Written by Mike Kriel, CEO of Launch Workplaces
A few weeks ago, I came across a post about a coworking operator that put a very large expense on a monthly P&L. Way over budget. No prior written consent from ownership, and no variance explanation. When the owner asked about it, the answer was essentially “this is what we did, and we’re not changing it.”
Before I go any further, I want to be clear about something. I have not done the work to verify whether that story is accurate, and I have no interest in naming anybody. Who did what is not the useful part.
The useful part is what it tells you about your own agreement.
When things are going well, nobody reads the management agreement
Here’s the reality of any partnership. If revenue is running ahead of projections and expenses are coming in under budget, there is no discussion. Everybody’s happy. Nobody pulls the agreement out of the drawer.
The agreement only matters when something goes sideways. Revenue comes in below what you hoped, an expense lands that you didn’t expect, and now you’re looking for the section that tells you what to do about it.
If that section isn’t there, you’re in a conversation with no rules. You call your operator, and if the answer is “it’s not in the agreement, deal with it,” what’s your move?
That’s the whole argument for spending real time on the document up front.
Your management agreement should define the expense framework before anyone spends a dollar
A good operator is an expert at running these spaces. That means they should be able to tell you, with reasonable accuracy, what each category costs to run.
We build our agreements around formulas. Office supplies, as an example, are usually driven by member count or revenue. If you’re running a good operation, that number tends to land somewhere between one and two and a half percent of revenue.
The other half of it is category discipline. Office supplies go in office supplies. It’s not a catch-all, and it’s not a place to park things that don’t have an obvious home. Every category should mean what it says.
When both of those are written down, an expense that lands three times over budget isn’t a mystery. It’s a variance from a defined framework, and it has to be explained.
The five-hundred-dollar rule
Here’s a piece of language I’d put in every agreement.
If the operator knows they’re going to exceed a budgeted category by more than five hundred dollars, they email ownership before it happens.
Not after. Before.
These things come up. Every year or two, we get hit with a software or hardware upgrade fee. We don’t always know which month it’s going to land in, but we know it’s coming. So when it does, ownership gets an email that says here’s a thousand-dollar charge coming this month, here’s what it’s for, and here’s why it’s a one-time thing this year.
Sometimes that’s a request for pre-approval. Sometimes it’s just a heads up. Either way, the owner is never surprised, and that’s the point.
It’s a small clause. It prevents a large percentage of the arguments.
The variance report is where this should have been caught
We’ve talked about variance reports before on this podcast, and this is exactly why they matter.
If you spend $33,000 on office supplies against a $1,000 budget, the variance report is where you say so. Here’s the number, here’s the budget, here’s what happened, here’s why.
In the story I read, that didn’t happen. The expense went on the P&L, and the package went to ownership without a word about it.
An operator who can’t explain a number that far outside of budget is telling you something about how they run their business.
Every section needs a “what happens if”
The broader lesson here isn’t really about expenses. It’s about the habit of asking “what happens if” for every part of the agreement.
What happens if we blow the budget? What happens if we can’t agree on whether an expense was legitimate? What happens if this relationship stops working?
Conflict resolution, mediation, arbitration, and audit rights feel like paperwork when everyone is getting along, and they’re the only thing you have when you’re not.
It’s much easier to write that language while you’re building the relationship than to invent it in the middle of a disagreement.
If the story I read is true, then it stinks for that owner. But it’s also a situation that better language would have made a lot easier to resolve.
That’s the part worth taking away from it.
If you want to learn more about how great operators approach management agreements or what you should look for when exploring flexible office space for your building, start with the Commercial Landlord’s Guide.
And if you are not already watching, Flex in Five on YouTube is where I break down one landlord question at a time.
