Contracts with Food Management Companies

This Management Bulletin (MB) is to clarify requirements in crediting for, and use of, U.S. Department of Agriculture (USDA) Foods in contracts with food service management companies (FSMC) and to provide guidance to ensure compliance with such requirements in the first and final years of such contracts.

Crediting for the Value of USDA Foods and Single Inventory Management

In accordance with Title 7, Code of Federal Regulations (7 CFR), Part 250.51(a), the FSMC, in its contract with a school food authority (SFA) must credit the SFA for the value of all USDA Foods received in a school year. The FSMC must provide such credit whether or not the USDA Foods are used in the year of receipt. This ensures that the SFA/FSMC can use single inventory management (USDA Foods are stored and tracked together with purchased foods). Using single inventory management reduces the time and labor burden for both self-operating SFAs and SFAs contracting with FSMCs.

Carry-Over Inventory of USDA Foods in the First Contract Year

If the SFA was self-operating in the previous year, the newly contracted FSMC must credit the SFA for the value of USDA Foods in inventory carried over from the previous year. However, under single inventory management it is difficult to distinguish between USDA Foods and purchased foods in inventory, as all foods are comingled. Consequently, it is important for a previously self-operating SFA to include crediting requirements for all carry-over inventory (i.e., USDA Foods and purchased foods together) in its procurement or solicitation documents and resulting contract. The SFA may use the fair market value of foods in its carry-over inventory or may use another means of valuing such foods to determine credit.

If the SFA was operating under a contract with another FSMC in the previous year, the newly-contracted FSMC is not required to credit the SFA for the value of USDA Foods in inventory carried over from the previous year. This is because the USDA Foods should have been credited by the previous FSMC. If the previous FSMC did not provide such credit, the California Department of Education will determine if a claim is to be initiated to recover the value of the USDA Foods, or if the SFA must take corrective action to ensure future compliance with regulations.

In regards to food safety, the newly contracted FSMC is not required to credit a previously self-operating SFA for USDA Foods determined to be unsafe in inventories carried over from the previous year. The USDA Foods (or other foods) must not be used if the state or local health authorities or the SFA determine that they are not safe to eat. If USDA Foods are determined to be safe, but are beyond the "best-if-used-by" or "use by" date, the SFA must ensure use or other disposition of such foods in accordance with the same procedures the SFA applies to other foods and in accordance with applicable local laws or regulations.

The Final Contract Year

The FSMC must credit the SFA for the value of USDA Foods in the year that the foods are received by the SFA and must use the foods in the school food service, but it is not required that USDA Foods be used in the year of receipt. For example, if USDA Foods are not received until late in the school year, it may be more feasible to use them in the following school year. However, in the final year of contract the FSMC may not be able to use all USDA Foods before termination of the contract. The SFA may not return credit to the FSMC for the value of unused USDA Foods; as such return of credit would not be compatible with single inventory management and would make it difficult for the SFA to track the value of USDA Foods from year to year. Additionally, the FSMC may not remove or retain unused USDA Foods at contract termination, except at the SFA's discretion (i.e., if the SFA has provided for such removal or retention of its inventory of commingled purchased and USDA Foods, in accordance with its contract). However, the FSMC must return all unused USDA ground beef and ground pork, and all processed end products.

In order to avert the problems described above, the following information will ensure that all USDA Foods can be used before contract termination.

SFA and FSMC Coordination in Ordering USDA Foods

The FSMC may order or select USDA Foods in coordination with the SFA in accordance with requirements in 7 CFR 250.50(d) and 7 CFR 250.58(a). Such coordination in ordering ensures that only those USDA Foods that can be effectively used in the food service are ordered, and that such foods are ordered as early in the school year as possible in order to ensure their use before the end of the year. Therefore, we encourage SFAs to involve FSMCs as much as possible in ordering USDA Foods.

Use of Commercial Substitutes in Management of the Food Service

The FSMC may use commercially purchased foods of the same generic identity, of U.S. origin, and of equal or better quality in place of USDA Foods in accordance with 7 CFR 250.51(d). The only USDA Foods that cannot be substituted are USDA ground beef, USDA ground pork, and all processed end products (i.e., containing USDA Foods). The "substitution option" applicable to most USDA Foods permits a FSMC to ensure their use, or the use of acceptable commercial substitutes, during the same school year in which the USDA Foods are credited. For example, if USDA canned corn will not be received until late in the school year, the FSMC may use an acceptable commercial substitute before the USDA corn is received; then, when the USDA corn is received later in the year, the FSMC may, at the discretion of the SFA, retain such food when the contract terminates. However, the SFA must ensure that such substitution has been made, and that it has received credit for the value of all USDA Foods received, in accordance with review requirements in 7 CFR 250.54(c).

Conclusion

It is important for the SFA to identify at an early stage the procedures or activities that will be necessary to ensure compliance with requirements for crediting for and use of USDA Foods in its FSMC contract. SFAs are encouraged to work closely with the FSMC to ensure that USDA Foods are used most effectively and efficiently in the school food service.

This MB explains the USDA Policy Memo FD-110, “Clarification in Crediting for and Use of Donated Foods in Contacts with Food Service Management Companies­­–First and Final Year Contracts” dated January, 2011, located at the following USDA web page http://www.fns.usda.gov/sites/default/files/pmfd110_NSLP_CACFP_SFSP-CreditingDonatedFoodsrevJan2011.pdf [Note: the preceding web address is no longer valid and has been replaced by https://www.fns.usda.gov/further-clarification-crediting-and-use-donated-foods-contracts-food-service-management-companies].

If you have any questions regarding this MB, please contact Amy Bell, Child Nutrition Consultant, Commodity Distribution Unit, by phone at 916-322-5051, toll-free at 800-952-5609, or by email at abell@cde.ca.gov or Sherry Tam, Child Nutrition Consultant, Commodity Distribution Unit, by phone at 916-324-9875, toll-free at 800-952-5609, or by email at stam@cde.ca.gov.