Perhaps the heart of good meeting planning is the ability to write contracts that cover all potential outcomes of an event. Of all these outcomes, perhaps none is more important than avoiding being hit with attrition fees by the host hotel. As all planners know, these fees can be very costly and, in many cases, can be avoided with a tight contract.
Recently I had the pleasure of attending an exciting (!) lecture on Hotel Contracts lead by attorney John S. Foster from Atlanta. The event was put on by the PCMA Chesapeake Chapter and was hosted at the brand new Horseshoe Baltimore Casino. The presentation by Mr. Foster was entitled “Hotel Contracts Boot Camp” and certainly lived up to its name. While many aspects of hotel contracts were covered, the heart of the talk was a lively discussion of attrition. The presenter was not only an established attorney, but had spent many years in the hospitality industry – so he really knew his stuff! Here is a summary of some of his key points – related, of course, by a laymen and should not be considered as legal advice.
It is important to think of attrition fees in the correct fashion:
- Attrition fees are not technically “penalties” but are damages for a breach of contract.
- Attrition damages should be thought of as lost profits and not necessarily 100% of lost revenue. This is because issues such as variable costs and profit margins need to enter into the calculations. For example, if a room is not sold the hotel is not losing the full revenue because they are saving on variable costs such as room cleaning, supplies and so forth.
So now the trick is how to setup the damage formula. There are two ways of calculating the attrition damages:
- Guaranteed Revenue
- Guaranteed Room Nights
Planners will want the latter Room Nights calculation because you can create formulas that will work in your favor. Here are some things to consider in your Room Nights formula.
- To calculate unsold rooms, subtract from the total rooms in the hotel those that are off-market, sell-last/late rooms, and sold to other parties.
- Your group shortfall calculation should include subtracting allowable attrition per night and the actual rooms occupied by your group. Make sure your comp rooms do not work against your shortfall.
- Here is the key point, your short-fall calculation should take the lesser of your shortfall and unsold rooms in the hotel. This is crucial because if the hotel is sold out, then the loss to its profit is minimized by your group’s under-performance.
- Your group should take credit for unused comps and early arrivals.
- Shortfall should be based on cumulative room nights and not on per night calculations. That way good nights (where you over-performed) are taken into consideration with your bad nights.
In short, the attrition penalty needs to be based on an accurate calculation of what profit the hotel actually lost because of your group’s under-performance.
Mr. Foster was also adamant that you have an “Audit Provision” in your contract so you are able to accurately see how the hotel performed the nights of your group’s stay. You also need to have clauses that cover your inability to perform including force majeure.
As always, please work with your legal counsel to produce the best agreement.
Follow us on twitter for more articles like this posted every week!