What is Prime Cost in a Restaurant: Why It Matters and How to Control It

Restaurant prime cost is one of the most important metrics for running a profitable and efficient food service operation. It directly reflects how well you’re managing your biggest expenses—labor and inventory—and it shows where there’s room to improve without needing to change your concept, location, or menu.

Understanding what prime cost includes, how to calculate it correctly, and how to reduce it through daily operational decisions can transform a restaurant’s bottom line, regardless of size or format.

What is Prime Cost?

Prime cost, sometimes called direct or controllable cost, is the total of a restaurant’s cost of goods sold (COGS) and total labor costs. These two categories represent the most significant and most controllable expenses in the restaurant business. The prime cost equation can be expressed simply as:

Prime Cost = COGS + Total Labor Costs

Where:

• COGS includes raw material costs like food, beverage, condiments, packaging, and supplies used in food and beverage production.
• Labor Costs include direct labor wages, payroll taxes, workers compensation insurance, health insurance, and employee benefits.

Unlike overhead costs—such as rent, utilities, and insurance—prime costs vary based on volume, efficiency, and how decisions are made day to day. Tracking prime cost weekly, or even more frequently in fast-paced environments, gives restaurant operators early warning signs of waste or inefficiency.

1. Cost of Goods Sold (COGS)

The first half of the prime cost formula is the total cost of food and beverage items sold, adjusted by inventory. To calculate it accurately, use:

COGS = Beginning Inventory + Purchases – Ending Inventory

This approach captures the actual consumption of goods sold, not just what was purchased. It accounts for spoilage, theft, and waste—key variables that directly impact food cost percentage.

COGS should include:

• Direct material costs: proteins, produce, dry goods, dairy, baked items, sauces, and garnishes
• Beverage stock: coffee, tea, soda, wine, beer, and spirits
• Packaging: disposable cups, containers, wrappers, and napkins
• Prep materials: foil, gloves, wrap, and liners
• Cleaning supplies used specifically for food service areas

An ideal COGS target varies, but for many restaurants, a food cost percentage between 25% and 35% of total sales is considered healthy. A low food cost percentage is not always ideal if it compromises food quality, but going over 35% can quickly erode margins unless offset by high menu prices or tight labor control.

2. Labor Costs

Labor costs represent the second major component of prime cost. They include all wages paid to hourly employees and salaried managers involved in the production and service of food and beverages. Total labor cost also encompasses:

• Payroll taxes (FICA, Medicare, unemployment)
• Workers compensation insurance
• Health insurance and other employee benefits
• Training, onboarding, and uniform expenses

Direct labor costs include:

• Kitchen staff: line cooks, prep cooks, dishwashers
• Front-of-house staff: servers, bussers, hosts
• Management: chefs, GMs, assistant managers (if hands-on)

Effective scheduling, sales forecasting, and productivity benchmarks help reduce labor expenses. The goal isn’t to minimize labor at the expense of service quality but to match labor to actual business volume. Seasonal trends, weather, and local events should all inform staffing plans.

Calculating Prime Cost

To calculate prime cost, gather data on both COGS and labor expenses for the same period. Use gross sales (not net sales) to determine the prime cost percentage:

Prime Cost Percentage = (COGS + Labor Costs) ÷ Total Sales × 100

For example:

• Beginning inventory: $6,000
• Purchases: $12,000
• Ending inventory: $5,000
• Total labor cost: $18,000
• Gross sales: $60,000

COGS = $6,000 + $12,000 – $5,000 = $13,000
Prime cost = $13,000 + $18,000 = $31,000
Prime cost percentage = ($31,000 ÷ $60,000) × 100 = 51.6%

That result indicates strong cost control, especially if the service model is full-service or fine dining, where the labor component is naturally higher.

Prime Cost Targets by Restaurant Type

The ideal prime cost varies depending on the format and service model of the restaurant.

• Quick Service Restaurants aim for a prime cost between 55% and 60%. In these establishments, labor costs tend to be lower due to streamlined service and minimal table service requirements. However, food costs can be higher due to the competitive nature of pricing and the need to maintain quality and speed. Efficient inventory management and portion control are crucial to achieving this target.
• Full Service Restaurants often target a prime cost between 60% and 65%. These venues require more staffing for table service, which naturally increases labor costs. Menu pricing strategies and upselling techniques are important for maintaining this prime cost range. Consistent training and scheduling based on sales forecasts help manage labor expenses effectively.
• Fine Dining Establishments may exceed a prime cost of 65% due to the high level of service, premium ingredients, and skilled labor required. These restaurants compensate with higher check averages and premium pricing. Detailed cost analysis and menu engineering are essential to balance the elevated costs while maintaining exceptional service and culinary standards.

