Contract killings

This year's annual survey of the contract catering industry by the British Hospitality Association claims that the cost-plus contract will be abandoned within the next five years in favour of a more commercial arrangement - often fixed-price. But in many cases the picture is more complex.

The cost-plus arrangement of the 1970s and 1980s fell from favour as clients objected to the fact that they were expected to pick up all costs, often in the form of hidden discounts and loaded invoices. This situation is rare today, but the memory lingers. Clients now expect the caterer to take the risks with a fixed-price arrangement.

Fixed price was given a further boost by the arrival over the past decade of the public sector, which now accounts for a quarter of contractors' business. These are almost all fixed cost, although the NHS is often a hybrid of fixed price, nil subsidy and discounted meals.

A totally fixed-price contract is not seen as appropriate for all parties as the service gets squeezed between client and caterer. In practice, contracts are often a mixture, with cost plus including fixed elements, such as labour, and fixed price allowing for variables such as sales.

David Jenkinson, managing director of contract caterer Restaurants At Work, says: "If the price is fixed on one side and catering on the other, the only variable is the service and if this changes it means the menu goes down in value and standard or up in price."

Eighty per cent of Jenkinson's business is cost-plus, but many of these contracts contain fixed elements and are performance-related. He looks for earnings for the company as a percentage of the total catering budget turnover for the client.

"We discuss the most appropriate way of doing this with the client. It could be a combination of fee and retained discount, but it's done with the full agreement and commitment of the client."

"In the 1980s, cost plus got a bad name and the pendulum has swung violently the other way," says Ron Collacott, assistant managing director of Brian Smith, whose contracts are mostly fixed-price or have fixed-price elements. "[The pendulum] should be vertical, with core services specified and sundry costs met by contractors on a guaranteed basis."

Nelson Hind Catering Management has only 5% of its 153 contracts as fixed-price. The rest are cost plus with performance guarantees. Chris Hind, managing director, says: "I'm not a great believer in fixed price. The more fixed it is the more sovereignty moves away from the client.

"All the risks are taken by the caterer; he has to have control. But because the client may not get what he wants, the caterer can only threaten to terminate the contract. The employees suffer as labour is reduced and standards are lowered. With cost plus, the client has absolute power and if the contract is managed professionally, standards move up all the time."

Contractors accept they have to take risks and be responsible for retailing and merchandising. But for a fixed price to be effective, it is essential that there are clear specifications from the client, such as opening hours, level of hospitality and vending provision.

Aramark Food Services has 35% cost-plus contracts and the rest as a combination of "risk and reward". "We go for guaranteed solutions tailored to fit each client," says managing director Mike Tye. "We agree with the client the critical issues that we can work towards, such as subsidy level. Where possible we try to get guarantees and share the benefits and the pain. Some clients want to fix everything, but if circumstances change, it's better that we are flexible to hit the bottom line for the client."

"It's dangerous to say that the industry is going from cost plus to fixed price - most are a mixture of both," says Peter Aldrich, managing director of Sutcliffe UK. "It depends on how much sovereignty the client is prepared to offer the caterer. It could almost become a concession whereby the contractor pays to operate on the client's premises. Capital investment can become an extended form of contract with the benefits of security of tenure for the contractor and improved facilities for the client at no extra cost. This often becomes self-financing in a short time."

Mike Oldfield, managing director of Eurest, which has in-house brands such as Café Select and Upper Crust, believes retailing within contract catering is here to stay. "This is a retail generation," he says. "People want to trade up. In one of our units vended beverages are free, but people are paying 32p for a cup from Café Select because they're looking for the quality, ambience and experience."

Eurest's contracts are mostly fixed-price or commercial, but it also has a royalty contract, which earns it a fee through the till. "We have to be flexible," says Oldfield. "It can be between 35 and 50% depending on what subsidy the client wants, so we price the tariff to get gross profit instead of a management fee. The more we sell the more we make," says Oldfield.

Despite the shifts in contract patterns, caterers are optimistic about maintaining or increasing profit margins through realistic management fees, retailing opportunities and incentives, such as Sutcliffe's customer loyalty programme, launched earlier this year, which already shows a 6-10% increase in sales.

Although nil subsidy is held up as the "ideal solution" for clients, it is not realistic if there are not the numbers on site to support the services offered. The client must also be prepared to offer sovereignty to the caterer to trade as in a high street. Caterers now view it as more of an opportunity to expand the service, selling more and increasing spend per head, particularly with the introduction of non-catering services such as dry-cleaning and newsagents.

"Subsidies will continue to decline," says Bob Cotton, director of corporate affairs at Gardner Merchant, whose business has swung to 50% non cost-plus contracts in three years. "I doubt whether they will be whittled away completely, as companies still want to be seen as providing a service for staff. Whereas it used to be the client who picked up the bill and everyone was subservient, they now want a three-way partnership between customer, client and caterer."