Childcare Providers: Don't Update Your Contract in Response to COVID-19 Without Reading This First

With COVID-19 shutting down and limiting the services of childcare across the country, daycare and preschool programs are struggling to maintain their businesses. The CARES Act provided financial relief for some, but many others were shut out of the stimulus package. As the early childhood education industry waits to see if the Child Care Bailout will be considered and passed, many are looking to their existing families to support them.

We’ve discussed in other posts the legality of charging tuition payments. In short, unless your contract has explicit language regarding charging while not providing services during a public health outbreak, force majeure, or has similar text, you are unable to charge if you are closed during the COVID-19 pandemic. If you do, you run the risk of costly law suits from families.

Contracts with force majeure provisions excuse one or both parties from the agreed-upon obligations that arise when they are outside of the the parties’ control and make adhering to the contract impossible or impractical. That said, many are eager to make updates to their contracts so should we face another situation where childcare providers must close their doors because of a viral outbreak or other reasons, some payment can still be collected.

There are things to consider when making contract updates so you can keep your business running as well as be fair to families in your care.

What to think about before upating your contract

Relationships
Beyond worrying about lawsuits, you need to examine what is right and what will benefit you most over time. If you charge families when services cannot be rendered you run the risk of damaging your reputation. This is a referral business and you need to consider how many referrals you may lose from angered families. Over the course of several years, a family who loves you may tell dozens of others about you and that can all be negated in an instant. But that love may disappear if you don’t handle the financial situation with care and you may see hundreds of referrals lost.  

Fixed costs
Childcare is a fixed cost business. Month-to-month, your expenses are roughly the same. You have rent or mortgage, insurance, staff, materials, utilities, and food, if you serve meals. You also may have business expenses, such as a communications app like Pre to 3 and costs related to your vehicles if you provide transportation. These fixed costs may change slightly throughout the year, but generally, there should not be a great variance unless you make major purchases. During the COVID-19 pandemic or other similar situation, some of those costs will decrease significantly, such as staff, utilities, and food. The first thing you need to determine is what your average expenses are. Calculate what your weekly or monthly savings will be and subtract that from your required revenue to maintain your business.

Long-term planning
With the COVID-19 pandemic and while planning for the future, it’s impossible to know how long you must close your doors for. Think about your general enrollment and how long people use your services. If you’re a preschool program with children ages 3-5 exclusively, people are only with you for two years, versus a childcare provider who serves infants through pre-k. The longer a family has been with you and the longer they were planning on staying will likely impact how much they are willing to pay while you are closed. In your long-term contract planning to accommodate future shut downs for the COVID-19 pandemic or other unfortunate events, you have to consider that there will be families that are unwilling to pay anything and terminate care. There are three major things you need to account for:

1) Your customer acquisition costs
Your customer acquisition costs take into account how much time and money it takes to attract and register new families. You may or may not have a marketing budget where you invest in local promotions, both online and off, and these should be factored into your customer acquisition costs. However, often overlooked are labor costs involved in acquiring new customers. Even if you don’t spend a dime in marketing, you have to consider the time spent setting up tours, giving those tours, responding to emails and phone calls of potential customers, and processing paperwork and payments to get families registered.

2) The length of your sales cycle
Your sales cycle is the time needed for you to sign up a new family. Childcare, in general, has a long sales cycle. Families may put their name on your wait list many months before they need care and this is generally due to a lack of availability and start their research months before that. After the COVID-19 pandemic subsides, or in the event of a future outbreak or temporarily closure, consider if your sales cycle will change. If many people are out of work the same urgency won’t exist to obtain childcare. That means it may take you longer than normal to fill openings at your daycare or preschool. You need to predict and budget for your anticipated scenario.

3) Your market
In a separate post we’ve laid out detailed scenarios to prepare yourself for based on your market dynamics. Every area will be affected differently by job loss, or in some cases, job gains. In addition, you may find that competitors close or that a very successful provider takes over struggling centers and establishes market dominance. Your situation will be unique and every childcare provider should carefully examine her or his locality to predict as best as possible shifts in the market.

Security deposits
Many childcare providers collect security deposits upon registration. For some providers the amount is equal to a full month tuition and is applied to the last month of care. Security deposits assume, however, that when a family terminates care you are able to provide services. If you are not providing services, the termination clause in your contract does not apply and the security deposit must be refunded.    

