In the restaurant industry, there is no shortage of metrics to track — food cost percentage, labor percentage, gross profit, net profit, occupancy ratio, and on down the list. Each of these tells part of the story. But if you could only track one number to understand the fundamental health of your restaurant, prime cost is that number.
Prime cost is simple in its definition: it is the sum of your cost of goods sold (COGS) and your total labor costs, expressed as a percentage of net sales. It combines the two largest and most controllable expense categories in the business into a single, telling figure. When prime cost is in a healthy range, the rest of the P&L has room to breathe. When it is out of range, every other line item becomes a struggle.
How to Calculate Prime Cost
The formula is straightforward:
- Prime Cost = (COGS + Total Labor Costs) ÷ Net Sales × 100
Total labor costs should include everything: hourly wages, salaried management, payroll taxes, and benefits. Not just the hourly line employees — all of it.
As an example, if a restaurant generates $80,000 in net sales in a given week, spends $24,000 on food and beverage, and incurs $28,000 in total labor, the prime cost calculation looks like this:
- ($24,000 + $28,000) ÷ $80,000 × 100 = 65%
That is a prime cost of 65 percent. Whether that number is good or bad depends on the restaurant concept, but it provides an immediate, clear signal about financial performance.
What Are the Benchmarks?
Prime cost benchmarks vary meaningfully by concept. A quick-service restaurant, which has lower labor intensity, might target prime cost in the range of 55 to 60 percent. A full-service restaurant, with more hours of labor, more complexity of service, and higher cost menu items, typically operates with a prime cost target between 60 and 65 percent. Above 65 percent, most restaurant models begin to struggle to generate meaningful profit after paying occupancy, marketing, and overhead expenses.
These are not hard rules — a high-volume, low-overhead concept might sustain a 68 percent prime cost profitably, while a struggling location with high occupancy costs might need to be at 58 percent to survive. The benchmark exists as a point of reference, not a mandate. What matters is knowing your number, understanding your model, and managing toward a target that works within your specific financial structure.
Why Prime Cost, and Not Just Food Cost or Labor Cost Separately?
Restaurant operators often become fixated on one side of the prime cost equation at the expense of the other. A kitchen focused obsessively on food cost may cut portion sizes or quality in ways that damage the guest experience and, ultimately, sales. A management team focused only on labor may run the restaurant understaffed during key periods, resulting in poor service and reduced revenue.
Prime cost corrects for this tunnel vision by forcing both costs into a single view. A restaurant that achieves a 28 percent food cost but runs 42 percent labor has a prime cost of 70 percent — a serious problem, regardless of how attractive the food cost percentage looks in isolation. Conversely, a concept running 35 percent food cost with 26 percent labor has a prime cost of 61 percent, which may be quite manageable depending on the model.
The relationship between food cost and labor cost is also not static. When you invest in skilled kitchen staff who reduce waste and control portions, labor costs rise but food cost may fall. When you simplify your menu to reduce prep complexity, labor comes down. Managing prime cost means understanding this tradeoff and making deliberate decisions rather than optimizing each line independently.
Tracking Prime Cost Weekly
Prime cost is most valuable when it is tracked consistently and frequently. A monthly prime cost calculation tells you what happened. A weekly prime cost calculation tells you what is happening — and gives you time to respond before the month is lost.
To track it weekly, you need three inputs: weekly net sales (readily available from your POS), weekly food and beverage cost (which requires a weekly inventory count), and weekly labor cost (from your payroll system or scheduling software). The discipline of tracking weekly inventory is where many operators fall short, and it is precisely the discipline that separates operators who control their costs from those who are simply watching them.
Once you are tracking prime cost weekly, begin comparing it across days, dayparts, and seasons. High prime cost weeks often have a pattern — a supply delivery that came in heavier than normal, a slow week where labor wasn’t adjusted, a period of management transition. Identifying those patterns is where real cost management begins.
When Prime Cost Is Too High
If your prime cost is running above your target, the diagnosis requires looking at both components. Start with labor, because labor is the faster-moving variable — it responds to scheduling decisions made this week. If food cost is the driver, the path is through inventory controls, portioning, waste reduction, and purchasing discipline.
What prime cost cannot tell you is which specific items or shifts are driving the problem. It tells you that a problem exists and approximately where to look. From there, more granular analysis — daily waste logs, ideal versus actual food cost comparisons, labor productivity metrics like sales per labor hour — helps identify the root cause.
The goal is not to minimize prime cost at all costs. Cutting labor below the level needed to deliver a quality guest experience, or cutting food cost by compromising on ingredient quality, will damage the business in ways that don’t show up immediately in the prime cost number but show up soon enough in declining traffic and eroding sales.
The goal is to understand what your prime cost needs to be for your model to work, to track it relentlessly, and to make the operational decisions that keep it in the range that allows the rest of your P&L to function.
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*Spencer Houlihan is a former CFO for a multi-unit restaurant brand. RestaurantBottomLine.com is dedicated to helping restaurant operators protect their financial model.*
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