Sourcing Academy

Third Party Commission Payments

Understanding Third Party Commission Payments in Your Hotel Contracts

In this video, you’ll learn what commission payments in hotel contracts mean and why they are used. Understand how hotels view third-party commission payments work and learn how groups should approach third-party commissions. You’ll also learn about how to structure commission agreements and how to avoid the most common commission issues with hotels.

Overview

• In hotel contracts, room rates are often stated as “net, non-commissionable” or “commissionable at a rate of XX% to Group’s designed agent, [NAME].” Commissions are typically only paid on rooms sold at the Group rate or higher. Commissions are typically not paid on rooms sold at rates lower than the Group rate, staff rooms, and rooms sold which are commissionable to another party. Also, commissions are not paid on attrition or cancellation fees. Commissions are typically paid after the Group pays its master account bill.
  • Some hotels require that the agent of record have an International Air Transport Association (IATA) number in order to be paid a commission.

Group Perspective

• If you are working with a third party agent of record, ask the agent whether they will be compensated by a commission paid to it by the hotel, a fee paid to it by the Group or a combination thereof.
• Make sure Group has a written agreement with the agent of record.
• If the Group has not yet designated an agent of record but will do so in the future, the commission language should reflect that a commission will be paid to Group’s agent as designated to the hotel in writing.
• If the agent of record is specified in the hotel contract as the recipient of a commission, the agent is a designated beneficiary of rights under the hotel contract. What that means is that if the Group changes agents after the hotel contract is signed, the commission cannot be changed to the new agent without the prior written consent of the agent specified in the hotel contract.

Hotel Perspective

• Be sure to let the hotel know as early as possible (i.e. in RFP, or initial sourcing communications) that the rates will be commissionable. The commission is a cost of doing business that the hotel factors into the rates and concessions offered, so it is important for the hotel to know about the commission before it makes its proposal.
• Some third parties ask the hotel to guarantee that the room rate is not impacted by the commission. The hotel should only agree to such language if it is true. The hotel is then earning less revenue than it could have if the rate were non-commissionable, therefore the business may be less desirable to the hotel.
• Hotels do not want to be placed in the middle of disputes between customers and their third-party agents. Hotels should not be asked to cancel a contract and then re-issue a new one for the same event that “cuts out” the third party.
• The concept of commission is that the third-party is being compensated for bringing business to the hotel in the group block. If attendees reserve rooms outside the block through other methods, or the group owes performance/attrition or cancellation damages, the third party has not generated that revenue by bringing business to the hotel, therefore no commission is usually paid on those amounts.