Restaurant Prime Cost: Formula, Benchmarks & What It Means
If you want to know whether your restaurant’s cost structure is under control, there is one number you should be watching closely: restaurant prime cost.
Prime cost combines the two largest controllable operating costs in most restaurants:
For most restaurants, those two categories consume a large portion of every sales dollar. That’s why prime cost is one of the most useful numbers for understanding whether the operation is running efficiently.
What Is Restaurant Prime Cost?
Restaurant prime cost measures how much of your sales are consumed by the product and labor required to operate the restaurant.
It generally includes:
- Food COGS
- Beverage COGS
- Other direct product costs, depending on accounting policy
- Hourly employee wages
- Salaried management labor
- Overtime
- Employer payroll taxes
- Employee benefits
- Workers’ compensation
- Other applicable direct labor burden
The exact definition can vary slightly depending on your restaurant and accounting structure.
How to Calculate Restaurant Prime Cost
Calculate Actual COGS
Do not automatically use purchases as your cost of goods sold.
If your restaurant uses inventory-based accounting:
Example
Beginning inventory: $20,000
Purchases: $35,000
Ending inventory: $18,000
COGS = $37,000
Purchasing $35,000 of product does not mean the restaurant consumed $35,000 of product.
Inventory changes matter.
Read our complete Restaurant COGS Guide for a deeper explanation.
Calculate Total Labor Cost
Labor is broader than the gross-wage line on your payroll report.
Depending on your accounting policy, labor may include:
- Hourly wages
- Salaried employees
- Overtime
- Employer payroll taxes
- Benefits
- Workers’ compensation
- Bonuses
- Paid time off
- Other direct labor costs
If labor is causing pressure, see our Restaurant Payroll & Labor Controls .
Add COGS and Labor
Example
Net sales: $100,000
COGS: $30,000
Total labor: $30,000
That means approximately 60 cents of every sales dollar is being consumed by product and labor costs.
The restaurant has 40 cents left from every sales dollar to pay everything else.
What Does the Remaining 40% Have to Pay For?
Prime cost is not the same thing as restaurant profit.
The remaining money still has to cover expenses such as:
- Rent
- Utilities
- Insurance
- Repairs and maintenance
- Credit-card processing
- Marketing
- POS and software
- Accounting
- Professional fees
- Licenses
- Supplies
- Debt service
- Equipment
- Administrative expenses
- Taxes
- Owner return and profit
What Is a Good Restaurant Prime Cost?
There is no universal prime-cost percentage that works for every restaurant.
A full-service restaurant, quick-service concept, bar, coffee shop and fine-dining operation can all have different economics.
As a practical diagnostic framework:
Under ~55%
Potentially very strong depending on concept, service model and accounting methodology.
55–60%
Generally strong for many restaurant concepts.
60–65%
Potentially workable for many operations, but worth monitoring closely.
65–70%
Margin is getting tight. Management should understand what is driving the number.
Over 70%
A serious warning sign for many concepts. Food cost, labor, pricing, sales volume and operating controls deserve investigation.
The Most Important Question: Why Is Prime Cost High?
Suppose your restaurant has a prime cost of 68%.
That number alone does not tell you what needs to be fixed.
You need to split it apart.
Restaurant A
Food & beverage COGS: 34%
Labor: 34%
Prime cost: 68%
Restaurant B
Food & beverage COGS: 26%
Labor: 42%
Prime cost: 68%
Same prime cost.
Completely different operating problem.
If Food Cost Is Driving Prime Cost
Investigate:
- Vendor pricing
- Purchasing
- Portion control
- Recipe costing
- Waste
- Spoilage
- Comps
- Employee meals
- Inventory accuracy
- Receiving errors
- Product loss
- Menu pricing
- Menu mix
- Actual vs. theoretical food cost
A restaurant can have a perfectly reasonable theoretical food cost while actual food cost runs much higher.
Actual vs. Theoretical Food Cost
Theoretical Food Cost
What the restaurant should have used based on recipes, portions and recorded sales.
Actual Food Cost
What inventory and accounting show the restaurant actually consumed.
Example
Theoretical food cost: 28%
Actual food cost: 34%
Variance: 6 percentage points
That variance may come from:
- Overportioning
- Waste
- Spoilage
- Inventory loss
- Incorrect inventory counts
- Incorrect recipes
- Receiving errors
- Unrecorded comps
- Employee meals
- Product substitutions
- Vendor billing problems
Read our full guide: Actual vs. Theoretical Food Cost .
If Labor Is Driving Prime Cost
Investigate:
- Scheduling
- Overtime
- Sales per labor hour
- Opening and closing coverage
- Shift overlap
- Manager hours
- Productivity
- Slow-period staffing
- Employee turnover
- Payroll errors
- Actual hours compared with scheduled hours
- Labor compared with sales by day
Same Labor Dollars, Different Economics
Restaurant A:
$10,000 Saturday sales
$2,500 labor
Labor cost = 25%
Restaurant B:
$5,000 Saturday sales
$2,500 labor
Labor cost = 50%
Read: Restaurant Labor Cost Audit: 15 Numbers Every Owner Should Know .
What If Food Cost and Labor Are Both High?