State laws
Several states have specific requirements for force majeure to be invoked in a childcare contract. Currently, New York, Florida, California, Texas, and Illinois all have specific laws dictating how force majeure can be applied. You should check with a local contract attorney before making any updates to yours to ensure the language is specific to your state and protects you and your daycare or preschool should another COVID-19 pandemic or other Act of God occur making you unable to provide childcare. The wrong contract language could leave early childhood educators in the same situation many are in currently, with no payments being collected, and again, not adhering to your contract can have significant repercussions.

Online learning
Like K-12 schools, many childcare providers are utilizing online learning tools during the COVID-19 pandemic. Some children respond well to this type of learning and some don’t. Early childhood educators have not made provisions for online learning in their existing contacts and need to consider if it will be provided in the future during a temporary closure. Consider that without explicitly stating it in your contract, online learning is not a substitute for childcare and is not what parents retained you for. This is different from elementary, middle, and high schools as attendance in those is mandatory but daycare and preschool attendance are not. Creating online lessons may take a significant amount of work on your part or the part of your teachers. If you decide to include it in your contact, you must follow-through and provide it but also be prepared for pushback from parents regarding tuition payments for it.

What you should charge

Tiered payment model
In the future, if you need to temporarily close your daycare or preschool for an extended period of time due to COVID-19 or another reason and you’re planning on charging hold fees, consider fees, consider a tiered model where parents pay decreasing fees each month to retain their spot. This makes them far less likely to terminate care in the event of a temporary closure of your childcare program. Retaining existing families is the best case scenario, but even if you cannot retain them, decreasing fees feels more equitable to families. And using this strategy is far less likely to damage your relationship even if they do terminate. Month one you might charge full tuition to give you padding for the subsequent months, but moving forward, your fees would decrease each month until leveling off at a specific rate - say, 50% of tuition. The exact amount you charge should be calculated and justified, it should not be arbitrary. Providing families full transparency into your costs ensures they know that they money they’re paying is necessary to ensure you reopen your daycare or preschool.

Flat monthly holding fee
In a flat holding fee model you would charge parents the same amount each month while your daycare or preschool is temporarily closed due to COVID-19 or for another reason. Like the tiered payment model, a flat fee model should also take into account your reduced fixed costs for the duration of the time you’re not able to provide services. The amount you decide to charge will determine how likely parents are to terminate your services. The less you charge, the more likely you are to retain them.

Fees based on financial hardship
Charging adjusted fees based on financial hardship can be successful, or it could backfire. There’s really no way to predict what will occur. For some families, typically the ones experiencing financial hardship, it feels sensitive to their situation. For others, it may feel unfair if they are being charged a higher rate for holding the same spot, and you may end up alienating some. Keep in mind that families who are experiencing it may be waring of sharing details of their finances. If you decide to charge flexible fees for financial hardship you must be exceedingly explicit as to what constitutes it and how it must be proven.

Nothing
For many childcare providers, charging fees while not providing services doesn’t feel right ethically. This is a personal decision and not charging while closed ensures you maintain your relationships with the families who love you. This approach will give you the best retention rate and, more than likely, you’ll find that your families are willing to donate to you to ensure their children can return to your care one the COVID-19 outbreak, or other situation forcing closure, is resolved. Not charging is the best case scenario for families and if you’re financially able to do this, it’s recommended, but certainly won’t be for everyone.  

Full tuition
Some providers may include a clause requiring families to pay full tuition should they close in the future for a subsequent COVID-19 outbreak or other reason beyond their control. Charging full tuition while not providing services will undoubtedly lead to soured relationships and a significant termination rate. In addition, as you recruit new families in the months following the pandemic, you will likely find that parents are particularly sensitive to finances at this time, since many have experienced job loss and pay cuts of their own. They may also have terminated services with a provider who required tuition payments while closed. Including this in your contract may alienate parents and cause you to lose business in the short- and long-term.

The Bottom LIne

No two childcare providers have identical situations. Your current tuition rates, enrollment, market dynamics, fixed costs, and other factors all must be considered when making changes to your contract in response to COVID-19. The most important thing to do is seek counsel from a qualified local attorney who is familiar with force majeure clauses and can create the bulletproof language you need to ensure you won’t be met with lawsuits from angry customers.

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