A management contract is an legal agreement that empowers one entity to assume operational control of a separate business enterprise. The terms of the arrangement will vary, depending on the scope of the responsibilities entrusted to the managing entity. With this form of outsourcing, the managing entity does not just provide the client with guidance in how to effectively manage the business, but actually takes on the role of management and actively oversees the function of the business operation.
The purpose of a management contract is to provide a business with competent management personnel, without the need to actually hire those individuals. As with any type of outsourcing, this approach can save the client a great deal in the way of salaries and benefits like health insurance, profit-sharing, pensions, and other perks that are usually part of management packages. Entering into a management contract greatly simplifies the accounting process, since the client is not usually responsible for withholding taxes or other functions that are related to employees. Instead, the client pays a fee that is calculated using whatever criteria is determined in the terms and conditions of the management contract.
There are several different ways that the fees associated with the management contract may be determined. One common method is to require a fixed percentage of the gross operating profit that the client realizes under the management of the provider. In some cases, this figure is based on the total revenues received rather than the operating profit. There are also situations where the client will pay a fixed fee that remains the same regardless of any upward or downward movement of revenue or profits.
The scope of responsibilities that may be included in a management contract include the oversight of any or all areas of the client’s business enterprise. A contract may relate to the management of the accounting department, oversight of human resources initiatives, direct management of a facility or plant, or even the sales and marketing services related to the revenue generation process. Generally, the contract will not only identify the areas where management expertise will be rendered, but also grant the authority necessary to carry out those functions in a timely and effective manner.
Management contract terms also normally specify at least a minimum duration for the agreement to remain in force. It is not unusual for this type of contract to include a duration of several years, with options that provide both parties the ability to terminate the agreement, as well as options to renew. Depending on the amount of time covered by the contract, there may also be provisions for adjusting the fee upward to allow for shifts in the economy over the years. This is especially true when the amount of the fee is fixed rather than related to the profits generated by the client during the period that the agreement is in force.
