Procuring and Monitoring of FSMC Contracts

This Management Bulletin (MB) supersedes MB SNP-04-2014, which provided important guidance, essential reminders, and updates for all school food authorities (SFA) and local educational agencies (LEA) participating in the National School Lunch Program (NSLP) about procuring food service management company (FSMC) services and monitoring FSMC contracts. This MB replaces information in SNP-04-2014, originally provided in the fifth bullet under the heading “Use of Program Funds in Food Service Management Company Procurements,” regarding the responsibility of SFAs and LEAs to obtain a breakdown of questionable costs during the bidding process.  

As defined in Title 7, Code of Federal Regulations (7 CFR), Section 210.2, an SFA is the governing body that is responsible for the administration of one or more schools and has the legal authority to operate any of the federal nonprofit school nutrition programs (SNP). The NSLP and the U.S. Department of Agriculture (USDA) Foods Program are governed by 7 CFR, parts 210 and 250, respectively.

As defined in 7 CFR, Section 210.2, an LEA is a public board of education or other public or private nonprofit authority legally constituted within a state for either administrative control or direction of, or to perform a service function for, public or private nonprofit elementary schools or secondary schools in a city, county, township, school district, or other political subdivision of a state, or for a combination of school districts or counties.

NOTE: This MB provides general guidance on certain aspects of FSMC procurement and contract monitoring. It does not, and is not intended to, provide a complete explanation of all laws and program requirements applicable to FSMC procurement and contract monitoring. SFAs remain responsible for ensuring that their procurement methods, procedures, contracts, and contract oversight comply with all applicable California state and federal laws, regulations, and requirements. SFAs must also fully review and comply with program instructions and guidance materials. SFAs should consult with their own legal counsel regarding any proposed procurement methods or contract language.

Preapproval Requirement

In October 2007, the USDA issued the final rule—Procurement Requirements for the National School Lunch, School Breakfast, and Special Milk Programs—in the Federal Register, Volume 72, Number 210, page 61479 (referred to in this MB as the Final Procurement Rule), which codified new procurement requirements. Section 210.19(a)(5) of 7 CFR requires the California Department of Education (CDE) to annually review and approve each contract (including all supporting documentation) between any SFA and FSMC prior to execution to ensure compliance with all state, federal, and local procurement laws and regulations. The CDE will annually notify SFAs that are due to rebid their FSMC contracts to comply with this requirement and will provide the deadline by which the SFA must submit their bid package.

Food Service Management Companies and Services

Section 210.2 of 7 CFR defines an FSMC as a commercial enterprise or nonprofit organization that an SFA is, or may be, contracting with to manage any aspect of its food service operation. Under federal regulations, an SFA may contract with an FSMC to perform one or more activities of the SFA’s nonprofit food service operation, in one or more of its schools (7 CFR, Section 210.16[a]). These activities may include consulting, bookkeeping, menu development, maintenance of program documents (e.g., daily meal counts and menu production records), meal preparation and service, maintenance of meal claiming data, and purchasing services. Notwithstanding the above, California state and federal statutes and regulations require SFAs to retain general managerial control over their nonprofit school food service operations (California Education Code [EC] Section 35161 and 7 CFR, sections 210.3[d] and 210.16[a][4]).

The SFA shall retain control of the quality, extent, and general nature of their food service operations and the prices charged to children for meals (7 CFR, Section 210.16[a][4]), including the:

• Establishment and maintenance of the nonprofit school food service account
  (EC Section 38094 and 7 CFR, sections 210.9[b][1] and 210.14[a])
  
  
• Development and adjustment of the 21-day cycle menu that must be issued as part of the Request for Proposal (7 CFR, Section 210.16[b][1])
  
  
• Retention of signature authority on the SFA’s Permanent Single Agreement with the CDE, claims for reimbursement, and the nonprofit school food service account; notably, FSMCs may provide services related to the preparation of program reimbursement claims, but they are not allowed to submit program claims for reimbursement (7 CFR, Section 210.16[a][5])
  
  
• Assurance of lunch count accuracy prior to the submission of the monthly claim for reimbursement (7 CFR, Section 210.8[a])
  
  
• Retention of financial responsibility for their school food service programs
  (7 CFR, sections 210.9[b][1], [2], [3], and [4]; and California EC, sections 38094 and 38101[d])

Use of Program Funds in Food Service Management Company Procurements

The Final Procurement Rule contains important requirements for SFA procurement contracts with FSMCs, including:

• SFAs cannot use funds from their nonprofit school food service accounts to pay for procurements that do not comply with the applicable regulations in 7 CFR, including sections 210.16, 210.19, and 210.21(c)(3); the applicable provisions of sections 3016.36–3016.37, and 3016.60 (public entities); sections 3019.40–3019.48 (private, nonprofit entities) and the cost principles referenced therein. [Note: Effective October 1, 2015, 7 CFR, sections 3016.36–3016.37, 3016.60 and 3019.40–3019.48 were superseded by 2 CFR, section 416.1, sections 200.317–200.325, and Appendix II to Part 200(G).] Such payments constitute unallowable expenditures of nonprofit school food service account funds and may result in overpayment liability or other fiscal action, including CDE’s imposition of a reimbursement hold on SNP funds under 7 CFR, Section 210.24.
  
