Perth and Kinross Council (PKC), Dundee City Council and Angus Council have committed to funding an external review of Tayside Contracts.
The news emerged as PKC agreed to give £1.1 million from its earmarked reserves to Tayside Contracts which provides it with cleaning, construction, catering and training services.
Wage increases, lower than expected school meal uptake, court ruling costs and rising inflation have all created a financial pressure on the commercial and operating arm for all three Tayside councils.
Tayside Contracts provides the following services: civil engineering; school and community catering; facilities management; school crossing patrollers, and winter maintenance.
On Wednesday March 2022 PKC's Executive Sub-Committee of the Finance and Resources Committee agreed to authorise PKC's head of Finance Stewart MacKenzie to apply up to £1.1 million from PKC's unearmarked reserves to meet PKC's forecast obligations to Tayside Contracts in 2022/23.
A report put before the committee said there was a "very real risk that Tayside Contracts experience similar pressures in 2023/24".
Consequently all three councils have developed a scope for a review of Tayside Contracts which will be done by an independent consultant. PKC's chief executive Thomas Glen told councillors he and the chief executives of both Angus and Dundee councils had agreed to this.
The review will look at: the efficiency of Tayside Contracts as an operating organisation; comparative costs and options for services, and the commercial operations of Tayside Contracts.
The cost of the review will be shared between all three councils and the outcomes and recommendations will be reported back to PKC's Finance and Resources Committee.
Tayside Contracts managing director Keith McNamara told councillors "extraordinary circumstances" had led the organisation to project a deficit of £3.2 million. PKC is attributed with 34 per cent of any profit or loss on Tayside Contracts’ operations in 2022/23 based upon the previous year’s turnover - with £1.1 million being 34 per cent of £3.2 million.
Independent councillor Colin Stewart raised concern over school meal uptake being well below budgeted projections. There was a shortfall of 865,000 meals amounting to over £1 million.
Cllr Stewart said: "It seems like something there should have been action on at an earlier stage in the school year."
Mr McNamara said: "There is a balance. Picking a number that we think is realistic and does not sell us short - especially on the back end of the pandemic - is really challenging."
He said there would be "more realistic" figures going forward in 2023/24.
The report put before councillors said primary school meal uptake was recovering steadily and is expected to continue when the Scottish Government's free school meals initiative is expanded to all primary pupils. However school meal uptake in secondary schools is not returning to pre-pandemic levels "despite a slow and steady increase in meal uptake across Perth and Kinross".
Recent pay increases have also had a significant financial impact. The cost of pay awards in 2022/23 for Tayside Contracts was around £2.9 million more than budgeted.
As the meeting drew to an end SNP council leader Grant Laing thanked the committee for a "useful" and "frank discussion". The committee also agreed to a recommendation - tabled by Cllr Colin Stewart - to look into setting up a joint sub-committee with Angus and Dundee to scrutinise the performance of Tayside Contracts.
Cllr Laing welcomed the idea and said: "I wish Tayside Contracts all the best. All we look to do is to try and be a critical friend and look at things from a user perspective."
