agreement can be downloaded from below.
Management contracts are gaining popularity in industries like hospitality, airline, etc. because the owners of the businesses usually do not have the time to engage in operational functions and prefer to assign it to a specialized company. This saves time and resources and also ensures high standard of performance. However, getting another entity involved creates possibility of wide range of privacy issues and hence the agreement should be drafted carefully with the damages in case of breach in confidentiality.
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