The formula
Prime cost % = (Cost of goods sold + Total labor cost) / Total sales x 100
Cost of goods sold = Beginning inventory + Purchases – Ending inventory
Total labor cost = Wages and salaries + Payroll taxes + Benefits
Why these two costs, and only these two: they are the largest costs in the building and the only two a manager can move this week. Rent is fixed by a lease, utilities move slowly, but purchasing, portioning and scheduling change daily. Adding COGS and labor together matters because the two trade off against each other. Scratch cooking lowers food cost and raises labor. Convenience products do the opposite. Judged separately, both kitchens look like they are failing at something. Judged as prime cost, you can see which trade-off is actually cheaper.
How to use it, with an example
- Pick one period, a week is best, and take every number from that same period.
- Work out COGS the honest way: beginning inventory, plus purchases, minus ending inventory. If your books already give you a COGS figure for the period, use the second method and type it in directly.
- Add up the full labor cost: hourly wages, salaried managers and chefs, employer payroll taxes, workers compensation and benefits. Not just the hourly roster.
- Enter total sales for the same period and read the percentage, plus which half of it, COGS or labor, is doing the damage.
Worked example: A full-service restaurant opens the week with $6,000 of food and drink on the shelves, buys $15,000, and ends with $5,500, so COGS is $6,000 + $15,000 – $5,500 = $15,500. Labor for the week is $12,500 in wages and salaries, $1,100 in payroll taxes and $900 in benefits, a total of $14,500. Prime cost is $30,000 on sales of $48,000, which is 62.5%, inside the healthy full-service range. COGS is 32.3% of sales and labor is 30.2%, so neither half is out of line. The calculator above is prefilled with these numbers.
Prime cost stays honest when sales, stock and payroll already agree with each other. That is what happens when the restaurant runs on one system: Odoo for Restaurants ties the till to inventory and purchasing, so the COGS half builds itself from real stock movement, and the Odoo POS module feeds the sales figure the percentage is divided by. Instead of rebuilding prime cost from three exports every Monday, you read it.
Common mistakes
- Leaving salaried staff out of labor. Managers and head chefs are labor. Excluding them is the most common way operators understate prime cost by three to five points and then wonder why the bank account disagrees.
- Forgetting payroll taxes and benefits. Wages alone are not labor cost. Taxes, workers compensation and benefits typically add 8 to 15% on top of the wage bill.
- Using purchases instead of COGS. A delivery sitting on the shelf on Sunday night was not sold. Always adjust for inventory, the same discipline as in a proper food cost calculation.
- Comparing your number to the wrong concept. A 62% prime cost is workable for full-service and a problem for a burger counter. Match the benchmark to your format before you panic or relax.
- Chasing one half in isolation. Cutting prep labor by buying pre-portioned product swaps labor cost for food cost. If prime cost does not move, nothing was saved. Our guide to how to reduce restaurant food cost covers the purchasing side, and the restaurant menu costing guide shows how menu prices set the ceiling for the whole calculation.
FAQs
What is a good prime cost percentage for a restaurant?
For full-service restaurants, 60 to 65% of sales is the healthy range most operators and advisors work to. Quick-service and fast casual concepts usually need 55 to 60%, because their model depends on lower labor per transaction. Above 65% deserves attention, and above 70% is rarely sustainable once rent is paid.
What counts as labor in prime cost?
All of it: hourly wages, salaried managers and chefs, employer payroll taxes, workers compensation, and benefits such as health insurance. If a cost exists because a person works in the building, it belongs in prime cost. Owner draws and one-off contractor projects sit outside it.
How often should I calculate prime cost?
Weekly. Prime cost is a steering number, not a reporting number. A monthly figure tells you about a scheduling or purchasing problem weeks after it started, while a weekly figure lets you fix the roster or the order guide while the problem is still small.
Why is prime cost better than food cost alone?
Because food cost and labor cost trade against each other. A kitchen that preps everything from scratch shows a low food cost and a high labor cost; a kitchen buying convenience products shows the reverse. Prime cost captures both sides in one number, so a good trade-off is not punished.
My prime cost is 68%. Where do I start?
Look at the split first. If COGS is the heavy half, start with purchasing prices, waste and portioning. If labor is the heavy half, start with scheduling against sales by daypart, not across-the-board hour cuts. Fixing the wrong half usually makes the other half worse.
Does prime cost include rent and utilities?
No. Rent, utilities, marketing and the rest are real costs, but they are not prime cost, because you cannot manage them week to week. Prime cost deliberately covers only the two big controllable costs. Everything else is paid out of what prime cost leaves behind.
