Allowable Use of Procurement Fees in SFA Contracts

This Management Bulletin clarifies the allowable use of procurement fees in School Nutrition Program contracts relating to discounts, rebates, and applicable credits.

Many School Food Authorities (SFAs) contract with Food Service Management Companies (FSMCs) or other contractors to manage certain aspects of their food service, including purchasing goods and supplies for use in the food service operation. The following criteria apply to any contract that includes a purchasing clause that was executed after November 30, 2007 (the effective date of the United States Department of Agriculture [USDA] 2007 final rule):

1. All discounts, rebates, and applicable credits received by the contractor when purchasing goods on behalf of the SFA must be returned to the SFA’s nonprofit school food services account.
2. Any fee charged to the SFA that correlates to the amount of discounts, rebates, and applicable credits that the contractor is required to return to the SFA is an unallowable nonprofit school food service account cost and undermines the intent of the federal regulations referenced above.

A fee structured in this way is clearly intended to return some or all of the discounts, rebates, and applicable credits to the company with whom the SFA has contracted for services rather than to ensure that they accrue to the nonprofit school food service account.

Some examples of a fee that is directly tied to the amount of discounts, rebates, and applicable credits could include the following :

• A contractor purchases a food product from a vendor on behalf of an SFA. The vendor offers a 10 percent discount on the cost of the product. The contractor charges the SFA a 10 percent procurement fee for the service of purchasing the food product. (This practice also violates the cost-plus-a-percentage-of-cost contract prohibition in Title 7, Code of Federal Regulations, Section 210.16(c).
• A contractor purchases a food product from a vendor on behalf of an SFA at a cost of $1 per item. The vendor offers a 10-cent-per-item rebate, which the contractor passes along to the SFA. The contractor then charges the SFA a 10-cent procurement fee per item purchased from this vendor.

These fees are unallowable charges to the SFA’s nonprofit food service account. The SFA may, however, develop solicitations in a way that allows for management and/or administrative fees that include fees for procurement services. The procurement fee could be a separate fee or part of another contract fee, as long as it remains fixed.

The USDA required that all contracts comply with all aspects of the final rule by November 2009, including procurement fee limitations. If coming into compliance with the final rule does not materially change the terms of the contract, the SFA may amend the contract to include the requirements of the final rule. If an amendment constitutes a material change to the terms of the contract, it must be rebid. A material change to a contract is a modification that exceeds the terms of the original solicitation and resulting contract, and that is substantial enough that had other bidders been aware of the change during the biding process they might have bid differently.

The USDA’s October 2007 final rule regarding procurement is available for download at the following United States Government Printing Office web page https://www.gpo.gov/fdsys/pkg/FR-2007-10-31/pdf/E7-21420.pdf.

Contact Information

If you have any questions regarding this subject, you may contact the Procurement Resources Unit (PRU) by email at SFSContracts@cde.ca.gov to be directed to a PRU Specialist.