Why Do Food Costs Often Increase Under Management Fee Contracts?
They Don’t Have Any Skin in the Game
One of the fundamental flaws of management fee contracts is that food service providers have no financial risk when it comes to controlling costs. Unlike profit-and-loss (P&L) contracts, where the provider’s profitability depends on how efficiently they manage expenses, a management fee contract ensures they get paid regardless of how much they spend.
In other words, they have no skin in the game—and when there’s no real financial consequence for overspending, there’s little incentive to keep costs in check.
Here’s how this lack of financial accountability plays out:
- Every Dollar Spent Is Reimbursed
- Because institutions agree to cover all food, labor, and operational expenses, providers have no reason to negotiate prices, minimize waste, or optimize purchasing aggressively.
- If food costs go up? The school pays.
- If the provider makes inefficient purchases? The school pays.
- If there’s excessive food waste? The school pays.
- No Pressure to Find Cost Savings
- In a P&L contract, the provider must manage costs effectively to ensure they remain profitable. If they overspend, they lose money.
- In a management fee contract, there’s no penalty for inefficiency—the institution covers all costs no matter what.
- Inflated Pricing is More Profitable
- Some contracts base the provider’s management fee as a percentage of total operating costs—which means that higher costs can lead to higher fees for the provider.
- Instead of minimizing expenses, they are financially incentivized to let costs rise.
- No Consequences for Over ordering or Waste
- With a guaranteed cost reimbursement, providers may over-purchase ingredients, leading to excess food spoilage or waste.
- But since the school covers these costs, it’s not the provider’s problem.
- Limited Institutional Oversight
- Schools often lack the internal resources to closely monitor food purchasing and pricing trends.
- Providers know this and may exploit the lack of transparency by steering food purchases toward high-margin suppliers, proprietary brands, or pre-arranged vendor agreements that benefit them—not the institution.
The Solution: Make the Provider Accountable for Cost Control
If institutions want to prevent food costs from spiraling out of control, they need to tie the provider’s compensation to cost efficiency and operational performance. Here’s how:
- Shift to a Hybrid or P&L Model – A contract structure where the provider shares financial risk encourages cost-conscious decision-making.
- Implement Cost Targets with Financial Penalties – Require the provider to operate within agreed-upon budget limits, with financial consequences for exceeding them.
- Mandate Transparency and Independent Audits – Ensure food costs, supplier agreements, and rebates are openly disclosed and subject to external review.
- Benchmark Costs Against Market Rates – Require competitive bidding for food purchases to prevent inflated pricing.
Bottom line: A food service provider with no financial stake in cost control is not motivated to manage expenses responsibly. To prevent institutions from unknowingly subsidizing inefficient operations, contracts must be structured to hold providers accountable—because when they have skin in the game, they operate far more efficiently.
