Contract brewing economics for the host brewery

Why a host takes contract work

A brewery with fermenters that sit empty has fixed costs without sales. Contract brewing sells that time. The brand owner supplies a recipe, a specification and sometimes ingredients. The host brews, packs and may store the beer. It charges a fee.

Done well, it spreads fixed cost over more litres. Done badly, it clogs your brewhouse, risks your reputation and earns less than it costs. A typical trap is the client who needs a rush batch every time you are busy. Decide in advance how many brews a month you will give to contract work and in which weeks.

Start with your own cost per litre

You cannot price a contract job without your cost structure. Separate fixed costs, which you pay anyway, from variable costs, which each extra litre adds: ingredients if you buy them, power, water, gas, cleaning chemicals, packaging, extra labour and wastage. Cost per litre of beer shows the build.

The minimum sensible fee covers the variable cost plus a fair share of the fixed cost, plus the profit you would have made if the tank had made your own beer instead. That last element is the opportunity cost. Many hosts forget it.

A worked illustration

Use hypothetical currency units. Your variable cost to brew and pack a litre for a client, excluding their ingredients, is 22. Your fixed costs are 400,000 a month. You use 60 per cent of capacity for your own beer. Contract volume of 8,000 litres a month would use tank time that otherwise sits empty. If you charge 35 per litre, contribution is 13 per litre, or 104,000 a month.

That is useful money, but it only helps if you do not have to hire another person, buy new equipment or turn away your own sales. If the contract takes tank time you could have filled with your own beer at higher margin, the true cost is higher. Check capacity week by week before you quote. Draw the next eight weeks as a grid of fermenters and write your own brews in first. Contract brews go only into the gaps that remain. A fermenter that holds a 14 day ale for a client cannot hold your own seasonal at the same time, so count tank days, not just litres.

Terms that protect the host

• Who buys ingredients? Who owns leftover stock?
• Minimum volume per month, with a charge if it is not met.
• Payment days and a deposit for new clients.
• Yield: the litres you must deliver from a brew and who carries losses beyond that.
• Quality specification and who decides pass or fail.
• Recall and liability, with insurance.
• Confidentiality of recipes and what happens to the yeast.

Have a lawyer draw up the contract. We can help you price it. We cannot give legal advice.

Licensing and labelling

Contract production involves two businesses and often two sets of approvals. In India alcohol is a state subject, so the arrangements for brand owners and hosts differ from state to state and change. Label rules may require both parties to be identified in a particular way. Take advice from a licensing adviser before you accept a job.

Risks to your own brand

A client's weak beer made in your tanks can damage your reputation. A contaminated batch can infect your yeast and your lines. Require a clean brew record, use separate yeast handling and clean to a documented standard between jobs. If the client wants a style you do not normally brew, such as a sour, think about whether your plant can handle it safely.

When contract work stops paying

Contract work stops paying when it needs new capital, when it displaces better margin or when management time goes into someone else's problems. Set a rule: contract only fills spare time. Also track the real yield of each contract brew against the yield you quoted, because a few per cent of lost beer on an 8,000 litre month adds up quickly. Review it quarterly against your own sales forecast. The wider picture of costs and margin is in pricing beer for retail shelves. The course below shows how to build the full cost model.

Common questions

How should a host price contract brewing?

Cover variable cost, a fair share of fixed cost and the profit lost if the tank could have made your own beer. Then check what the market will pay.

Should the client supply ingredients?

Either can work. Agree who buys, who owns leftovers and who carries losses. Put it in writing.

Can contract brewing damage my own brand?

It can if quality slips or a contaminated batch affects your yeast. Set standards and clean between jobs.

Do I need extra approvals?

Often yes. Rules differ by state and change, so check with a licensing adviser first.