Taking advantage of economies of scale, international reservation systems, and brand awareness, a large number of hotels in Asia run under management contract arrangements.
It's common for contracts to span 30 years, with fees as high as 3.5% of total revenues and 6–10% of gross operating profit.
Management contracts are also prevalent in the airline industry, particularly when foreign government actions restrict other entry methods.
As an alternative to foreign direct investment, management contracts entail lower risk and can yield higher returns for the company.
[1][failed verification] In business management, franchising entails a contractual relationship between the franchisor (owner of the company) and the franchisee (purchaser of the brand name).
The franchisor grants the franchisee the right to use its trademark, alongside specific business systems and processes, in exchange for a fee.
A manager or any employee may terminate their job, leaving the business a hole in its team for the smooth functioning of the operations.
A contract management company can easily change few employees without stirring the constancy of the business model.
[5] Through management contracts, a businessperson can venture into international business opportunities without taking a huge risk of putting their own physical assets at stake.
When company management is contracted to a third party, the business owner may enter into confidential disputes.
If a country is going through political or social turmoil, the life of the Manager is put at risk to carry on with the business in such a situation.
It doesn't want any interference from the owner but at the same time wants continuous supply of investment for the expansion and growth of the project.
[9] The main purpose of this agreement is to help investors of some hotels who lack the skill and knowledge needed to operate them.
[13] The managing contractor is responsible for sub-contract claims arising from its own inadequate performance.