Even when attrition clauses are carefully scrutinized prior to signing a contract, organizations often end up agreeing to pay far more in attrition damages than is really necessary. Here are some contracting strategies that can save your organization a lot of money in the event of reduced meeting attendance.
Profits: Net, Not Gross
Many organizations negotiate so that no attrition damages are required if a group fills, for example, 80 percent of its total room block. Thus, a room block of 1,250 total rooms will not result in an attrition penalty if the organization fills at least 1,000 rooms. Hotels will often state in the contract that "if the group fails to use at least 80 percent of the total rooms in its room block, the group will owe as an attrition penalty the number of unused rooms in its room block below 80 percent multiplied by the average room rate, plus tax."
Under the formula outlined above, it seems that if, due to unexpectedly low attendance, your group fills only 900 rooms, the hotel suffers a loss of $20,000 (100 rooms at a rate of $200 each), plus room tax. Seem logical and fair? It's not. Here's why.
The goal of attrition damages should be to put the hotel in the same position it would have been in had your group performed properly and filled the minimum required number of rooms. But, if your group had actually filled all 1,000 rooms, the hotel would not have netted $20,000, because hotels do not make 100-percent profits on rooms. Rather, a typical hotel profit margin on rooms is about 75 percent, due to the cost of maid service, changing the sheets and towels, and so on. Therefore, your attrition damages should be the shortfall in room usage multiplied by 75 percentnot 100 percentof the cost of the room.
To return to our example above, attrition would equal the 100-room shortfall multiplied by 75 percent of $200, for a total of $15,000. That $15,000 is the true net profit the hotel could have expected to get had your group properly performed. If you instead agree to pay the hotel $20,000, then the hotel actually receives $5,000 more than it would have had you filled your room block.
Taxes: Not Always Necessary
Most hotels will release rooms in a group's room block once the "cutoff date" has arrived (typically 21-30 days prior to the conference). Once rooms are released for sale to the general public and are no longer being held for a particular party on a particular night, the law in many states does not require any room tax to be collected by the hotel and paid to the state on penalties that the hotel may charge for those unoccupied rooms, even if the penalty is measured by the rental value of the room. So in many cases, the tax that hotels charge on room attrition is never turned over to the state. Instead, it is just extra money that the hotel keeps in its own pocket. In short, in the contract, you should refuse to pay tax on attrition penalties unless the hotel can prove to you that tax is required by state or local law. In most cases, the property can't make that proof.
Three More Ways to Save
If your hotel contract is being signed two or more years prior to your event, ask for a clause that allows your organization to review its room block annually (normally 30 days after each prior year's annual conference ends), and that gives your organization the right to reduce your block based on attendance from that last completed conference. This clause can be a real lifesaver if you begin to see a downward trend in attendance at conferences.
Newly built or lesser-known hotels will sometimes allow a group to have attrition as high as 30 percent or more, so don't assume that 20 percent is the best you can ever hope for. This is also true when you sign a multiyear dealyou deserve some extra benefit for giving that hotel consecutive years of repeat business, and asking for a generous attrition clause is one way of getting it.
Finally, the last thing that may help in some narrow circumstances is to draft a very broad "force majeure" clause in the hopes that you can blame your attrition on a force majeure event, such as a storm, a gas shortage, a terrorist threat, or other unexpected event.
Originally published November 01, 2007
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