DEVELOPING A CONTRACT.

Are contracts always necessary between an association management company and its clients? That depends on their relationship. In most cases, a contract or letter of agreement is necessary to clarify expectations, protect the association, and outline the parties' responsibilities.

Especially in cases of a long-standing, amicable relationship between an association and its AMC, a contract may seem superfluous. But in general, a written contract serves to define mutual obligations and expectations. It provides an orderly structure for the relationship between the AMC and the association.

A management company may use a standard contract or contracts may be drawn to suit differing needs of association clients. For example, a standard agreement might include these basic elements: the service relationship, compensation, and termination.

Contract documents may range from simple letters of agreement to multipage contracts that describe every detail of the relationship between the organizations. Letters of agreement, which generally contain the standard elements of a contract--offer, acceptance, and consideration--and carry the legal force of a contract, may cover broad areas of agreement in general terms. A detailed contract may cover such specifics as: number of board meetings, number of newsletters to be published, regional seminars to be held, and number of exhibit booths to be sold at the convention.

In spite of the lack of uniformity, virtually all contractual agreements between AMCs and association clients cover these basic issues:

* Establishing the independent status of the AMC.

* Preserving the client's rights.

* Determining the management fee or method of compensation.

* Listing services to be provided.

* Defining the duration of the agreement.

* Setting out the method for terminating the agreement.

* Stating the association client's obligations to the AMC.

In addition, include the following statements in your agreement to address both AMC and association concerns as well as required legal issues:

* The AMC has the authority to handle funds on behalf of the client. (Specify who has signatory authority.)

* Bank accounts shall be solely in the name of the client, not joint with the AMC.

* The client is responsible for expenses incurred by the AMC on the client's behalf.

* An annual independent CPA audit (or review) will be conducted at the association's expense.

* The AMC has authority to negotiate and enter into agreements on behalf of client (e.g., hotel agreements, purchase of insurance).

* The AMC will receive fees or compensation for its services. (Specify how the fees will be paid by the client (e.g., direct transfer of funds), when this will happen (e.g., first of each month), and what the fees cover and do not cover (e.g., a simple statement that telephone expense is not a fee and is a reimbursable expense).)

* The AMC and client will indemnify each other.

Most AMCs carefully maintain their independence by ensuring that clients do not interfere in such matters as staff salary levels, work assignments, and areas of responsibility. This is seldom a cause for tension or disagreement in management contracts because the association client generally finds it advantageous to establish that the AMC assumes all responsibilities for its employees and that the fee paid by the client frees the association from any obligations for fringe benefits, retirement programs, pension programs, insurance, and so forth.

The contract may reserve to the AMC the right to select the personnel it will assign to the client, including the executive in charge of the account. Some contracts give the client the right to determine whether the employees assigned to it by the AMC are suitable to its needs.

Keeping records private

The association client should be considered an independent entity within the company that manages it. The association must be able to count upon the inviolability of its records, which means that the client has the sole right to its own information, records, and materials.

This right is generally spelled out in management contracts. Typically, the contract will state that the AMC cannot make use of the association's information without prior consent. All materials of the association client remain the property of the association. If and when the contract is terminated, all materials should be returned to the association client in usable form.

Defining compensation

Most association management contracts devote considerable attention to defining the management fee, retainer, or other method of payment. Twenty years ago, most AMCs charged their clients a fixed-fee retainer to cover annual personnel and operating expenses. In recent years, the trend has moved away from fixed fees, largely because of the difficulty of anticipating costs a year in advance. Instead, most AMCs now charge clients a management fee covering certain basic services, with other services billed as used.

Whatever the form of payment, all AMCs charge their clients for management, rent, overhead, staff time and related expenses, and profit.

If the contract specifies a fixed management fee, the fee sometimes amounts to about half of the total payment to the AMC. The management fee typically covers senior staff time, rent, office use, and equipment. All other charges are on an as used" basis. These may include special projects such as public relations, government relations, statistical reporting, convention and exhibit management, and so forth. Sometimes arrangements for special services are covered by separate letters of agreement, independently of the management contract.

Most contracts stipulate that ancillary services such as word processing, computer use, reproduction, and printing will be provided at rates competitive to those of outside contractors.

In addition, the management contract may specify the number of hours or percentage of time to be devoted to the client by key AMC staff members. Although this has not yet become a standard element of management agreements, it does represent an attempt by both parties to reach a clearer understanding.

Often, associations that use fixed-fee contracts for other services will ask that their management contract include a fixed-fee retainer along with agreements concerning charges for special projects outside the annual operating plan. These agreements may include incentive programs based on performance.

AMCs take different views on the acceptability of incentive programs. Some companies share the legal profession's view that contingency payments are inappropriate for professional services. Others argue that incentive payments are a part of the compensation patterns of some associations and industries and that AMC contracts should allow for those customs.

Detailing services

Most management contracts attempt to define the services that the AMC will supply to its association client. These provisions are often broadly stated and refer to standard policies. The contract may simply say, for example, that "services are as mutually agreed upon from time to time with the client."

Although some contracts go into great detail on this subject, some firms prefer to use broad, general terms. That way, both the management company and the client depend on the mutual agreement that they have reached. Defining services too narrowly may inadvertently lead to an adversarial relationship between the two parties.

It is often helpful to list in the contract specific exclusions--services or personnel that are not included in the management fee but that the AMC will provide for an additional fee. In fact, this section of the contract can be the key to establishing a working relationship between the AMC and the association because it lists the management company's capabilities.

Length of the contract

Management contracts are often drawn up for one year, either with automatic renewal or with intent to renew. Short-term contracts require that both parties review the contract to ensure it continues to reflect current needs and expectations. Doing this on an annual basis tends to focus both sets of needs more effectively.

In other cases, an association and its AMC may have a longterm contract to which they infrequently refer. Long-term contracts give the AMC a sense of protection from political vagaries that may occur within the association. They also give the client a sense of assurance that the AMC will invest its time and energy for the long haul. In today's rapidly changing business environment, however, associations' changing needs may require them to reexamine their management contracts more frequently than they have in the past.

Virtually every association management contract contains a clause designed to protect the management company from losing employees to its client. Frequently, AMCs seek added protection through employment contracts for their key employees. Companies that have experienced so-called employee piracy know that the cost of losing a key employee can be considerable.

In other cases, the contract may simply provide for financial compensation to the firm if the association client hires an AMC executive.

Reverse protection is guaranteed in some contracts, specifying that the AMC will not hire any executive or administrative personnel from the client unless the prospective employee has already been terminated.

Terminating agreements

The period of notice required to terminate a contract may run from 30 days in a few cases to, more frequently, 90 or 120 days. The termination clause for a large association may specify a period of six months or more. Longer notice offers protection for both the association and the AMC since, if cancellation takes place, both organizations need time to handle the transition.

Responsibility of Leadership

It's essential that newly elected directors of the association review and understand the organization's contract. To achieve this, some AMCs conduct orientation programs for new directors so they will understand how the company operates, its personnel assignments, and the nature of the contract or operating policies that define its relationship with the association. At the very least, the current agreement needs to be included in the board manual.

Failure to provide some form of review can lead to misunderstanding. Even if the contract has remained unchanged and unchallenged over a long period of time, the best course is to recognize that the leadership of associations changes. Each new slate of elected leaders needs a clear understanding of the relationship between the management company and the association. (For a sample contract go to www.asaenet.org/sections/amc and click on "Online Resources.")

To assist you in the transition of the association's records and important information to your new management company, see the sidebar, "Association Management Company Transition Checklist on page 16," or go to www.asaenet.org/sections/amc.