Restaurant prime cost is your cost of goods sold plus your total labor cost, including payroll taxes and benefits, shown as a percentage of sales. It is the single number that tells you whether the two biggest expense lines in your business are under control. Many operators and advisers aim for roughly 60% of sales, and treat anything over 65% as a warning sign.
The reason it matters is simple. Rent, utilities and insurance are mostly fixed once the lease is signed. Food and labor move every week, and they move because of decisions you and your managers make. Prime cost puts both on one line so you can see the trade-off between them.
Here is how to calculate it properly, how often to run it, and what to do when it creeps up.
Key takeaways
- Prime cost = cost of goods sold + total labor cost, divided by total sales.
- Total labor means wages, salaries, employer payroll taxes and benefits, not just the hourly wage line.
- Baker Tilly puts typical targets between 58% and 62% of sales depending on concept, and says over 65% makes profit extremely difficult.
- Calculate it weekly, using a real inventory count, so you can correct course before the month closes.
- Food and labor offset each other. A cheaper menu that needs more prep hours may not lower prime cost at all.
What goes into prime cost
Advisers at the accounting firm Baker Tilly define prime cost as the two biggest expenses a restaurant has, cost of goods sold and labor, calculated as a percentage of total sales. The definition is short. Getting the inputs right is where most reports go wrong.
Cost of goods sold
COGS is what you actually used, not what you bought. Purchases alone swing with delivery timing. If a big protein order lands on Friday, a purchases-only report makes that week look terrible and the next one look brilliant. Include food, beverage (beer, wine, liquor, soft drinks, coffee) and, if you track it this way, paper and packaging.
Total labor cost
This is the line most owners understate. Total labor should include:
- Hourly wages for front and back of house.
- Salaried management, including kitchen managers and the general manager.
- Employer payroll taxes. The IRS notes that employers pay their own share of Social Security and Medicare taxes on top of what they withhold, and pay federal unemployment tax from their own funds.
- Benefits such as health insurance contributions, paid leave and workers’ compensation premiums.
Leave out owner draws unless the owner works a scheduled shift that would otherwise be paid. If you do work the line, put a market wage for that role into labor. Otherwise your prime cost looks healthy only because you are working for free.
The formula, step by step
The formula has two parts. First work out COGS from inventory, then add labor and divide by sales.
- Beginning inventory: the value of food and beverage on hand at the start of the week, from last week’s closing count.
- Add purchases: everything received during the week, at invoice cost.
- Subtract ending inventory: the value of your count at the close of the week.
- The result is COGS. Beginning inventory + purchases – ending inventory.
- Add total labor for the same seven days, including taxes and benefits.
- Divide by total sales for the week, then multiply by 100.
A worked example
Say you run a 70-seat restaurant that did $32,000 in sales last week. Beginning inventory was $9,000, you received $10,500 in deliveries, and the closing count came to $8,800. COGS is $10,700. Wages, salaries, payroll taxes and benefits for the week came to $9,900.
| Line | Amount | Share of sales |
|---|---|---|
| Sales | $32,000 | 100% |
| Cost of goods sold | $10,700 | 33.4% |
| Total labor | $9,900 | 30.9% |
| Prime cost | $20,600 | 64.4% |
These figures are illustrative, not a benchmark. The point is that 64.4% sits at the top of the range most advisers consider workable. The owner has something to fix, and a weekly report caught it while there were still three weeks left in the month.
Prime cost is the one number on your P&L you can change by next Friday.
What a healthy number looks like
Baker Tilly’s guidance puts prime cost targets at 58% to 62% of sales depending on the type of restaurant, uses 60% as an average target, and says a prime cost over 65% makes it extremely difficult to make a profit. Treat those as a starting point rather than a law.
Your own target depends on your concept. A steakhouse carries high food cost but can run a lean line. A scratch bakery-cafe may have modest ingredient costs and heavy labor. What matters is that food plus labor lands inside your target, and that you know which side is driving it.
Why weekly beats monthly
A monthly P&L tells you what went wrong four to six weeks ago. A weekly prime cost report tells you what went wrong last week, while the schedule for next week is still open and the next order has not been placed. Baker Tilly’s advice includes conducting a consistent, accurate weekly inventory for the same reason.
How prime cost relates to food and labor cost
Food cost percentage and labor cost percentage are the two halves of prime cost. Tracking them separately tells you where a problem sits. Tracking them together stops you from fixing one by breaking the other.
- Cutting prep labor by buying pre-cut produce raises food cost. Whether prime cost falls depends on the price difference versus the hours saved.
- Switching to cheaper cuts that need long braising lowers food cost and may raise labor.
- Trimming a closing shift lowers labor but can raise waste if food is not broken down and stored properly.
Run each change through prime cost, not just the line it was meant to improve. For more on the food side, see our guide to controlling food costs.
Fixes when the number runs high
On the food side
- Check recipes against reality. Cost every recipe and confirm the kitchen follows the spec. A heavier hand on protein adds up fast.
- Compare theoretical and actual usage. Baker Tilly recommends comparing what your sales say you should have used with what inventory says you did, to spot waste or theft.
- Order to par with purchase orders. Over-ordering turns into spoilage.
- Update recipe costs whenever supplier prices change, so menu decisions use current numbers.
- Push high-margin items. Train servers to suggest the dishes that make you the most money, not just the most expensive ones.
On the labor side
- Schedule to forecast. Build the schedule from projected covers by daypart, not from last week’s schedule.
- Watch sales per labor hour. It shows whether each shift’s staffing matched its sales.
- Move prep to quiet hours. Batch prep and pre-portioning during slow periods frees the line when it gets busy.
- Cross-train. A server who can run food or a prep cook who can cover dish gives you flexibility without adding a body.
- Use part-time shifts to cover peaks rather than full shifts that sit idle for half their length.
More guides like this are in our restaurant operations section.
FAQ
What is a good prime cost percentage for a restaurant?
Advisers commonly aim for around 60% of sales. Baker Tilly cites 58% to 62% depending on concept and warns that over 65% makes profit extremely difficult.
Does prime cost include the owner’s salary?
Include it if the owner works a role you would otherwise pay someone to do. Leaving it out makes prime cost look better than the business really is.
Should I use purchases or inventory to calculate COGS?
Use inventory. Beginning inventory plus purchases minus ending inventory gives what you actually used. Purchases alone swing with delivery timing.
How often should I calculate prime cost?
Weekly. It gives you time to adjust schedules and orders before the month is over.
Start a weekly prime cost report
Pick a count day, build a one-page sheet with the six lines from the formula above, and run it for the next four weeks. Once you have a baseline, set a target for food and a target for labor that add up to your prime cost goal, and review both with your kitchen manager every week. If scheduling is the weak spot, our notes on restaurant labor scheduling are a good next read.
Featured photo: Laptop, Small notebook, Netbook, Rostov-on-Don, Russia by Vyacheslav Argenberg, BY 4.0.
