Understanding the different types of catering contracts

Catering contracts are legal agreements entered into between the client and caterer to supply food and refreshments in the workplace, for a specified period. There are many different types of catering contracts and there are pros and cons to each of them. Clients select the contract style that suits; their organisation’s requirements, style of food, employee expectations, working environment, location, catering competition and catering policy. The type of catering contract will usually be specified to the contractor in the catering tender process.

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.

These are the main types of catering contracts:

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.

Concession

• In addition to Nil Subsidy, a percentage return (usually of sales) is given to the client each month.
• Caterer provides client with monthly sales volumes.
• Usually used in retail or on the High Street.
• These tend to be high volume contracts.

Royalty contract

• Best used as part of a long term strategy.
• Provides the client with a guaranteed percentage return-on-sales each month.
• Transfers the risks of managing food costs and stock holdings to the caterer.
• Client’s royalty percentage is maintained even if caterers profit is reduced in the event the caterer doesn’t control their costs.
• Royalty contract incentivises both parties.
• Provides an alternative to an incentivised management fee based SLA.
• Only applicable in large turnover operations.

Glossary of common contract catering terms used in different types of catering contracts

Subsidy

The bottom line cost to the client for a caterer to provide the catering service where the sales income is less than the costs of operation.

Service-level agreement (SLA)

Part of a service contract where the level of service is formally defined. The caterers income (however earned i.e. management fee) can be incentivised either on sales and/or SLA.

Gross profit (GP)

The difference between the food cost and revenue that normally offsets part or all of the operating costs

RRP

Recommended retail price

Tariff

Selling price

Operating expenses

Costs other than food, i.e. cleaning, disposables, uniforms, equipment and deep cleans.

Labour costs and all the costs related to the employment of the team.

Management fee

Revenue received directly for operating the service to cover costs for employing and managing the people and services needed to deliver the service.

Download our guide to understanding the different types of catering contracts here

Expert advice

To share best practice, we have developed bartlett mitchell’s expert guides for workplace and contract catering. Download the pdf guide to Different types of catering contracts  or read our expert guide to 5 advantages of contract catering

 

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