Food Service Contracts – Do They Matter to You?
On June 14, the New Jersey Department of Agriculture, Division of Food and Nutrition, School Nutrition Programs (SNP), quietly announced a change in the type of contract that will be allowed with Food Service Management Companies (FSMCs). The original schedule was supposed to begin July 1, 2018, but it was revised on July 31, to provide for a one-year-delay in the launch to the 2019-2020 school year.
According to the actual announcement, “contracts with Food Service Management Companies will require a standardized RFP which will be provided by the State Agency. The RFP will be based on fixed-price. Cost-reimbursable contracts will be phased out as noted in the schedule….” The initial memo indicated that all contracts would be phased-out beginning with the 2018-2019 school year, and completed by the 2020-2021 school year.
This new change will apply to the majority of our districts. The change does NOT affect, however, those districts not participating in the National School Lunch Program (NSLP), or those that operate their own in-house food service programs. NJASBO Resolution addressing the new contract changes.
Understanding the critical differences between the two types of contracts is important to be able to assess if your district will be impacted by the change. The SNP requires a district to issue a Request for Proposal at a minimum of every five years. Historically, the result of that process has been a cost-reimbursable contract with the successful FSMC.
A cost-reimbursement contract enables the district to collect the revenues from the food service program and, with proper documentation, reimburse the FSMC for the costs (food, personnel, supplies, etc). The FSMC also receives a management fee (call it their profit) typically based on a cents per meal calculation or a fixed amount established in advance. A cost-reimbursement contract also typically includes a bottom line profit (or loss) guarantee.
It is important to not confuse a fixed-price management fee under a cost reimbursement contract with the newly mandated fixed-price contract. Under the new fixed-price contract requirement, the only price quoted will be a fixed-price per meal that will have to cover ALL elements of the cost of running the program, including – presumably – the profit margin for the FSMC. The SNP has stated that “price is NOT the sole basis for the contract award; however, price remains the primary consideration once the most qualified proposal is identified. Price/cost must have the most weight of all scoring criteria.”
Based on conversations with many business administrators and multiple FSMCs, there are a number of ramifications for our affected districts to consider.
On one hand, a fixed-price contract could simplify a BA’s financial oversight of the operations. The FSMC would be reimbursed at a fixed-price per meal, times the number of meals or meal equivalents served. Rebates, discounts, and commodity usage would no longer be a concern.
There is a concern, however, that price could become the primary consideration of any purchase and limits other options. In order to monitor price versus value, the Request for Proposal specifications would have to be detailed and thorough as “the RFP will require the School Food Authorities (SFAs, i.e., school districts) to lock into food specifications, paper quality, staffing requirements, wages and benefits, and all associated costs for the contract term.” As a BA working in the real world, there also are issues that must be considered when providing a successful food service program such as ongoing level of staffing, declining participation, providing additional service lines, and changing the quality of paper products, as well as:
- Food allergies
- Sushi bars
- Organic foods
- Vegetarian options
- Jersey Fresh produce
- Quality of cold cuts
This level of detail is important because, per the SNP, “If an SFA expects to renew the contract for additional years, it is recommended that it plan for its needs over a 5-year period to assure that all potential program changes can be identified in the RFP. This planning will help to minimize material changes which will require a new RFP.”
How many of us are able to anticipate changes five years out, or have not had a parent, PTO, staff or student request changes? The SNP states, “it is anticipated that the SFA will be able to dictate the level of quality and service it expects in its RFP…any significant change would require the district to go back out to bid the next year.” Budget exceptions only will be allowed if the request could not have been reasonably anticipated during the development of the RFP, and is of an emergent nature. “Failure to properly anticipate requested enhancements, improvements or other changes in and of itself must not be the only justification for the requested budget exception.” If the requested change is material, the SFA would have to re-bid.
Re-bidding can be involved. There is the administrative time to revise the RFP, but there also are tasks involved in potentially changing over FSMCs each time a material change occurs. Additionally, there may be changes in staff, Point of Sale systems, other equipment and inventory, etc. And, what happens if there are fewer competitors and there are no bidders? Who reaps the benefit of increased rebates, discounts and commodities?
Perhaps some of the more major considerations are the outcomes that arise from placing a primary emphasis on pricing. The FSMC would need to project its cost of operations and guarantee those, potentially, for five years. The SNP would continue to calculate the allowable annual price adjustment in accordance with the consumer price index. This type of contract places the risk of fluctuations in food costs, labor and benefits, supplies, and of course rebates, discounts, and commodities in the hands of the FSMC – for better or worse. Would this reduce competition and FSMC options for districts? Time will tell.
More important is a concern about the risks to the quality of the food served to our students, if the FSMC needs to offset unanticipated costs over the contract term. Would NJ Fresh string beans, for example, be replaced by canned string beans? Over time, how would these qualitative changes impact participation? At what point are fewer meals being served without reducing staff?
Of course there are a multitude of scenarios that could play out both in favor of, or against, the district. The SNP has said this new method will improve integrity, transparency, and accountability. But, will we sacrifice the ability to effect change for a known price per meal? Will a change in the contract potentially jeopardize the quality and participation rates for our students’ food service operations? Will it reduce the workload and responsibilities of the districts that must monitor the quantitative and qualitative components of the RFP? Each district has its unique characteristics and priorities, new rules will require careful consideration.
This article appeared in the October 2017 Key Post, a publication of the New Jersey Association of School Business Officials. NJASBO President Susan Young is a CPA, RSBA, CFE, SFO.