The most successful restaurants coach their management teams to keep a finger on the pulse of finances by regularly revisiting the question, “What is prime cost?” Many restaurants calculate prime cost and leave it to ride for far too long — weeks or even quarterly. However, you need to understand some fundamentals to truly manage your establishment for maximum profitability, as one of the most crucial metrics is the restaurant prime cost.
By understanding, calculating, and managing your restaurant’s prime costs regularly, you can streamline operations and boost profitability while ensuring your restaurant remains financially healthy.
What Is Restaurant Prime Cost?
Restaurant prime cost is a critical performance indicator that restaurant owners can use to monitor their business’s financial health. It also plays a leading role in financial reporting. Prime cost allows restaurant operators to make informed decisions to boost profit margins and helps tremendously with budgeting and cost control. Every savvy restaurateur keeps profit margin top of mind, and prime cost allows you to continuously monitor operational inefficiencies.
Prime cost represents the two most significant expenses your restaurant will face:
- Cost of Goods Sold (COGS): All the ingredients and materials used to prepare menu items and beverages.
- Total Labor Costs: Wages, salaries, payroll taxes, and benefits for all employees.
Considering that the two largest expenses are represented here, you should make it a priority for your owners and management team to understand prime cost, so they can dig into restaurant accounting and identify areas for cost control.
How to Calculate Prime Cost
Prime cost is the combination of your COGS and total labor costs, expressed as a percentage of total sales. When calculated this way, it shows how much you’re spending on the two biggest controllable expenses (food and labor) and what percentage of your revenue you’ll have leftover for profits and other expenses. Here’s how to do it:
(COGS + Total Labor Costs) / Total Sales
To express prime cost as a percentage of sales, multiply the prime cost ratio by 100:
[(COGS + Total Labor Costs) / Total Sales] x 100
Step-by-Step Example: A Real-World Scenario
Let’s say you run a fast casual restaurant and your numbers look like this for the month of June:
- COGS: $25,000
- Total Labor Costs: $10,000
- Total Sales: $55,000
Let’s plug those numbers into the formula:
[(25,000 + 10,000) / 55,000)] x 100 = 63.6%
A prime cost of 63.6% means that over 63 cents of every sales dollar is going toward the food and labor required to operate your restaurant. That leaves you with less than 37% to cover rent, utilities, supplies, taxes, and (ideally) some profit.
What Is the Average Restaurant Prime Cost?
Wondering what is a good prime cost for a restaurant? Understanding your prime cost in relation to industry averages will help you set realistic targets and spot opportunities to improve efficiency. Although the average prime cost varies by service model, prime cost as a whole typically accounts for 55% to 65% of total sales, broken down as:
- Food and Beverage Cost (COGS): 25–35% of sales on average
- Labor Cost (Wages + Taxes + Benefits): 30–35% of sales on average
Since your restaurant’s service model is the most significant factor impacting prime cost, comparing your metrics to industry averages for similar concepts can give you a clearer sense of where you stand — and where to improve.
Quick-Service Restaurants
Quick-service restaurants (QSRs) benefit from simplified menus, high sales volume, and simpler staffing requirements. Because table service is minimal or nonexistent, labor costs are generally lower than in other service models.
QSR operators can generally expect the following cost averages:
- Average Total Prime Cost: 55–60%
- Typical COGS: 28–32%
- Typical Labor Cost: 25–30%
Fast Casual Restaurants
These concepts offer higher-quality food than QSRs and may provide limited counter or table service, such as food runners. The operational focus is still on speed of service and lower-priced menus than full service or fine dining, but these restaurants may have slightly higher labor costs due to more complex food prep and the additional services offered than in QSR models.
Fast casual operators can generally expect the following cost averages:
- Average Total Prime Cost: 58–62%
- Typical COGS: 30–34%
- Typical Labor Cost: 28–32%
Full-Service Restaurants
For restaurants that provide service to guests from beginning to end, managing labor is critical. Labor costs for larger front-of-house teams, hosts, bussers, and more complex kitchen staff can easily creep up and push costs out of control. However, to remain profitable, you’ll need to maintain total prime costs under 60% to account for more expensive rental costs for larger dining rooms and other non-prime expenses.
Full-service operators can generally expect the following cost averages:
- Average total prime cost: 60% or lower is ideal
- Typical COGS: 30–35%
- Typical Labor Cost: 30–35%
Fine Dining
A sophisticated fine-dining experience includes high-end ingredients, intricate preparation, and white-glove service. While this premium experience can translate to higher revenues from customers, it can come at a higher cost to your restaurant in the form of labor-intensive prep and higher-priced food products. While a higher prime cost is expected in this model, restaurant owners should still aim to keep their prime cost below 65% to ensure profitability.
Fine dining operators can generally expect the following cost averages:
- Average total prime cost: 60–65%
- Typical COGS: 32–38%
- Typical Labor Cost: 30–35%
These percentages should serve as benchmarks, not rigid rules. Factors like location, size, restaurant type, and customer matrix can all influence your unique prime cost, so your team should strive to align targets with what you know is realistic for your operation. Scrutinize your prime cost through consistent tracking to ensure you operate within a close range of these numbers.
Why Is It Important to Control Prime Costs?
