Prime Cost and Labor Cost: The Numbers That Run Your Restaurant

Ask experienced operators which number they watch most closely and many will say prime cost. Restaurant owners who check it every week catch problems while there's still time to fix the schedule or the order guide. Prime cost is your cost of goods sold plus your total labor cost, and together those are usually the two biggest lines on your P&L. Here's how to calculate it, what belongs in it, and why the schedule is the part of it you can change fastest.

What goes into prime cost

Prime cost = cost of goods sold (COGS) + total labor cost

Prime cost percentage = prime cost ÷ total sales × 100

COGS covers food and beverage, including beer, wine, liquor, and non-alcoholic drinks. Some operators add paper and packaging, especially takeout-heavy concepts. Pick one definition and use it every period so the trend means something.

Total labor cost covers everyone on payroll: hourly wages, overtime, salaried managers and chefs, payroll taxes, benefits, and workers' compensation insurance. If you work as your own GM, include a market salary for that role, or your prime cost will look better than the business really is.

Tips that pass through to staff aren't part of your labor cost, though the employer payroll taxes on reported tips are. Ask your accountant how to book them.

How to calculate COGS for the period

COGS = beginning inventory + purchases − ending inventory

Count inventory at the same time each period and price it the same way each time. Our guide on how to calculate food cost covers counting, pricing, and the mistakes that throw the number off.

How to calculate labor cost percentage

Labor cost percentage = total labor cost ÷ total sales × 100

Two more labor numbers are worth tracking:

• Sales per labor hour (SPLH) = sales ÷ hourly labor hours. It shows how productive each scheduled hour was.
• Labor cost per cover = total labor cost ÷ covers. It helps when your check average shifts.

Worked example: one week

Here's a week at a casual full-service restaurant, in round numbers:

• Sales: $40,000
• COGS: $5,000 beginning inventory + $12,600 purchases − $5,200 ending inventory = $12,400
• Labor: $7,500 hourly wages + $2,500 salaried managers + $1,600 payroll taxes and benefits = $11,600
• Hourly staff worked 500 hours, and the restaurant served 2,000 covers

SPLH is $40,000 ÷ 500 hours, or $80. Labor cost per cover is $11,600 ÷ 2,000 covers, or $5.80.

Now say a slow week brings in $34,000 and the schedule doesn't change. If COGS holds at 31 percent of sales, it falls to $10,540. Labor stays at $11,600, which is now 34.1 percent of sales, and prime cost jumps to $22,140, or 65.1 percent. Nothing went wrong in the kitchen. The schedule just didn't follow the sales.

Trim 80 hourly hours at the average of $15 an hour and wages fall by $1,200. Labor drops to $10,400, or 30.6 percent, before counting the payroll tax you'd also save, and prime cost lands near 61.6 percent. That's why labor gets so much attention. It's the part of prime cost you set in advance, when you write the schedule.

Restaurant prime cost targets, and why yours may differ

Benchmarks blend very different restaurants. A full-service dining room needs more staff per cover than a counter-service spot, and a menu built on prime beef carries a higher food cost than one built on pasta. If your rent is high, your prime cost has to be lower to leave any profit. The trend in your own numbers, week over week, is the benchmark that counts.

If prime cost runs high, find which half moved

Split the number before you react, and compare COGS and labor to their own targets.

• If COGS moved, check portioning, waste logs, comps and voids, supplier price changes, and whether the sales mix shifted toward lower-margin dishes.
• If labor moved, compare scheduled hours to actual hours, look for overtime, and check whether sales came in under forecast.
• If sales dropped, expect most of the damage in labor percentage. COGS falls along with sales, and a fixed schedule doesn't.

A short Monday routine

1. Pull last week's sales from the POS.
2. Add up purchases from that week's invoices.
3. Count inventory at the close of the week, Sunday night if your week ends Sunday, and use it as ending inventory.
4. Pull total labor from payroll, or estimate it from the time clock plus a payroll tax percentage your accountant gives you.
5. Calculate prime cost, labor cost, and SPLH, and write them next to the targets.

Where labor cost leaks

• Schedules copied from last week when the forecast changed
• Overtime from thin coverage or late call-outs
• Early clock-ins and late clock-outs nobody approved
• Slow shifts with no cut plan
• Training hours nobody budgeted
• Side work that grows to fill the time
• Turnover, which pays for the same training again and again

How to bring labor cost down without hurting service

1. Forecast covers by daypart. Use last year, recent weeks, reservations on the books, and local events.
2. Build a staffing guide. Set how many servers, cooks, and dishwashers each cover level needs, and schedule to it.
3. Set a cut order. Decide who goes home first when covers come in light, and give managers the authority to send people home early.
4. Check overtime before you publish. Overtime caught on Monday is a schedule fix. Overtime caught on payday is a cost.
5. Watch part-time hours. Under the Affordable Care Act, employers with 50 or more full-time employees, counting full-time equivalents, generally treat anyone averaging 30 hours a week as full time for health coverage rules. Keep an eye on part-timers who drift up.
6. Compare scheduled to actual every day. A five-minute check each morning catches a problem before it becomes a week.

Good restaurant scheduling software handles most of this list for you, drafting the week from the forecast and flagging overtime before anyone else sees it. If you build schedules by hand, our restaurant schedule template walks through a week that hits a labor target.

How often to check

Check labor against sales daily, and calculate prime cost weekly. Monthly numbers arrive too late to fix the month they describe. Put the weekly prime cost on one line your managers can see, next to the target, and talk about it at the weekly managers' meeting. When people see the number every week, they start making the small calls that move it, like cutting a server on a dead Tuesday or catching a double order from a supplier.

How Monarch helps

We set up restaurant scheduling and labor planning that drafts each week from your forecast, staffing minimums, and labor target, then flags overtime before you publish. Our free AI assessment reads your answers, your Google listing and reviews, and your website, and Christy follows up personally.