Catering Services and Food Procurement (CSFP) Toolkit
Costing Options
- Zero/Nil subsidy
- Fixed price
- Cost plus
- Cost plus with incentives and guarantees
- Commercial/Concession
1. Zero / nil subsidy
This applies if all the costs associated with the contract are covered by their operating margins. However, free-of-charge services such as hospitality requirements for example are in addition to the subsidy because the caterer is not receiving cash for these. The caterer must charge the client in the same way as the diners are charged. Additionally, the client takes the risk of bad debt.
It is widely acknowledged that the nil cost option is only possible on sites where there are in excess of 1000 customers. This is unless the services are designed to attract a nil subsidy e.g. a café deli with a single hot option, one or two staff and a relatively high price similar to high street prices.
2. Fixed price
This applies if the annual cost of the contract is fixed in total, giving certainty about the financial commitment, unless circumstances change significantly. The contractor takes a risk on revenue and costs and is therefore likely to incorporate some contingency or risk premium. Typically, they would also have increased control over key elements of the services that affect their costs, such as opening hours, menu content and pricing.
Significant changes to circumstances or requirements are negotiated as variations. Standards must be monitored to ensure that there is no noticeable drop in service levels as it is in the interests of the contractor to reduce costs.
Fixed price contracts are most suitable where the circumstances of the contract are relatively stable, demand patterns are established and major changes are not expected.
3. Cost plus
This applies if the contractor manages the service on behalf of the client and charges whatever it costs in addition to a management fee. There is no strong incentive for the contractor to reduce costs, but the client does have full sovereignty over all aspects of the offer. Good contract management skills are required from the client to ensure that suitable key performance indicators are set and that milestones are achieved.
Cost Plus contracts are not generally used for providing food for staff, but are typically used for hospitality services, where the client solely determines the level and type of demand. Where major changes to circumstances in the food provision for staff are anticipated or at the opening of a new facility/service where demand patterns are unknown, it can be beneficial to operate on a Cost Plus basis for a short period like six months and then fix the cost for the remainder of the contract. This allows for flexibility in responding to customer reactions to the services and the organisation can make changes to services without continually negotiating variations to contracts. Contractors do not need to build in safety margins to guard against the risks of the unknown.
4. Cost plus with incentives and guarantees
Similar to the Fixed Price option, this applies if the contractor guarantees to absorb the costs of an overspend on agreed budgets up to a proportion (e.g. 25%) of their management fee. Beyond that, the client pays, but may well have grounds for termination and can instruct the contractor to make changes. The incentives can come in the form of a share of any savings, if costs are below budget.
The contractor may also be required to put at risk a further part of their management fee against a satisfactory performance on qualitative and customer satisfaction measures. These may be a combination of key performance indicators, quality audits, customer satisfaction surveys and uptake levels.
5. Commercial / concession
This applies if revenues exceed the operating costs that are usually defined as labour, food, sundries and fee/profit. The contractor may pay a concession based on a percentage of sales revenue. This is common in public catering situations. A joint venture arrangement with shared profits may be an option but would require more comprehensive auditing and monitoring. It would also require an informed client representative who understands the implications of the sharing of risks.
Page last modified: 21 February 2008
Page published: 21 February 2008