  
• The CDE must review and approve all new and renewing FSMC contracts and  supporting documentation, including solicitation documents, scoring sheets, proposals, and any amendments to these documents, before such contracts and amendments are executed by either party (7 CFR, sections 210.16[a][10], 210.19[a][5], and 210.21). SFAs that do not obtain prior approval for their bid documents and contracts may not use food service program funds to pay for FSMC services.
  
  
• Cost-reimbursable FSMC contracts and solicitation documents, including cost plus fixed-fee contracts, must include provisions clearly specifying that the FSMC’s allowable costs shall be paid from the SFA’s nonprofit school food service account after deducting all discounts, rebates, and applicable credits accruing to or received by the contractor or any assignee under the contract (7 CFR, Section 210.21[f][1][i]).
  
  
• All cost-reimbursable solicitation documents and subsequent contracts for or including purchasing services, as well all FSMC solicitation documents and contracts, must require the contractor to provide the SFA with sufficient information to permit identification of the contractor’s allowable and unallowable costs and the specific amount of all discounts, rebates, and credits on all invoices and bills presented for payment to the SFA (7 CFR, sections 210.21[f][1][ii] and [f][1][iv]).
  
  
• While the requirement to obtain documentation of all costs, rebates, and discounts is not applicable to fixed-price contracts, SFAs must ensure that all costs paid are allowable. To ensure the SFA only pays the FSMC for allowable costs, the CDE encourages SFAs to obtain a description of all goods and services included in the fixed price during the bidding process and to seek further detail of questionable costs. SFAs must pay unallowable costs identified in the proposal and the resulting contract from an account other than the SFA’s cafeteria fund. Pursuant to 7 CFR, Section 210.19(a)(1):
  
  Each State agency shall ensure that SFAs comply with the requirements to account for all revenues and expenditures of their nonprofit food service. SFAs shall meet the requirements for the allowability of nonprofit school food service expenditures in accordance with this Part and, 7 CFR, Part 3015 and 7 CFR, Part 3016, or 7 CFR, Part 3019, as applicable. [Note: Effective October 1, 2015, Title 7, Code of Federal Regulations (7 CFR) Parts 3016 and 3019 have been superseded by Title 2, Code of Federal Regulations, Part 200.]
  
  
• SFAs and LEAs must monitor FSMC compliance on an ongoing basis and strictly enforce all contract provisions, including those related to the return of discounts, rebates, and applicable credits, as well as credits for all USDA Foods received for use in the SFA’s meal service during the school year. 

Displacement of Classified Personnel

California EC sections 45103.1 and 45103.5 prohibit FSMC contracts that result in the elimination or displacement of classified personnel or positions. This means that school districts and county offices of education cannot contract with an FSMC to perform any activities that are currently or customarily performed by school district food service staff. In accordance with EC sections 38103 and 45103, school districts must hire staff for food services.

Crediting for and Use of USDA Foods

Under 7 CFR, Part 250, the FSMC contract is subject to a number of important additional requirements when USDA Foods are received by an SFA and made available to an FSMC for preparing SFA program meals. Those requirements include, but are not limited to:

• The SFA must have in place a proper, executed contract with the FSMC before any USDA Foods are made available to the FSMC (7 CFR, Section 250.50[a]).
  
  
• The SFA solicitation documents and the contract must clearly identify all activities the FSMC is to perform involving the use of USDA Foods (7 CFR, Section 250.50[c] and [d]).
  
  
• If the SFA gives the FSMC authority to spend USDA Foods entitlement on their behalf, such an allowance must be stated in the contract. Further, the contract requires that the FSMC identify how much entitlement it used during the school year and provide reports showing the amount credited to the SFA.
  
  
• Both fixed-price and cost-reimbursable contracts must expressly require an FSMC to credit the SFA for the full value of all USDA Foods received for use in the SFA’s meal service during the school year or federal fiscal year (7 CFR, sections 250.51[a] and [b]; USDA manual Contracting with Food Service Management Companies: Guidances for School Food Authorities, Chapter 3, pp. 3–2 and 3–3). The procurement documents and contract provisions must specify the following:
  
  
  • The method for determining USDA Foods values to be used in crediting or the actual values assigned (7 CFR, sections 250.50[c] and [d]).
    
    
  • The general storage and inventory requirements as stated in 7 CFR, sections 250.14(b), 250.14(d), and 250.52.
    
    
  • Fixed-price and cost-reimbursable contract procurement documents must include all the provisions under 7 CFR, Section 250.53.
    
