Contract Catering: The financial models

Apr 19, 2021 editor

Following a turbulent year in Contract Catering, many of our clients have moved to Cost Plus models or Cost Plus with Guarantees to weather the storm. But what does this actually mean?

Contracts should be fair to both parties and be able to give accountability and value to the client as well as a realistic reward and/or incentive to the caterer.

Catering contracts are legal agreements entered into between the client and caterer for a specified period. Ultimately, as the client you need to determine which model works for you before entering into a procurement process. Clients may wish to consider; their organisation’s requirements, style of food, employee expectations, working environment, location, catering competition and catering policy.

Cost Plus

  • An estimated budget is prepared by the caterer.
  • The caterer operates the service according to the budget.
  • If the budget is exceeded, the client pays the difference; if savings are made, these are passed on to the client.
  • Subsidy can change monthly.
  • Contractors charge a management fee.

Cost Plus guarantee

  • Same benefits as ‘cost plus’ and in addition the caterer guarantees certain lines within the budget i.e. labour costs, gross profit percentage, sundries as a percentage of sales and management fee.
  • Ensures any benefit in increased sales will decrease the bottom line subsidy.
  • Cost lines will be ‘fixed’ or guaranteed and charged to the client.
  • Client does not usually benefit from any savings, but an agreement can be made to split any savings between caterer, client and catering team.
  • Contract can incorporate an incentivised management fee based upon performance.
  • A service level agreement (SLA) is drawn up and caterer agrees to put part of their fee at risk.
  • Caterers performance is measured against the SLA.
  • Subsidy will be variable.

Nil subsidy/Cost

  • Caterer normally has full autonomy over the tariff, menu and all sundry costs and how these will be applied.
  • Nil subsidy can only be considered in high volume sites where near high street pricing is acceptable.
  • No cost to the client and the caterer takes all the risk.
  • For Nil Subsidy and a Concession Contract, certain parameters need to apply, such as sovereignty over service levels, opening times, offer and pricing.
  • A profit and loss account is run by the caterer but these are not submitted to the client.

Fixed price/Cost/Subsidy

  • Annual budget, including all known variables is prepared by the caterer.
  • Annual cost is divided by 52 to calculate a weekly fixed subsidy, or by 12 to calculate a monthly fixed subsidy. This cost is charged to the client.
  • Client does not pay for any overspends and knows exactly what the subsidy will be each month.
  • The management fee element of the subsidy can be incentivised, however this is not entirely fair to the caterer as they already take the risk of providing the service.
  • Lower quality contractors could reduce the quality and overheads to enhance their profit.
  • The management fee is often higher to take possible risks into account.

Fixed cost per head/user/employee

  • An annual budget is prepared and calculated to provide a fixed cost per user.
  • The client is charged using the daily numbers multiplied by the food cost per head.
  • Caterers have systems in place for counting the number of users.
  • This is a common style of contract for hospitality, schools and for clients where the customer does not pay for their meal.