Why is it important to benchmark fixed price contracts?

Fixed price contracts are more common these days as contractors feel that they can benefit from receiving a fixed monthly payment either at commencement or at the end of each month.

Clients also feel that it is a more simple arrangement and easier to manage.
Contractors will try to establish a fixed price at the highest realistic level to maximise profit.

The client will try at the outset to negotiate the best deal with the contractor to maximise quality at the best possible price.

Fixed price contracts will sometimes have clauses relating to annual RPI increases and some will include clauses relating to the volume of business and adverse pricing increases. The bands relevant to volumes of business must be fairly broad otherwise the fixed price would revert back to a cost/plus with the fixed price changing constantly.

A fixed price contract can be beneficial if there is likely to be a stable level of patronage and a constant level in service and quality.

Why benchmark?

• To establish a benchmark percentage level in relation to general market prices for all the contractors’ supplies, preferably at the outset, that can be monitored throughout the contract.
• To support any changes that may be necessary to tariffs, and other annual increases due to changing costs in the market price.
• To prove due diligence and best practice and maintain quality of food. Quality can be reduced by a gradual reduction in the frequency of quality prime foods appearing on the menus either due to price increases or to increase gross profit levels.
• To be in control, reducing the possibility of contractors or suppliers grossly manipulating the cost of supplies.
• To negotiate any revisions to the contract from a position of strength.
• To monitor the efficiency of contractors purchasing, it affects the price you pay!

Tip

Establish at commencement a ‘fixed element contract’ that fixes the total and all elements of cost, labour, hours and headcount, food cost amount and percentage in relation to income. Other overheads amount and percentage related to income.