Plugging the Loopholes

The company’s contract with its food service operator was coming up for renewal. Could Clarion help negotiate better terms and reduce the subsidy?

What We Found: The agreement had no provision requiring the contractor to do a good job—manage efficiently, serve good meals, keep food safe or keep the facility clean. There was no “independent contractor” clause, meaning the company could be held liable for anything the contractor did under the contract, including violations of health code, OSHA and labor laws.

The biggest loophole was financial. The contractor could charge what it pleased for overhead costs, such as fringe benefits, IT system, proprietary materials, insurance and “related services.”

The contractor charged 34% of payroll for wage-related taxes, workers compensation insurance and fringe benefits. The liability insurance and “related services” charge was 2.55% of sales.

Challenged, the contractor’s regional vice president provided a spreadsheet showing the composition of the wage-related charges and insurance charges. The 34% payroll surcharge included such items as accruals for bonuses, severance pay and service awards. The 2.55% insurance charge included liquor liability insurance, although the company prohibits alcohol on the premises. The actual charge for liability insurance was 0.52% of sales.

Outcome: Negotiation is the art of compromise. Because the company did not want to accept competitive proposals, our leverage was limited. The final agreement:

• Standards for operational performance, food safety and sanitation were inserted.
• An independent contractor clause was added.
• Charges for overhead costs were restricted.
• The charge for wage-related taxes, benefits and insurance was capped at 27% of payroll.
• The liability insurance charge was capped at 0.8% of sales.
• The contractor’s management fee was increased, but a portion of the fee was put at risk: The contractor could earn as much as 20% extra fee, or lose up to 25% of its fee, depending on operational and financial performance.

Direct savings exceeded $50,000 in the first year.