How To | Cost Reduction

5 guidelines for controlling contracted dining service costs while maintaining quality

How To | Cost Reduction

5 guidelines for controlling contracted dining service costs while maintaining quality

  • To ensure that food costs remain within budget, contractual guarantees such as maximum cost per patient per day can be negotiated to ensure budget is met.
  • Dining services contractor requests for new equipment capital funding should be addressed in the agreement. The financial support should draw on a line of credit to ensure that the spending is not adding to the contractor’s profit margin.
  • If expenses are trending higher than budget, set the expectation that the contract food service provider must provide a comprehensive plan to reduce expenses with time-bound, measurable commitments.

Hospitals and health systems spend large sums on food and food services and the stakes are high. Food quality and related service is visible to everyone and can impact patient and visitor experience and staff  productivity. Food vendors become virtual partners. Agreements and relationships need to be managed to ensure optimal performance for the least cost and the process should be seamless.

Hospitals and health systems are looking to reduce time and overhead involved with staffing and running day-to-day food service operations in a market where the clientele increasingly demands more diverse dining options and service levels.

However, negotiating the service agreement is fraught with nuance, leaving organizations prone to potential errors that could end up costing hundreds of thousands, if not millions, in unexpected billings. Following these guidelines in the set-up and review of the master services agreement will help ensure that your entity has audit milestones and safeguards in place to ensure the optimal level of service and price for food and services provided:

Hiring practices and labor allowances. Dining service providers should bring expertise in hiring and retaining qualified staff throughout all dining services areas, regardless of the labor market or payroll logistics. Contractual provisions in the form of guarantees will ensure that payroll costs stay within budget and that any costs associated with hiring, management and retention of staff are the financial responsibly of the dining services provider.

Food costs. Food cost is typically a large portion of any hospital spending. To ensure that food costs remain within budget, contractual guarantees such as maximum cost per patient per day can be negotiated to ensure budget is met.

In addition to contractual guarantees, rebates should be negotiated when appropriate. While many dining service providers offer their clientele favorable basket pricing, vendor volume food discounts provided to the servicer are often their most significant profit centers. A “market basket” comparison of major food items should be conducted to ensure that volume discounts earned by your dining services provider are being passed on to the client. The result of this analysis will assist in negotiating appropriate rebate percentages or dollars.

Capital expenses. Even though your dining services provider can be a great resource in assessing logistics and cost of updating dining service areas, beware of their offer of capital dollars in exchange for contractual concessions. Many times, they will provide funding in exchange for an additional term on the contract or to rectify service or cost concerns; what may appear to be a one-time source of financial relief could end up costing your facility over the long run. It may make more sense financially to leverage this offer in negotiating annual recurring savings.

If the dining services contractor is looking for your organization to provide capital funding for new equipment purchases, ensure that the agreement language includes requirements that the contractor offer support for expenditures or draws on the line of credit provided on a quarterly basis to ensure that the spending is not adding to their profit margin.

Monthly/quarterly review. Contractual language requiring a quarterly review of year-over-year financials is a necessity to ensure the client is satisfied with operational performance. Schedule a quarterly business reviews with the food service contractor’s district manager or equivalent.

If expenses are trending higher than budget, the food service provider should offer a plan to reduce expenses with time-bound, measurable commitments.

If revenue is trending unfavorable to budget, set the expectation that the contract food service provider must provide a comprehensive plan with time-bound measurable commitments.

Diner reviews. In addition to guarantees surrounding labor and food expenses, it may be appropriate to negotiate food and overall dining quality as a contractual guarantee. Your dining service contractor is the compensated expert and should be taking steps to enhance the dining experience and showcase your program to stakeholders.

To ensure that concerns are addressed, a contractual provision that can be utilized is tying quality to financial penalties. By integrating pre- and post-patient satisfaction surveys into the master service agreement, you’re incentivizing your dining service provider to enhance the patient experience while ensuring food pricing and service levels remain at optimal levels. 

About the Author

Stephen Carrabba

is president and founder, Expense Consulting, Bloomfield, Conn. (s.carrabba@ expenseconsulting.com).

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