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The 3 “Right” Ways to Calculate Attrition

 Hotel Desk Bell and Cash

Attrition is a damages payment intended to compensate a hotel for its losses if a group fails to fill its room block commitment.

When considering how much attrition damages a group should pay, the key question is what makes the property “whole.” Anything more is considered an improper “penalty” because it would earn more for the hotel than had the group properly performed. And penalties cannot be enforced.

Industry veterans like to debate 3 different ways to calculate attrition, each of which has its own proponents:

The “Percentage” Method: A “lost profits” percentage of the room rate for each unused room in the group’s block.  This method looks at only the group’s rooms commitment, and assumes that when a room is empty the hotel saves money on utilities such as electricity and water, housekeeping, and other labor, and no commission is paid to a third party planner.  These savings are taken into account, and the attrition charge is some amount less than the room rate for each room, equal to the hotel’s lost profits on that room.  This is frequently written in contracts as a percentage of the room rate.

        – Favored by:  Planners.

        – Opposed by:  Hoteliers.

“100% Room Rate” Approach: Damages are equal to the full room rate for each unused room.  This is probably the easiest way to calculate attrition since no assumptions or math is involved.  This approach assumes there is no savings to the hotel from an unused room because the hotel incurs costs in trying to re-sell the room.  Also, the property may resell a room for less than the group’s room rate, and even if they do not any labor and utility savings from an empty room is minimal.

        – Favored by:  Some hoteliers; this is the standard approach in hotel-drafted contracts.

        – Opposed by: Some planners, particularly for limited service properties.

• “Anticipated Revenues” Method: Attrition equals the “expected revenue per guest” – an amount in excess of the room rate that the hotel estimates the average guest would spend each day, taking into account resort fee surcharges and amenities such as the hotel restaurant, bar, spa, pay-per-view TV, mini-bar, gift shop, and golf.  Hotels consider that an average guest will use these facilities and other amenities, and they assess a fee on top of the room rate based on anticipated revenues derived from their experiences with other groups and guests. The argument is that these amenities lead a group to utilize that property, so the average guest would be expected to use them.  The attrition charge under this approach is the entire room rate, plus an additional amount the average guest would probably spend on the hotel’s extra services.

        – Favored by: Hoteliers.

        – Opposed by: Planners, particularly when the group contract includes no commitment to use
           some or all of the hotel’s amenities.

Which is right?  Maybe all of them – the law is uncertain. There are pluses and minuses to each approach. The key is for each hotelier to consider what would make her property whole if the group didn’t use all of its rooms, and for planners to make the same calculation based upon their contractual commitments to use rooms, food & beverage, and other amenities at a particular hotel property.

How do a hotel and a group agree on which attrition approach to use? It’s a matter of negotiation. There haven’t been enough court rulings to determine that one approach is right, so a party with a good argument and powers of persuasion can argue for whichever they prefer. As with all parts of a contract, the key is to arrive at an equitable attrition damages provision that is fair and defensible in the event it is invoked.

Final Note: This blog is not “legal advice”; rather, it’s a discussion intended to make you think and draw your own conclusions. Legal advice can only be rendered after a discussion of your particular circumstances with an attorney competent in meetings law.

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