Revenue or Profit? Understanding the True Cost of Attrition Fees

Revenue or Profit? Understanding the True Cost of Attrition Fees

In a recent HopSkip x Legalese with the Ladies webinar, Kelly Bagnall, Partner at Holland & Knight LLP and a leading authority on hospitality law, along with Barbara Dunn, Partner at Barnes & Thornburg LLP, tackled one of the most enduring questions in contract negotiations: Should attrition fees be based on revenue or profit? 

Why Clarity Matters

When it comes to contracts, ambiguity can lead to costly misunderstandings. Kelly and Barbara stressed the importance of being clear about the basis for attrition fees right from the start.

If a group intends only to cover lost profit, this must be explicitly defined in the contract. Otherwise, most agreements default to covering revenue, including room rates and food and beverage minimums.

Revenue vs. Profit: What’s the Difference?

• Revenue-Based Fees: Most hotel contracts are structured around gross revenue. This means attrition fees are calculated based on the total expected revenue from rooms and services, not just the hotel's lost profits.
• Profit-Based Fees: Negotiating profit-based fees can be more complex and require careful discussion. As Barbara noted, profit can be tricky—its definition varies and can be difficult to pinpoint precisely for any given night.

Practical Tips for Negotiating Contracts

For planners, understanding how to negotiate these terms can make a significant difference:

Focus on Flexibility:
A more adaptable approach can involve using sliding scales for cancellations or adjusting room blocks.

For example, if a group adjusts its room block later in the planning process, the contract must allow for corresponding changes to the fee calculations.

Avoid Mutual Cancellation Clauses:

Both speakers advised against mutual cancellation clauses that require hotels to pay the same amount as groups in case of a cancellation. These terms often fail to hold up legally and can create more challenges than they solve.

Be Clear in Your Proposals:

Barbara suggested avoiding terms like "profit" during negotiations and instead focusing on specific, revenue-based metrics to establish a clearer understanding between all parties.

Why It’s Important Now

How contracts handle attrition fees can substantially impact planners' and hotels' bottom lines. With market dynamics constantly shifting, getting these details right is more important than ever.

By prioritizing clear communication and carefully structured agreements, both sides can avoid disputes and ensure fair outcomes.

Dive Deeper into the Discussion

Watch the full HopSkip webinar with Kelly and Barbara to gain more insights into the complexities of attrition fees and how to negotiate them effectively.

Their decades of experience offer valuable guidance for anyone navigating the intricacies of event contracts. 

Watch the full webinar recording here.