    Note: In accordance with 7 CFR, Section 250.51(b), in a fixed-price contract, the SFA may permit the FSMC to precredit the SFA (as part of the fixed price) for the anticipated value of the USDA Foods. However, the SFA must ensure that the FSMC provides an additional credit for any USDA Foods not accounted for in the fixed price per meal—e.g., for USDA Foods that are not made available until later in the year (7CFR, Section 250.51[a]). If the SFA does not use precrediting, the FSMC should not include the USDA Foods credit in the fixed price. The FSMC must credit the SFA on the FSMC’s invoice submission to the SFA. 
    
    
  • For both fixed-price and cost-reimbursable contracts the SFA must conduct a reconciliation at least annually (and upon termination of the contract) to ensure that the FSMC credits the SFA for all USDA Foods received in the school year or federal fiscal year (7 CFR, Section 250.54[c]).

For more details on these requirements, refer to MB USDA-FDP-02-2011 and MB USDA-FDP-04-2011 on the CDE’s Food Distribution Program (FDP) Management Bulletins Web page at http://www.cde.ca.gov/ls/nu/fd/fdpmbulletins.asp.        

Contract Oversight and Monitoring

Both the CDE and the SFA are responsible for ensuring that SFAs and LEAs with FSMC contracts structure and manage such contracts as required by state and federal law. Monitoring and oversight of FSMC contracts throughout the school year is essential to ensure compliance with federal and state laws, including an SFA’s receipt of the full value of:

• Purchase discounts, rebates, and credits on commercial products in cost-reimbursable or cost plus fixed-fee contracts
  
  
• Credits for the value of all USDA Foods

Failure by an SFA to undertake necessary oversight and monitoring measures puts state and federal funds at risk and SFAs and LEAs may not receive the full value of USDA Foods credits or commercial purchase discounts, rebates, and credits. The CDE can withhold funds from the SFA for failing to enforce these monitoring requirements.

Training Recommendations and Other Resources

The SFA should strongly encourage any staff tasked with procurement responsibilities, wholly or in part, to complete all relevant training to ensure program integrity and compliance with federal and state regulations (USDA Policy Memoranda SP 23-2013 and SP 35-2013).

CDE training recommendations include:

• The USDA manual Contracting with Food Service Management Companies: Guidance for School Food Authorities is available on the USDA Food and Nutrition Service School Meals Guidance and Resources Web page at http://www.fns.usda.gov/school-meals/guidance-and-resources. [Note: The preceding link is no longer available. Updated guidance can be found at https://www.fns.usda.gov/cn/updated-guidance-contracting-food-service-management.]
  
  
• Information on the procurement process and applicable regulations is available on the CDE Food Service Management Company Procurement Web page at http://www.cde.ca.gov/ls/nu/sn/fsmcproc.asp.

The following USDA Policy Memoranda can be found on the USDA School Meals Policy Web page at http://www.fns.usda.gov/school-meals/policy:

• USDA Policy Memorandum SP-23-2013: Guidance Reaffirming the Requirement that State agencies and School Food Authorities Periodically Review Food Service Management Company Cost Reimbursable Contracts and Contracts Associated with USDA Foods is available on the USDA Food and Nutrition Service (FNS) web page at https://www.fns.usda.gov/guidance-reaffirming-requirement-state-agencies-and-school-food-authorities-periodically-review-food.
  
  
• USDA Policy Memorandum SP 35-2013: State Agency Oversight and Monitoring of School Food Authority Contracts with Food Service Management Companies is available on the USDA FNS web page at https://www.fns.usda.gov/state-agency-oversight-and-monitoring-school-food-authority-contracts-food-service-management.

CDE MBs relating to procurement, FSMC contracting, and the use of USDA Foods are available on the following CDE Web pages:

• SNP MBs, including the two listed below, are available on the CDE SNP MB Web page at http://www.cde.ca.gov/ls/nu/sn/mb.asp
  
  
• FDP MBs are available on the CDE’s FDP MB Web page at  http://www.cde.ca.gov/ls/nu/fd/fdpmbulletins.asp  

Food Service Management Company Fact Sheet

Each SFA that contracts with an FSMC must complete all required information in the FSMC Fact Sheet, which is part of the annual Child Nutrition Information and Payment System (CNIPS) program application update.

Important: The current FSMC Fact Sheet in CNIPS incorrectly directs SFAs in an extension year of their FSMC contract to skip items 2 through 8. SFAs and LEAs should note that items 2 through 8 must be completed every year.

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 [Note: The preceding contact is no longer valid. Please contact the School Food Service Contracts Unit (SFSCU) by email at SFSContracts@cde.ca.gov to be directed to a SFSCU Specialist.

If you have any questions about USDA Foods, please contact Sherry Tam, Associate Governmental Program Analyst, FDP, by phone at 916-324-9875 or by email at stam@cde.ca.gov.