What is prime cost in a restaurant?

What is prime cost? In a restaurant, it is the cost of the food and drink the venue sells plus the full cost of the people who prepare and serve it. Added together and divided by sales, it shows how much of every unit of money the guests spend goes straight back out on ingredients and wages. It is usually the largest group of costs in the business, and the one that managers can change most directly.

The figure matters because food and labour are where most restaurants win or lose. Rent, insurance and other overheads are mostly fixed once the lease is signed. Food and labour move every week with the menu, the suppliers, the rota and the trade. A venue that keeps the two together within a sensible range rarely gets into trouble; one that lets them drift for a few months often does.

This guide explains what prime cost includes, how to calculate it, why food and labour are judged together rather than separately, the range many operators aim for, and how it fits among the restaurant KPIs a venue tracks each week. It links to a longer guide on watching it weekly.

Prime cost is the cost of goods sold plus total labour cost. The cost of goods sold is what the food and drink used to make the venue's sales actually cost. Total labour cost is everything the venue spends on its people: wages, overtime, employer taxes and contributions, benefits, and agency staff.

As a percentage, it is that combined cost divided by net sales. If a venue sells 100,000 in a month, uses 30,000 of food and drink, and spends 32,000 on labour, its figure is 62,000, or 62 per cent of sales.

The term comes from accounting, where prime cost means the direct costs of producing something: its materials and the labour that goes into it. In a restaurant, the materials are the ingredients, and the labour is the kitchen and front of house team.

Restaurants adopted the idea because it groups the two costs that most directly follow the trade.

The cost of goods sold is not simply what the venue bought. It is what it used, which is purchases adjusted for the change in stock:

The result is the cost of the food and drink used. It includes waste, staff meals if they are not separated, and anything lost, which is why it can be higher than the recipes suggest. Our guide to what is food cost, and which one you mean explains the different versions.

Labour cost includes every cost of employing people: wages and salaries for the kitchen and front of house, overtime, holiday pay, employer taxes and contributions, pensions or end of service benefits, staff meals if they are counted as a benefit, and agency or temporary staff. Many venues include the general manager's salary; some leave out salaried senior management. Decide and be consistent.

Our guide to labour cost in a restaurant, counted properly covers what to include.

To calculate it for a week or a month:

The result, as a percentage, is the venue's prime cost percentage for the period.

Here is an illustrative month. The figures are examples.

That leaves about 36 per cent of sales to cover rent, utilities, other overheads and profit.

Now take a quieter month for the same venue. The figures are examples.

Food cost as a share of sales hardly changed. The rise came almost entirely from labour, which stayed nearly fixed while sales fell. That is the most common pattern in quiet months, and the reason the rota deserves as much attention as the menu.

Food and labour are judged together because they trade off against each other. A kitchen that buys prepared ingredients, such as peeled vegetables or ready-made sauces, spends more on food but less on labour. A kitchen that makes everything from scratch spends less on ingredients but needs more cooks. A venue with a simple menu needs fewer staff; one with an elaborate menu needs more.

Looking at either cost alone can mislead. A food cost that rises after switching to prepared ingredients may be fine if labour fell by more. The combined figure shows whether the trade-off is working.

The combined cost is usually the largest share of a restaurant's spending, often far more than rent and all other overheads together. It also moves quickly: a supplier price rise, a menu change, a heavier rota or a quiet month can shift it by several points within weeks.

That combination, large and fast-moving, is what makes it the most useful cost figure to watch.

A widely quoted rule of thumb in the industry is that a full-service restaurant should keep the combined figure at or below roughly 60 to 65 per cent of sales. Quick-service venues often run lower, and fine dining venues can run higher, especially where labour is intensive. The right range for any venue depends on its format, its rent, its prices and its location.

Use the rule of thumb as a starting point, then set your own target from your budget. A venue with low rent can carry a higher figure; one with high rent needs a lower one.

To set your own target, start from what the venue needs to cover its other costs and make a profit. If rent, utilities and other overheads come to 25 per cent of sales, and the owner wants a profit of 10 per cent, food and labour together can be no more than 65 per cent. If overheads are 30 per cent, the limit is 60.

Work it out from your own budget, then express it as a range, such as 60 to 63 per cent, rather than a single number.

Within the combined figure, the food cost percentage is the cost of goods sold divided by sales. It is useful to track separately, because it is managed by different people, usually the head chef, and responds to different decisions: purchasing, portioning, waste and pricing.

Our guide to how to calculate food cost percentage covers the method step by step.

Labour cost as a percentage of sales is the other half, managed by whoever writes the rota. It responds to the hours scheduled, the mix of staff, overtime and the trade. Labour cost percentage tends to rise sharply in quiet weeks, because many hours are needed whatever the trade.

Our guide to labour cost percentage by service covers how to read it service by service.

Many venues only see the combined figure in the monthly accounts, weeks after the month ends. By then, it is too late to change anything. Calculating it weekly, with an estimate of food cost from purchases and a quick count of the most valuable stock, and the week's wage bill, gives a figure that can be acted on.

Our guide to prime cost, the one number to watch weekly shows how to do it in under an hour.

A weekly estimate does not need a full stock count. Count the most valuable items, perhaps the twenty that make up most of the stock's value, and estimate the rest. Add the week's purchases. Take the wage bill from the rota and timesheets. The result will not be exact, but it will show within days whether the figure is moving.

Once a month, the full stocktake gives the exact figure. Compare it with the weekly estimates to see how accurate they were.

The combined cost is one of the most important restaurant KPIs, alongside covers, average spend per head, net sales against last year, table turnover and no-show rate. It answers a simple question each week: are the two biggest costs under control?

Our guide to restaurant KPIs worth tracking every week sets out the full list.

