How Much Do Hotel Management Companies Charge
Staying in a hotel can be a wonderful experience. From the plush beds to the sparkling pool, hotels aim to provide guests with a comfortable and relaxing getaway. But operating these grand facilities requires extensive work behind the scenes. This is where hotel management companies come in. They handle the day-to-day operations of hotels on behalf of the property owners.
But how much do their services cost? Hotel management fees can vary greatly depending on the size of the hotel, location, services provided, and other factors. In this article, we’ll break down the typical fee structures and costs associated with hiring hotel management companies.
Quick Answer 👇
Hotel management companies typically charge a management fee ranging from 3% to 5% of a hotel’s total revenue.
What is a Hotel Management Company?
A hotel management company oversees the operations and management of a hotel on behalf of the hotel owner or investor. They provide expertise to handle everything from staffing, maintenance, marketing, revenue management, accounting, quality control, and more.
Hiring a hotel management company provides several benefits for hotel owners:
- Operational experience – Hotel chains have extensive experience successfully operating multiple properties. They have proven systems in place.
- Brand power – Major brands have powerful marketing and loyalty programs that individual hotels cannot match.
- Cost efficiencies – Management companies achieve savings through corporate discounts and centralized accounting/purchasing.
- Expert personnel – Management firms maintain a skilled staff of professionals that a stand-alone hotel may not be able to afford.
Factors Affecting Hotel Management Fees
Hotel management fees can range from 2% to 12% of total hotel revenue. But many factors determine where in this spectrum your particular fee will fall.
Size of the Hotel
- Smaller hotels generally pay a higher base fee – around 10-12% of total revenue
- Larger hotels pay a lower base fee – closer to 2-4%
This sliding scale accounts for the economies of scale in operating larger properties.
| Hotel Size | Typical Base Fee Range |
|---|---|
| Under 100 rooms | 10-12% |
| 100-300 rooms | 8-10% |
| Over 300 rooms | 2-5% |
Location
The location of a hotel significantly impacts management fees. Prime locations demand higher fees.
- Major metropolitan hotels usually pay fees around 10-12%.
- Suburban/highway locations fall closer to 8-10%.
- Small town/rural hotels often pay 4-6%.
Level of Services
Full-service hotels require more management attention and therefore higher fees.
- Extensive service (full-service) hotels may pay 8-12%.
- Select service (limited food & beverage) fall in the 4-8% range.
- Limited service (few amenities) average 2-6%.
Management Company
The experience and expertise of the management company factors into their fees.
- Major chains like Marriott and Hilton charge higher fees given their brand value and centralized services.
- Smaller third-party operators typically fall on the lower end of the fee spectrum.
Typical Hotel Management Fee Structures
Hotel management contracts incorporate different types of fees including:
Base Fee
This is an agreed upon percentage of the hotel’s total revenue that goes to the management firm. Base fees usually range from 2-10%.
Incentive Fee
An added fee based on the hotel achieving certain performance goals like occupancy rate or net operating income. Generally incentive fees add 1-2% above the base fee.
Franchise Fee
If the hotel operates under a major brand’s flag, there is an additional franchise royalty fee. This averages 4-6% of total revenue.
Other fees like marketing charges, reservation systems, and technology fees may also apply. All these costs can add up to 8-20% of total hotel revenue going to the management company and brand.
Average Hotel Management Fees
According to HVS Hotel Management, here are average management fees for hotels in the United States:
| Hotel Type | Avg. Base Fee | Avg Total Fees |
|---|---|---|
| Luxury | 3.7% | 12.6% |
| Upper Upscale | 3.5% | 11.7% |
| Upscale | 3.8% | 12.1% |
| Upper Midscale | 5.2% | 13.8% |
| Midscale | 7.1% | 15.0% |
| Economy | 8.2% | 14.9% |
As these figures illustrate, base management fees average 3-8% for larger branded hotels and 7-8% for smaller independent hotels. Total fees average around 12-15% across all hotel categories.
Negotiating Hotel Management Fees
When negotiating a hotel management contract, owners should:
- Research the average fees in your market and for comparable hotels. Use this data as leverage.
- Make sure the fee structure and percentages are clearly defined.
- Link fees to performance metrics favorable to the owner, like net operating income.
- Add clauses allowing you to review and adjust fees periodically.
- Include an acceptable termination clause if you become dissatisfied.
With the right due diligence and negotiation, hotel owners can strike a fair and cost-effective management agreement. Just be sure to thoroughly understand the fees and how they impact your bottom line.
Conclusion
While hotel management companies require significant compensation, their expertise and services enable properties to maximize revenue and guest satisfaction. Typical fees range from 8-12% of total revenue for full-service branded hotels and 2-6% for limited-service independents. But many factors impact the actual fees charged, so negotiate contracts carefully. With the right partner under a fair agreement, hiring a hotel management company provides access to professional talent and resources that owners need to succeed in the exciting but competitive hospitality industry.
Frequently Asked Questions
Q: What is the average fee for hotel management companies?
A: The fee varies but typically ranges from 3% to 5% of gross revenue.
Q: Are there additional charges besides the management fee?
A: Yes, there may be fees for marketing, maintenance, and renovations, depending on the contract.
Q: Do hotel management companies charge differently for different hotel sizes?
A: Yes, fees often increase with larger hotels due to increased responsibilities.
Q: Is the management fee a fixed percentage or negotiable?
A: It’s usually negotiable based on the hotel’s specific needs and market conditions.
Q: Do management companies charge for their initial assessment?
A: Some companies offer free assessments, while others charge a one-time fee.
Q: Are there termination fees if I want to switch management companies?
A: Termination fees may apply, as outlined in the management contract.
Q: Do management companies charge for employee training?
A: Training costs are typically included in the management fee.
Q: Can I expect lower fees if my hotel consistently performs well?
A: Some companies offer performance-based fee structures as an incentive.
Q: Are there any hidden fees I should be aware of?
A: Always review the contract carefully to understand all potential charges.
Q: Do management companies offer discounts for long-term contracts?
A: Some companies may offer reduced fees for extended management agreements, but it varies.