A good prime cost percentage is always relative to the business model, geographic location, and pricing strategy. What matters most is consistent tracking and trending in the right direction.

Why Prime Cost is a Financial Health Indicator

Tracking prime cost is not just about reducing expenses—it’s about maximizing operational efficiency. It reflects how well resources are being used to generate revenue. Keeping it in range unlocks several business advantages:

• Margin Protection: A low or well-managed prime cost ratio ensures profitability even during slow periods.
• Pricing Accuracy: Real-time visibility into costs supports dynamic menu prices that match market conditions.
• Operational Adjustments: Changes to prep, purchasing, and scheduling can be made based on actual performance, not estimates.
• Cash Flow Stability: When labor and inventory are tightly controlled, less money is tied up in overstaffing or overstocking.
• Competitive Benchmarking: Comparing your restaurant’s prime cost performance with industry averages helps identify competitive weaknesses and strengths.

Restaurants that neglect prime cost analysis often find themselves relying on sales volume alone to stay afloat. But in high-cost environments, even strong sales can’t compensate for poorly controlled expenses.

How Prime Cost Supports Menu Pricing Strategy

Menu pricing without prime cost data is guesswork. Every item should be priced to cover direct costs and contribute to overhead and profit. The product’s minimum sales price depends on ingredient costs, labor intensity, and service requirements.

For instance, a dish with expensive proteins and high prep time needs either a premium price or tight control over portioning and waste. Pairing high-cost items with high-margin accompaniments (like cocktails or desserts) can help balance the equation.

Menu engineering strategies, such as promoting dishes with lower food cost and higher appeal, work best when tied to actual prime cost components. The more accurate the cost breakdown, the more confidently prices can be set and adjusted.

Reducing COGS Without Compromising Quality

Many restaurants fall into the trap of reducing food costs at the expense of food quality. Instead, the focus should be on efficiency. Key strategies include:

• Vendor Review: Regularly compare pricing across food and beverage vendors and negotiate volume-based discounts.
• Inventory Discipline: Weekly counts, FIFO rotation, and just-in-time ordering reduce spoilage and theft.
• Recipe Standardization: Standard portion sizes and plating instructions help control ingredient usage.
• Waste Logs: Tracking why items are discarded (burned, expired, spoiled) helps identify training or storage issues.
• Cross-Utilization: Designing menu items that share ingredients reduces raw material costs and simplifies inventory.

These practices help maintain or even improve food quality while keeping costs within a target range.

Reducing Labor Costs Without Cutting Service

Lowering labor costs doesn’t mean reducing staff arbitrarily. Smart labor management aligns team hours with actual business needs and can significantly impact a restaurant’s prime cost performance.

• Forecast Scheduling: Utilize historical sales volume data to accurately predict staffing requirements, ensuring optimal coverage without overstaffing during slower periods. This approach helps in maintaining a good prime cost percentage by aligning labor costs with actual business demand.
• Cross-Training: Train staff to perform multiple roles, allowing for more flexible and leaner shifts. This not only reduces the need for additional hires but also enhances employee engagement by offering diverse work experiences, contributing to efficient labor cost management.
• Limit Overtime: Closely monitor employee hours to prevent unplanned overtime charges, which can inflate labor expenses. Implementing strict controls and using scheduling software can help keep overtime in check, thereby supporting better prime cost control.
• Retention Programs: Develop strategies to retain skilled staff, as hiring and training new employees can be costly. Long-term employees contribute to a stable workforce, reducing recruitment and onboarding costs, which positively affects the restaurant’s prime cost.
• Productivity Metrics: Implement systems to measure output per labor hour, providing insights into staffing efficiency. This data-driven approach allows for adjustments in scheduling and staffing, ensuring labor costs are aligned with sales volumes and contributing to an ideal prime cost ratio.