When the figure rises, find out which half moved. If food cost rose, look at supplier prices, waste, portion sizes, the mix of dishes sold and any pricing changes. If labour rose, look at hours scheduled against the trade, overtime, and any services where the rota was heavier than needed.

Then act on the cause: re-cost and re-price dishes, adjust portions, cut waste, reshape the rota. A small change in each, sustained for a few weeks, usually brings the figure back.

The figure is a percentage of sales, so it rises when sales fall even if costs stay the same. A quiet week with a full rota will show a high labour percentage. That does not always mean labour is out of control; it may mean the rota did not change with the trade.

Read the figure alongside sales and covers, and ask whether costs moved with the trade or stayed fixed while trade fell.

Prices affect the figure directly. A price rise, if guests keep ordering, lowers both the food and labour percentages, because the same costs are divided by more sales. That is why menu pricing is one of the most powerful levers. But prices that rise too far lose guests, and sales fall.

Our guide to menu pricing covers how to set prices with the costs in mind.

Some venues look at the combined figure by service, especially labour, because a lunch service with a heavy rota and light trade can hide inside a good week. The food side is harder to split by service, but the labour side can usually be split from the rota.

Splitting it shows which services carry the costs and which earn the profit.

Another useful view is the combined cost per cover: food and labour divided by the number of guests served. It shows what each guest costs the venue to feed and serve, and it can be compared with spend per head. If the cost per cover rises faster than spend per head, margins are shrinking.

This view is especially useful when sales change because prices change, since it is not affected by the price rise itself.

Staff meals and comps are easy to lose inside the figure. Food given to the team, dishes sent free to unhappy guests, and tastings for suppliers all use ingredients without producing sales, so they raise food cost. Some venues record them separately so they can be seen; others accept them inside the cost of goods sold.

Either way, know roughly how much they are. A rise in comps after a run of kitchen problems will show up in the figure, and it is worth being able to explain.

Most venues include drinks in the cost of goods sold, alongside food. Drinks usually carry a lower cost as a share of their price than food does, so a venue that sells more drinks will often see its combined percentage fall, even if nothing else changes.

Track drinks cost separately as well, so a fall in drinks margin is not hidden by a strong month in the kitchen.

The figure is most useful when it shapes decisions. Before adding a labour-intensive dish, ask what it does to the combined cost. Before switching to prepared ingredients, compare the extra food cost with the hours saved. Before adding a member of staff, ask how many extra covers or how much extra spend they need to bring to keep the percentage in range.

Used this way, it turns many small choices into one clear question: does this keep our two biggest costs under control?

The figure moves with the seasons. In busy months, fixed hours are spread across more sales, so labour falls as a percentage and the combined figure looks healthy. In quiet months, the opposite happens. Compare each month with the same month last year, not with the month before, so seasonal swings are not mistaken for problems.

Our guide to seasonal trade covers how to map the year.

The team does not need the accounting, but it helps if they understand the idea. A kitchen that knows food and labour together take most of every sale takes portions and waste more seriously. A floor team that knows a quiet Tuesday with a full rota costs the venue money understands why shifts sometimes finish early.

Keep the explanation simple: of every 100 the guests spend, roughly how much goes on ingredients, how much on wages, and how much is left for everything else. Share the trend each month, not every detail.

In a group, calculate the figure for each venue, measured the same way, and compare. A venue whose figure is far above the others may have higher wages, a more labour-intensive menu, more waste or lower prices. The comparison prompts questions, not conclusions.

Agree the definitions centrally: what labour costs are included, how staff meals are treated, how stock is counted.

Venues define the figure slightly differently, which makes comparisons between businesses tricky. Some include salaried management in labour, some do not. Some include staff meals in food, some separate them. Some include drinks in the cost of goods sold, some track food alone. Some use gross sales, some net.

None of these is wrong, but the venue must choose and be consistent, so the figure can be compared week by week.

The combined figure does not cover everything. Rent, utilities, marketing, repairs, insurance, card fees, software and the owner's own costs all sit outside it. A venue with a healthy figure can still lose money if its other costs are too high.

Our guide to a restaurant profit and loss you can read shows where it sits in the full picture.

servearound provides the sales side of the calculation. Payment analytics shows what was collected, net of discount and with the tax within gross shown, and the dashboard shows revenue, covers and spend per cover against the previous period. The menu report shows gross margin once dish costs are set, which helps explain changes in food cost.

Purchases, stock counts and the wage bill sit outside servearound, in your supplier invoices, stock sheet and payroll, so the cost of goods sold and labour are taken from those. See Analytics.

The cost of goods sold, food and drink, plus total labour cost, usually expressed as a percentage of net sales.

Opening stock plus purchases minus closing stock, plus total labour cost, divided by net sales.

A common rule of thumb for full-service restaurants is at or below roughly 60 to 65 per cent of sales. Set your own target from your budget.

Because they trade off against each other, and the combined figure shows whether the trade-off is working.

Weekly, with an estimate, and monthly with a full stocktake.

Some venues include them, some do not. Choose and be consistent.

Probably because sales fell. The figure is a percentage of sales.

No. Rent and other overheads sit outside it, and must be watched too. A venue can hold its food and labour in range and still lose money if its other costs are too high for its sales.

What is prime cost? The cost of goods sold plus total labour cost, divided by net sales. It is usually the largest group of costs in a restaurant and the one that moves fastest with the menu, the suppliers, the rota and the trade.

Food and labour are judged together because they trade off against each other. A common rule of thumb is at or below roughly 60 to 65 per cent for full-service venues, but set your own target from your budget. Calculate it weekly, split it into food cost percentage and labour cost, act when it moves, and keep it among the restaurant KPIs you read every week.