Expert Guides
Understanding the different types of catering contracts
Catering contracts are vital legal agreements between the client and caterer, facilitating the supply of food and drink in the workplace for a specified duration.
Pros and cons of different contract types
Each contract type has different and distinct advantages and considerations. It’s crucial for clients to select the contract style that aligns with their organisation’s needs, culinary preferences, and workplace dynamics. This expert guide outlines the types of catering contract and their different purposes.
Cost plus contracts
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The caterer prepares an estimated budget.
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The caterer operates the service according to the budget.
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If the budget exceeds, the client pays the difference; if the caterer saves money, they pass the savings on to the client.
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The subsidy can change monthly.
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Contractors charge a management fee.
Cost plus guarantee contracts
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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/or management fee.
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Ensures any benefit in increased sales will decrease the bottom line subsidy.
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The caterer fixes or guarantees the cost lines and charges them to the client.
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The client usually does not benefit from any savings, but the caterer, client, and catering team can agree to split any savings.
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Contracts can incorporate an incentivised management fee based upon performance.
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A service level agreement (SLA) outlines the terms, and the caterer agrees to put part of their fee at risk.
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The SLA measures the caterer’s performance.
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Subsidy will be variable.
Nil subsidy/cost contracts
Fixed price/cost/subsidy contracts
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Annual budget, including all known variables is prepared by the caterer.
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Annual cost is divided by 52 to calculate a weekly fixed subsidy, or by 12 to calculate a monthly fixed subsidy. This fee is charged to the client.
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Client does not pay for any overspends and knows exactly what the subsidy will be each month.
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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.
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Lower quality contractors may reduce the catering’s quality and overheads to enhance their profit.
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The caterer may charge a higher management fee to cover their possible risks.
Fixed cost per head/user/employee
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An annual budget is prepared by the caterer to calculate a fixed cost per head.
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The client is charged using the daily numbers multiplied by the food cost per head.
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Caterers have systems in place for counting the number of users.
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This is a common style of contract for hospitality, schools and for clients where the customer does not pay for their meal.
Concession
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In addition to nil subsidy, a percentage (usually of sales) is returned to the client each month.
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Caterer provides client with monthly sales volumes.
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Usually used in retail or on the High Street.
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These tend to be high volume contracts.
Royalty contract
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Most effective when used as part of a long term strategy.
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Provides the client with a guaranteed percentage return-on-sales each month.
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Transfers the risks of managing food costs and stock holdings to the caterer.
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Client’s royalty percentage is maintained even if caterer’s profit is reduced in the event the caterer doesn’t control their costs.
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Royalty contract incentivises both parties.
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Provides an alternative to an incentivised management fee based SLA.
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Only applicable in large turnover operations.
Glossary of common contract catering terms used in different types of catering contracts
Subsidy
The bottom line cost paid by the client to the caterer to provide the catering service, used where the sales income is less than the cost of operation.
Service-level agreement (SLA)
Service level agreements in the contract define the level of service. The contract incentivises the caterer’s income based on sales or SLA performance, whether earned through a management fee or other methods.
Gross profit (GP)
The difference between the food cost and sales revenue that normally offsets part or all of the operating costs
RRP
Recommended retail price
Tariff
Selling price
Operating expenses
Operating expenses include costs other than food, such as cleaning, disposables, uniforms, equipment, and deep cleans. Additionally, they cover labour costs and all associated employment expenses, such as the employer’s NI, pension, healthcare, and more.
Management fee
Catering revenue received directly from client for operating the catering service to cover costs for employing and managing the people and services needed to deliver the service.
Expert advice
To share best practice, we have developed BM’s unique expert guides for workplace and contract catering. For more information read our expert guide to 5 advantages of contract catering.
Listen here as Ian explains the different types of contract catering.