High labor costs may be justifiable if paired with high food and beverage sales, as they can enhance service quality. However, bloated schedules or poorly utilized teams can negatively impact both prime cost performance and employee morale. Strategic labor management is essential for maintaining a healthy balance between cost efficiency and service excellence.

The Value of Weekly Prime Cost Tracking

Many restaurants only calculate prime cost monthly, which creates a delay in identifying problems. However, tracking prime costs weekly offers a more immediate and accurate snapshot of operational efficiency, enabling timely interventions and adjustments.

Weekly tracking allows restaurant owners and managers to:

• Optimize Purchasing Decisions: By monitoring inventory levels and purchasing patterns weekly, restaurants can adjust orders to prevent surplus, minimizing spoilage and waste.
• Enhance Menu Performance: Identifying underperforming menu items on a weekly basis allows for quick menu adjustments, ensuring that only profitable items remain, thereby protecting margins.
• Improve Labor Management: Weekly insights into labor costs and scheduling enable managers to make necessary adjustments mid-week, such as reallocating shifts or modifying schedules to better align with actual sales volumes.
• Foster Accountability: Consistent weekly reviews keep managers and staff accountable, promoting a culture of continuous improvement and attention to cost control.
• React to Sales Fluctuations: Even if sales volume varies week to week, tracking trends provides a solid foundation for making informed decisions, allowing restaurants to adapt swiftly to changing market conditions.

Common Mistakes in Prime Cost Calculation

Incorrect prime cost calculation can lead to false confidence in financial health or conceal hidden inefficiencies within a restaurant’s operations. Some common issues encountered during prime cost calculations include:

• Not Accounting for Ending Inventory: Failing to adjust for ending inventory can result in inaccurate COGS, as it doesn’t reflect the actual consumption of goods.
• Ignoring Indirect Labor Costs: Overlooking expenses like payroll taxes, workers compensation insurance, and employee benefits can underestimate total labor costs.
• Using Net Sales Instead of Gross Sales: Calculating prime cost percentage with net sales provides a skewed view of profitability, as it excludes discounts and allowances.
• Failing to Separate Food Cost from Beverage Sales: Combining food and beverage costs can obscure individual performance metrics, leading to uninformed decision-making.
• Using Invoice Amounts Instead of Actual Consumption Data: Relying solely on invoice amounts doesn’t account for spoilage or waste, which can inflate perceived efficiency.

Accurate prime cost performance depends on precise tracking and disciplined reporting of direct expenses, ensuring that restaurant owners can make informed decisions to optimize operations and enhance profitability.

Clean data is essential. Prime cost performance depends on accurate tracking of direct expenses and disciplined reporting practices.

Prime Cost vs. Other Restaurant Metrics

While prime cost is a powerful metric, it’s only one part of a larger financial ecosystem. Here’s how it compares:

No single number tells the full story. But prime cost offers the most actionable insights on a weekly basis and connects directly to daily decisions around labor and product.

How KNOW Helps Optimize Prime Cost

Prime cost control hinges on consistent operations, accurate data, and effective communication between teams. KNOW, a digital operations platform designed for the restaurant industry, directly supports the reduction of both labor costs and cost of goods sold—the two core components of prime cost. Here’s how:

1. Smarter Staff Scheduling to Control Labor Costs

Labor costs often spike due to inefficient shift planning and poor visibility of staff hours. KNOW’s scheduling feature allows managers to assign shifts based on real-time demand forecasts and historical sales data, helping reduce unnecessary labor hours. With built-in communication tools, last-minute changes are managed without confusion, minimizing unplanned overtime and absentee-related costs.

2. Real-Time Task Management to Eliminate Operational Waste

From prep line checks to inventory closing routines, KNOW’s digital checklists ensure frontline teams follow consistent procedures. This standardization helps reduce food waste, prevents overproduction, and ensures portions are accurate—key factors in maintaining a low food cost percentage. Every task is timestamped and tracked, providing managers visibility into execution and compliance.

3. Inventory & Safety Controls That Support COGS Management

KNOW helps teams stay on top of food safety and storage compliance with real-time logging and automated alerts. This reduces spoilage, avoids expired stock, and improves inventory turnover. By ensuring proper handling and rotation of ingredients, the platform indirectly reduces raw material costs, one of the largest contributors to COGS.