Controlling prime cost is about more than just cutting expenses. When you have a clear picture of these costs, you’re better positioned to make intentional, data-driven decisions that enhance profitability without sacrificing quality or service. Here’s why it matters:
Profitability
Your prime cost directly affects your bottom line. Since food and labor are your two biggest controllable expenses, even a small reduction here can result in significant profit gains. Likewise, allowing your prime cost to creep up by even a percentage point or two can erode your already razor-thin profit margins.
However, be cautious about aggressive cost-cutting that isn’t backed by data. Slashing labor hours or switching to lower-quality ingredients can lead to corner-cutting by staff, poor execution, and customer dissatisfaction. These short-term savings often backfire by reducing revenue or increasing other costs that cancel out any initial gains.
Budgeting
Accurate prime cost tracking can give you a clearer picture of how your resources are allocated and help create realistic budgets. By knowing how much of your revenue goes into labor and COGS, you can make informed decisions about when and where to invest or cut back. Just remember that trimming costs too far, especially during peak periods, can lead to understaffing and stockouts that strain your operation and reduce revenues.
Menu Pricing
When you know exactly how much you’re spending on ingredients and labor to produce each dish, you can set competitive menu prices that maintain profitability. That said, menu changes aimed solely at reducing costs (like shrinking portions or removing premium ingredients) should be approached carefully, as they may impact perceived value and guest satisfaction.
Operational Efficiency
Regularly calculating prime cost keeps you keenly aware of ever-fluctuating food costs, wage increases, or operational inefficiencies. It can help you identify issues that eat into your profits, such as overstaffing during slow shifts or excessive prep waste, allowing you to make changes that maximize your restaurant’s efficiency and profitability.
Forecasting
When you have tight control over costs, it becomes much easier to plan ahead. A clear pulse on your food costs can help dial in on more accurate inventory ordering, and a deeper understanding of your labor needs can help you develop tighter labor schedules as sales patterns fluctuate. Forecasting in both of your prime cost areas is key to operating at maximum efficiency, but it only works when you’re using current, accurate data.
Checklist for Controlling Prime Costs
Keeping your prime cost in check is vital for success. To do so, you’ll need to take the following steps:
1. Review and Forecast Labor, Then Schedule Accordingly
Scheduling software aligns labor with sales forecasts and employee availability. Automating the scheduling process can reduce labor costs and ensure adequate staffing during peak times. Tools that provide data-driven forecasting can help you identify your establishment’s busiest periods and adjust labor needs accordingly. This strategy prevents overstaffing and keeps guests from wondering why there are only two servers on the floor.
One attractive aspect of implementing and actively utilizing scheduling software is the ability to track labor costs in real-time, enabling managers to make data-driven adjustments on the fly.
2. Take Control of Your Inventory and Optimize Your Menu
Inventory management software is a game-changer. It tracks product usage, helps you maintain optimal inventory levels, and minimizes waste. Digital tools can assist your staff, allowing them to focus on concepts like cross-utilization of ingredients (using the same ingredient across multiple menu items) to reduce costs. Using fresh ingredients in several dishes encourages creativity and thoughtful menu planning.
A responsible chef or kitchen manager who understands the bottom line revisits inventory reports and regularly applies numbers to adjust the menu. An essential part of menu optimization is scheduling regular menu reviews to remove underperforming items and prioritizing the ones that move. Being alerted to discrepancies and potential theft is another invaluable benefit of inventory management software in the kitchen, especially in the bar.
3. Leverage Relationships with Your Vendors
Building strong relationships with vendors can lead to better pricing and terms. It’s important to schedule time regularly with your reps to review your product mix. Honest, open communication ensures you’re all on the same page, keeping you aware of any opportunities to reduce costs.
You’ll need to understand your prime cost when vendors suggest items they may pitch as “value adds.” Entering a conversation with a rep with this knowledge gives you a clear vision of what costs you can cut without disrupting the integrity of the restaurant’s vision or the guest experience.
For example, vendors may offer discounts for bulk purchases, provide seasonal promotions, or inform you of options you didn’t know existed. Losing money on that Choice Angus ribeye? Perhaps your rep offers you samples of a needled Select Holstein ribeye from a smaller processor. Perform taste tests and include your rep and kitchen so the team can be informed and trust that the management and ownership team cares. Bringing in front-of-house leads during tastings of a potential new product is often appropriate, as their relationships with guests are as invaluable as offering a product they stand behind.
When teams come together with reps and vendors, you can create a community that demonstrates your care for not only your bottom line but the purveyor’s product, as well. When your vendors stay informed about your needs and limitations, they can help with creative solutions and place you at the top of their list for deals.
Take Control of Prime Costs with Back Office
Embracing technology that automates back-of-house operations calculations and analysis is vital as you regularly manage the books, specifically your restaurant’s prime costs. Technology removes the burden of manual weekly cost calculations, allowing you to make small, manageable adjustments. These incremental improvements will position you for consistent success and allow you to stay ahead of issues that hinder business growth and profitability.
Back Office was built by restaurant operators who understand the importance of having simple, automated ways to manage your most important restaurant metrics. Our integrated tools help you monitor labor, inventory, and sales in real-time, giving you confidence and control in managing your costs efficiently. Explore how Back Office can simplify your workflow and support smarter operational decisions.