Prime cost is the one number that tells a restaurant owner, every week, whether the two costs they control are under control. It is food and beverage cost plus labor cost, as a share of sales. Everything else on the P&L — rent, insurance, loan payments, software — is decided once a year and changes slowly. Food and labor are decided every shift, and they are where independent restaurants make or lose most of their money.
This guide gives the definition and formula, a worked example for a 60-seat restaurant, how to read the number week to week, what moves it, what to do about it, and where it misleads.
What prime cost is
Prime cost = cost of goods sold (food and beverage) + total labor cost.
Prime cost % = prime cost ÷ total net sales × 100.
Two accounting traps decide whether the number is honest:
- Purchases are not cost of goods sold. COGS for the period = opening stock + purchases − closing stock. If you only add up invoices, a big delivery in the last week inflates the number and a lean week flatters it. A stock count — monthly is enough to start — turns purchases into consumption.
- Labor must be fully loaded. Wages, employer taxes and contributions, benefits, overtime, and a market-rate wage for the owner’s own hours. An owner who works 50 hours a week unpaid and reports a 28% labor cost has a 34% labor cost and a restaurant that cannot afford to replace them.
Use net sales — after discounts and comps, before sales tax. If you split food and beverage, prime cost still uses the total of both COGS against total sales; the food cost percentage and beverage cost percentage are the separate ratios.
Worked example: one month, then one week
A 60-seat neighbourhood restaurant, open six days:
| Month | Amount | % of sales |
|---|---|---|
| Net sales | $144,000 | 100% |
| Food COGS (opening stock $7,200 + purchases $42,500 − closing stock $6,900) | $42,800 | 29.7% |
| Beverage COGS | $7,900 | 5.5% |
| Labor, fully loaded, incl. owner at $1,100/week | $46,100 | 32.0% |
| Prime cost | $96,800 | 67.2% |
| Fixed and other operating costs | $30,200 | 21.0% |
| Operating profit | $17,000 | 11.8% |
The same restaurant in a single week: sales $34,000, food purchases $10,600, beverage purchases $1,900, labor $11,000. With no stock count that week, weekly prime cost = (10,600 + 1,900 + 11,000) ÷ 34,000 = 69.1%. Two points above the monthly figure — partly noise from delivery timing, partly a real rise. The weekly number is an estimate that the monthly count corrects; that is fine, as long as you read the trend and not one week.
Why one number instead of two
Food cost and labor cost are usually watched separately, and each can be “improved” at the expense of the other:
- Cut labor hard and the kitchen over-preps to cope, plates go out wrong, tables turn slower, waste rises and sales fall. Labor cost improves; food cost and revenue worsen.
- Move to more scratch preparation to “save” on ingredients and labor hours climb. Food cost improves; labor worsens.
Suppose food cost improves from 31% to 29% and labor worsens from 31% to 34%. Read separately, the kitchen has a good story. Prime cost went from 62% to 63% — the restaurant is worse off by one point of sales, about $1,400 a month at the volume above. Prime cost is the number that tells the truth about the trade-off, which is why the restaurant KPI framework puts it at the top of the weekly list and why the labor cost guide insists on reading labor alongside it.
The connection to profit
Operating margin = 100% − prime cost % − occupancy and other operating costs %. For a given rent, prime cost sets the ceiling on profit. A restaurant paying 12% of sales in occupancy and 9% in other operating costs that wants a 10% operating margin needs prime cost at or below 69%. The same restaurant in a cheaper location at 7% occupancy can run prime cost at 74% and earn the same margin. This is the single strongest argument against copying someone else’s benchmark: the prime cost your restaurant can afford is a function of your rent, your concept and your margin target. Set the margin target first, then derive the prime cost target — the approach the restaurant profitability guide lays out.
How to read it
- Trend over four to six weeks, not a single week. Delivery timing, a stock count, one training shift or one big party can move a week by two points. Four weeks in the same direction is a signal.
- Prime cost up while sales are flat means something structural changed: a supplier price, a menu change, a rota template, an overtime habit. It will not fix itself.
- Prime cost up while sales fell is usually labor: the rota was built for the busier week. Fix the rota before touching the menu.
- Prime cost down while sales rose is the healthy version of leverage — check it is not being achieved by under-staffing the peak.
- Which half moved? Always decompose: food and beverage COGS on one side, labor on the other. They have different owners and different fixes.
What moves prime cost
On the food and beverage side: supplier price changes that were never passed on to the menu; portion drift; waste and spoilage; theft and unrecorded comps; a sales mix shifting toward low-margin items; a missed or careless stock count. The food cost guide covers each driver in detail.
On the labor side: a rota copied from last week instead of built from covers by hour; overtime instead of hiring for a recurring gap; training shifts; wage increases not reflected in prices; and, most often, sales falling while hours stay flat. Sales per labor hour is the companion metric — the labor cost guide shows how to use it.
On the sales side: because prime cost is a ratio, anything that lowers sales without lowering cost raises it — a slow month, a lost daypart, a falling average check. Before cutting cost, check whether the denominator moved.
Practical actions
- Calculate it weekly. Sales from the POS, purchases from invoices, labor from payroll or the rota. Ten minutes. Enter the stock value in the weeks you count.
- Set your own target from your margin target and occupancy cost (above), and a tolerance — a point and a half is a reasonable starting band — inside which you do nothing.
- When it breaches, decompose first. Food side or labor side? Then run that side’s checklist.
- Rebuild the rota from covers by hour for the last four weeks, not from the template, and set a labor budget per shift (forecast sales × target %) before the rota is written.
- Re-cost the top ten dishes against current supplier prices every quarter, and re-price or re-portion the ones under margin.
- Log waste — a sheet by the bin is enough. Unrecorded waste hides inside food cost and makes the diagnosis impossible.
- Count stock consistently — same day, same person, valued at last cost.
Limitations
- Prime cost excludes occupancy and other operating costs. A restaurant can hold a healthy prime cost and still lose money on rent — read it with break-even and operating margin.
- It rewards cutting. Service, retention and waste costs from an under-staffed floor arrive weeks later, in other KPIs.
- Without a stock count it is a purchasing ratio, not a consumption ratio, and swings with delivery timing.
- Published ranges — you will see figures like “under 60–65% for full service” — are rules of thumb that vary with concept, rent, owner labor and delivery mix. They are a sanity check, not a target.
Frequently asked questions
What is a good prime cost percentage for a restaurant?
The one that leaves your required operating margin after your occupancy and other operating costs. Many full-service independents aim for the low-to-mid 60s; counter service and low-rent sites can run higher and still be profitable. Derive yours from your own numbers rather than adopting a published figure.
Should prime cost include the owner’s salary?
Yes, at the wage you would have to pay someone else to do the same hours. Otherwise the number describes a restaurant that only works while you work for free.
How often should I calculate prime cost?
Weekly, with a monthly stock count to correct the estimate. Monthly alone is too slow: by the time the P&L arrives, four weeks of the problem have happened.
Is prime cost the same as cost of goods sold?
No. COGS is food and beverage only. Prime cost adds labor.
Related restaurant KPIs
Food cost percentage · Labor cost percentage · Gross, operating and net margin · Break-even point · Average check · The restaurant KPI framework
Track prime cost without building a spreadsheet. The free Restaurant KPI Excel template calculates food, beverage, labor and prime cost from one monthly entry sheet and colour-codes them against targets you set. If you already know your prime cost and want it weekly — with the stock true-up built in, a diagnosis of which side moved, a priority in dollars and one action — that is what the Restaurant Performance System is built around.