4. Onboarding & Cross-Training to Improve Labor Efficiency

Reducing labor costs isn’t just about cutting hours—it’s about getting more value from every shift. KNOW’s mobile training tools allow staff to be cross-trained in multiple roles, improving team flexibility and reducing dependency on additional hires. A better-trained team is also less likely to make mistakes that lead to waste or rework.

5. Operational Data to Track Prime Cost Performance

KNOW captures activity-level data across operations, which helps identify inefficiencies contributing to inflated prime cost. Managers can analyze trends in task completion, staff performance, and compliance across locations, giving them the insights needed to adjust schedules, tighten procedures, or revisit vendor-related decisions.

By equipping restaurants with tools to streamline daily execution, reduce waste, and control staffing more precisely, KNOW helps keep prime cost in check—without compromising food quality or service standards.

FAQs

1. My sales are strong, but profits are thin. Could a high prime cost be the reason?

Yes. A high prime cost percentage—especially above industry benchmarks—often explains thin profit margins despite strong sales volume. Since prime cost includes your total labor cost and cost of goods sold, an issue in either category can lead to disproportionate spending. Even a few percentage points above your prime cost targets can significantly reduce net profits in the restaurant business.

2. Should salaried managers be included in my prime cost calculation?

Yes, if they are directly involved in operations. For accurate prime cost calculation, you should include their wages as part of direct labor costs. If they only handle administrative costs, they should be classified under overhead expenses instead. Including operational managers helps restaurant owners measure true direct costs tied to the production process.

3. How often should I calculate prime cost—monthly or weekly?

To stay agile, you should be tracking prime cost on a weekly basis. Calculating prime costs weekly gives real-time insights into fluctuations in labor costs or raw material costs, especially in fast-moving environments like quick service restaurants. Waiting until the end of the month often delays cost control actions and affects overall prime cost performance.

4. My food cost looks fine, but labor seems high. Where do I start troubleshooting?

Start with a close look at your total labor cost compared to your food and beverage sales. Use your prime cost formula to isolate where direct labor is exceeding projections. Examine schedules against sales volume, and review whether hourly employees are efficiently assigned. Check for hidden costs like payroll taxes, employee benefits, and workers compensation insurance, which are often overlooked in initial assessments.

5. Should beverage costs be included in my prime cost?

Yes. All food and beverage items sold to customers contribute to your restaurant’s prime cost. This includes beverage sales—both alcoholic and non-alcoholic—since they represent real direct material costs. Excluding them skews your prime cost ratio, underestimates your cost of goods sold, and may cause you to underprice your menu.

6. How can I lower prime cost without cutting staff or using cheaper ingredients?

Focus on improving cost analysis and process efficiency. Standardizing recipes and tightening prep controls can lower food cost without compromising food quality. Smarter scheduling and cross-training reduce labor expenses without affecting service. You can also renegotiate with food and beverage vendors to lower direct costs. Reducing conversion costs and optimizing the production process allows for better control of prime cost components.

7. Is it okay for my prime cost to go above 65% in a fine dining setup?

For fine dining establishments, slightly higher prime cost targets are common due to elevated direct material costs and higher wages paid to skilled staff. However, this must be supported by premium menu prices and higher per-cover food and beverage sales. In these cases, a good prime cost percentage might exceed that of quick service restaurants, but only if total cost margins are still sustainable.

8. How do I factor in comps and staff meals into my COGS?

These are part of your goods sold but don’t generate revenue, so they affect your food cost percentage. For accurate prime cost calculation, include the cost of staff meals, comped items, and waste in your COGS using your prime cost equation. This ensures your prime cost ratio reflects all actual direct expenses related to inventory usage, not just what was sold.

9. Can I still reduce prime cost if I already have lean staff and tight food costs?

Yes. Even if you maintain a low food cost percentage and minimal labor costs, inefficiencies may still exist. Analyze ending inventory vs. beginning inventory for inconsistencies, review underperforming menu prices, and identify low-margin food and beverage items. Micro-adjustments in direct materials usage or staffing by daypart can save a few percentage points off your restaurant prime.

10. My prime cost is under control, but overhead is killing me. Should I still focus on it?

Absolutely. Controlling prime cost gives you more room to handle overhead costs like rent, utilities, and administrative costs. Since prime cost makes up the majority of a restaurant’s total cost, getting it right allows you to better absorb less-flexible expenses. It’s your most actionable lever for financial health within the broader restaurant industry framework.