In this segment, I will explain some tactics that I have seen used by some FSMC’s. I assure you that if you are reading this, you will not see this information provided anywhere else.
What follows is an actual description of only three of the tactics I have seen employed by a FSMC. Many State Agency and school district personnel simply do not have a clue of how some (not all) FSMC really operates or how offering a free – no charge breakfast to students or promoting a $.10 breakfast can actually move money from the district to the FSMC. Don’t believe me – read on.
Actual Occurrence #1
A school district has a contract with a FSMC that specifies a minimum “guaranteed return”, but the company’s monthly P&L shows that the district is making more money than the minimum guarantee. The company wants a larger share of these “profits” than their bid price would allow and the company needs to legally get a portion of the district’s profit, that is the portion that exceeds the minimum guarantee specified in the bid. After all the FSMC wants all the funds other than that which the bid specifies must be guaranteed to the district. How can this be done legally? It’s very easy and done under the “guise” of promoting “Breakfast at School”.
Let’s assume for purposes of this discussion that the school has a “per meal” bid with FSMC – “X” that calls for payment of $2.00 per reimbursable meal served with an allowance for conversion of ala carte sales to “equivalent meals”. This contract provides payment to the FSMC of $2.00 for every reimbursable meal served which will include lunch, breakfast and ala Carte equivalents. Now you may think that manipulating ala Carte sales is the way for the FSMC to get those extra funds from the district’s side of the ledger. Right? If you think that is true you are wrong. The way to do it is to offer “Free (no charge) breakfasts to all students or a Breakfast Special for $.10. Think about that for a moment.
The FSMC is paid $2.00 for every reimbursable meal served, including breakfast, which is the least expensive for the company to serve. Let’s assume it cost the company $.75 (food & labor & misc.) to serve a reimbursable breakfast for which they receive $2.00 from the school district. By promoting a “no charge” breakfast, the company loses nothing but actually gains $1.25 on each breakfast served. Since most of these breakfasts would be from the “paid” category, the district will receive only “paid reimbursement” from the state and federal government and nothing from the student for the “service of the no charge meal”. The end result is the district actually pays the FSMC from its “school meals” account and forfeits the student-selling price for the meal. The company has now successfully reduced the amount of “profit” the school/district is making and legally “moved” a major portion of those funds directly to the bottom line of their Profit & Loss Statement. I have seen a FSMC employ this tactic 2, 3, and even 4 times a month, depending on the number of free – no charge meals served. Assuming that the “logistical problem” often associated with breakfast at school is not an issue, who would question a company’s effort to “increase breakfast participation?”
Actual Occurrence #2
I have seen districts that have contracted with a FSMC for some years, and established a very “amicable” relationship with the company. The district trusts the company, they normally will like its manager (and district manager), probably makes a bit of money (profit) each year, and is happy to keep the same company when it is time to “re-bid” the contract.
When this scenario occurs a representative of the FSMC will contact the district business official and enumerate all the positive things they are doing for the district, the security of having a “local manger”, the profit the school is making on the company’s operation, and all the “hassle associated with a transition to a new company should they, the incumbent lose the bid. When this occurs, the school will be willing to “bend the bidding laws” to try to keep the same company and of course the company is happy to assist in any way it can. How is this done? Easy, the company will offer to assist the district in preparing the bid specifications (which is not allowed by regulations). The resulting bid specifications will not fully reveal all the data necessary for a “new bidder(s)” to properly prepare a competitive bid or in the manner described in #3 below, will impose unrealistic requirements for the bidder. Often the number of reimbursable meals, ala carte sales, cost of labor, etc. can be significantly under reported in order to cause the new bidder(s) to bid higher than they might otherwise bid. I have also seen school districts advertise the bid with minimum public notice, schedule a mandated “walk through” late on a Friday afternoon, and run the public advertisement on a holiday weekend (e.g. Memorial Day) when few read “classified ads”. All techniques that is legal but used to discourage a competitive bid, thereby giving the advantage to the incumbent. Of course the incumbent promised the district they would keep their bid low or at the existing level in return for the quiet bid. Thereby securing the district’s share of the program’s profit.
While it is true, that in this scenario, the district will make more money than it did the previous year, the FSMC will make much more. Why? Because it will have a contract that is presumably good for a 5-year term (or more) and had the bid been truly competitive and fair, the incumbent would have bid much lower to win the bid against its competition, thereby reducing its profit and increasing that of the school district. The result, the incumbent company wins, and the school district thinks they benefited as well. Actually the district will lose much more money than it thought over the 5 year contract term mainly because they liked the great job the staff of the incumbent contractor has working in the district. What they didn’t realize was that if the bid went to a new company, that company would probably retain the same staff and produce the same meal but for a much lower price that would surely have resulted from the “competitive” bid.
Actual Occurrence #3
I once bid a contract in a situation where the school district wanted desperately to keep the incumbent contractor so their bid was a “fee based bid”. (Fee based bids are described later in this booklet but essentially they allow for payment of a “management fee” plus reimbursement of actual and allowable operational expenses). This type of bid is not longer allowed in some States. In my example, this particular bid specified that a cash security deposit of $50,000 had to be submitted to the district with award of the bid. The security deposit would be held for 4 years and returned in the fifth and final year of the contract. Two other prospective bidders refused to bid on this contract stating that the bid specifications and terms were skewed to retain the incumbent and impossible for any other company to comply.
Well I calculated the cost of operating this particular program according to the information provided in the bid specifications, for my client (a competing company). Most of this information was indeed skewed and misleading, but I knew the program and knew the “real” revenue potential, and so I was able to calculate a fair and realistic bid. I even calculated the interest cost to my company for the $50,000 cash security deposit. At the bid opening the incumbent bid a management fee of $4000.00 per year. Remember under a Management Fee type of Bid, the “management fee” must represent the company’s profit since direct operational costs are reimbursed based on invoices, payroll records etc. So a $4,000 annual fee meant that if the company operated the program “legally” it could only make a profit of $4,000.00 per year, and it would take many years, (certainly more than five years), before they could recoup their $50,000 cash security deposit and realized a real “profit”. Of course, the security deposit would be returned upon termination of the contract but.... I knew the company would make their money in other ways and seriously protested the award of the bid.
To make a long story short, the bid was awarded to this other company. I immediately filed a complaint with the State Agency, and now this state no longer permits a Management Fee bid for schools cafeteria contracts. My edification came when the school district “re-bid” the contract after the first contract year because under the winning company’s operation, the district experienced a loss of over $70,000 of their fund balance. That’s $70,000.00 not the $4,000.00 administrative fee that was “bid”. After skewing their bid specifications to retain the incumbent contractor, that contractor took advantage of the district to the “tune of $70,000”. Moreover, any clear thinking individual would know that the company didn’t lose a penny and probably made a huge profit ( that $70,000?). The reason? If the company had lost a singe cent, they would have been the ones who wanted the contract re-bid, not the school district.
Note: the above and all articles in this Food Service Management Company series are the property of Frank Rinaldi (DBA SLANT Consultants), and may not be copied, redistributed, or used in any manner, unless approved in writing by Frank Rinaldi. All Rights are Reserved.
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