Example
Food & beverage COGS: 34%
Labor: 35%
Prime cost: 69%
At that point, telling the kitchen to “watch food cost” probably isn’t enough.
Telling management to simply “cut labor” probably isn’t enough either.
Potential causes may include:
- Underpricing
- Low sales volume
- Poor menu mix
- Excessive staffing
- Weak purchasing controls
- Waste
- Portion inconsistency
- Poor inventory controls
- High employee turnover
- Excessive overtime
- Unprofitable operating hours
Prime Cost vs. Food Cost vs. Labor Cost
| Metric | What It Measures |
|---|---|
| Food Cost % | Food COGS relative to food sales |
| Beverage Cost % | Beverage COGS relative to beverage sales |
| Labor Cost % | Labor relative to sales |
| Prime Cost % | COGS + labor relative to sales |
Prime Cost Is Not the Same as Profit
A restaurant can have a healthy prime cost and still lose money.
Example
Sales: $100,000
Prime cost: $58,000
That leaves $42,000 before other operating expenses.
Now assume:
- $20,000 rent
- $7,000 utilities and insurance
- $6,000 processing, repairs and operating expenses
- $10,000 other expenses
Suddenly, very little is left.
If the P&L shows profit but your bank account tells a different story, read: Why Your Restaurant Can Be Profitable on Paper but Have No Cash .
Track Prime Cost Weekly—Not Just Monthly
At minimum, calculate prime cost monthly.
But if you want to identify problems while there is still time to act, weekly tracking is much more useful.
Week 1
Prime cost: 59%
Week 2
Prime cost: 61%
Week 3
Prime cost: 66%
Week 4
Prime cost: 70%
The important question isn’t simply that Week 4 reached 70%.
The Number Isn’t the Goal. The Trend Is.
Track:
- Prime cost %
- Food and beverage COGS %
- Labor %
- Sales
Then compare:
- Week over week
- Month over month
- Same period last year
- Budget vs. actual
Trend Matters
A restaurant sitting steadily at 61% may be healthier than one that was at 56% three months ago and has climbed to 65%.
Five Prime Cost Mistakes Restaurant Owners Make
Using Purchases Instead of Actual COGS
Buying $30,000 of product does not necessarily mean you consumed $30,000. Inventory changes matter.
Counting Only Employee Wages
Ignoring payroll taxes, benefits and other direct labor burden can understate true labor cost.
Comparing Different Reporting Periods
Sales, COGS and labor need to represent the same period.
Looking Only at the Percentage
A 65% prime cost does not tell you what caused it. Always examine the COGS/labor split.
Waiting Until the Monthly P&L Is Finished
By then, the month has already happened.
Don’t Fix Prime Cost by Cutting Everything
An owner sees a 68% prime cost and the immediate reaction may be:
“Cut labor.”
That may help—or it may create an entirely different problem.
Cutting labor too aggressively can lead to:
- Slower service
- Lower guest satisfaction
- Employee burnout
- More mistakes
- Higher turnover
- Lower sales
Likewise, cutting food quality simply to reduce COGS can hurt the guest experience.
Five Questions to Ask When Prime Cost Suddenly Increases
Did Sales Change?
A sales decline can make existing staffing and purchasing patterns much more expensive as a percentage.
Did Vendor Prices Increase?
Check actual invoices instead of relying on assumptions.
Did Labor Hours Change?
Compare actual hours with sales and with the original schedule.
Did Inventory Change?
Compare beginning inventory, purchases and ending inventory.
Did Anything Change Operationally?
- New menu items
- New employees
- New operating hours
- New vendors
- New portion sizes
- New promotions
- More comps
- More waste
A Simple Weekly Restaurant Prime Cost Review
At minimum, your weekly review should answer seven questions.
Sales
What did we sell?
COGS
What did we actually consume?
Labor
What did we spend on people?
Prime Cost
What percentage of sales did those categories consume?
Variance
Are we better or worse than our target or prior period?
Diagnosis
Which component caused the change?
Action
What are we changing this week?
Want to Know Where Your Restaurant Is Leaking Money?
Use the Margin & Menu Restaurant Financial Leak Checklist to review prime cost, inventory, labor, cash and the other systems affecting profitability.
When Prime Cost Doesn’t Make Sense
If prime cost looks too high—or your P&L says the restaurant is profitable while your bank balance tells a different story—you may not have one bad number.
You may have a systems problem.
POS configuration, inventory, purchasing, payroll, scheduling, merchant settlements, accounting, cash controls and financial reporting all need to work together.
Find the Cost Driver Behind the Percentage.
The Margin & Menu 360° Restaurant Financial Audit examines the systems creating your prime-cost number rather than simply comparing your restaurant with a benchmark.
- POS sales and reporting
- Food and beverage COGS
- Inventory and purchasing
- Recipe and portion controls
- Labor and payroll
- Scheduling and overtime
- QuickBooks and account mapping
- Cash and merchant settlements
- Financial reporting
- Overall profitability
You receive a financial health score, written findings and a prioritized action plan showing what is driving the number and what deserves attention first.
360° Restaurant Financial Audit — $995
Fix the Systems Behind Your Restaurant’s Numbers.
Better restaurant financial performance starts with systems that connect. Explore the areas where Margin & Menu helps restaurant owners improve control, reporting and profitability.