How to calculate prime cost (and what's a good prime cost percentage)

If you only track one number in your restaurant, make it prime cost. It's your cost of goods sold plus your total labor, as a percentage of sales. Those are your two biggest controllable costs, and together they eat most of every dollar that comes through the door. Rent is mostly fixed once you sign the lease. Prime cost moves every single week, and it moves based on decisions your team makes on every shift.

I named the company after this number for a reason. Here's how to calculate it correctly, how often to look at it, and what a good prime cost percentage looks like for your kind of restaurant.

The prime cost formula

Prime cost = (food cost + beverage cost + total labor cost) ÷ total sales

That's it. The math is simple. The mistakes happen in what people put into each bucket.

Food and beverage cost means cost of goods sold, not purchases

The most common error I see is using what you bought this week as your food cost. Purchases aren't usage. If you stocked up on proteins ahead of a price increase, your "food cost" spikes. If you ran the walk-in down before inventory, it looks great. Neither number tells you what you actually used to make the food you sold.

Cost of goods sold (COGS) fixes that:

COGS = beginning inventory + purchases − ending inventory

Do this separately for food and for beverage. Beverage should be its own line because it runs on different margins, and blending it into food hides problems in both.

Total labor means all of it

"Total labor" isn't just hourly wages. It includes:

• Hourly wages, including overtime
• Salaried managers and kitchen leadership
• Payroll taxes (the employer side)
• Benefits: health insurance, retirement contributions, paid time off
• Workers' comp, if you're tracking it as a labor cost

Leaving out salaried managers or payroll taxes is the easiest way to convince yourself labor is fine when it isn't. If a salaried GM is on the payroll, that salary is labor. Count it.

How you handle tips depends on how they flow through your books. Tips paid out to staff from guest payments generally aren't your cost, but tip credits, service charges and any owner-funded tip pools need to be treated consistently. Pick a method with your bookkeeper and stick to it so week-to-week numbers are comparable.

Sales means net sales

Use net sales after comps, discounts and voids, not gross. If you use gross sales, every comp makes your prime cost look better than it is.

A worked example

Hypothetical example: a full-service restaurant does $100,000 in net sales for the month.

| Line | Amount | % of sales | | --- | --- | --- | | Food COGS | $26,000 | 26% | | Beverage COGS | $5,000 | 5% | | Total labor (hourly, salaried, taxes, benefits) | $32,000 | 32% | | Prime cost | $63,000 | 63% |

Food COGS here came from $8,000 beginning inventory + $27,000 purchases − $9,000 ending inventory. Note that the food and beverage lines are shown as a percentage of total sales so they add up to prime cost. When you track food cost and beverage cost on their own, you divide each by its own category's sales, which is a different (and more useful) number for managing those lines.

These are round, made-up numbers. Plug in your own with the Prime Cost Health Check and see where you land.

Weekly vs. monthly

Most owners see prime cost once a month, when the P&L comes back from the bookkeeper. Sometimes that's three or four weeks after the month ends. By then you've already paid for the problem for six or eight weeks.

I track it weekly. Here's what that takes:

• Weekly inventory on your big-dollar items. You don't need to count every spice. Count proteins, high-cost produce, liquor and anything else that makes up the bulk of your spend. Count the full inventory monthly.
• Invoices entered as they arrive. If invoices sit in a folder until month-end, you can't calculate a weekly COGS.
• Labor pulled from your POS or payroll system weekly, with a weekly accrual for salaries, taxes and benefits so the number isn't artificially low.
• The same day every week. Monday morning works for most operators. Same day, same person, same format.

A weekly number won't be perfect. Invoice timing and partial counts add noise. That's fine. The point is to see the trend early. If prime cost jumps three points in a week, you want to know on Monday, not five weeks later.

What's a good prime cost percentage?

The common rule of thumb is 60–65% of sales for full-service restaurants and 55–60% for limited-service and quick-service concepts.

Treat those as a starting point, not a grade. The right target depends on your concept:

• Scratch kitchens and prep-heavy menus tend to run lower food cost and higher labor. That's a trade-off, not a problem, as long as the total works.
• Concepts built on expensive proteins often run higher food cost and need tighter labor to compensate.
• Strong bar programs usually pull prime cost down, because beverage generally carries better margins than food.
• Counter service should run lower labor than full-service. If it doesn't, scheduling is usually the reason.
• High-rent locations need a lower prime cost, because occupancy takes a bigger bite out of what's left.

It also helps to know how thin the margin is underneath. The NRA reports median pre-tax margins of roughly 2.8% for full-service and 4.0% for limited-service operators. On numbers like that, two points of prime cost can be most of your profit.

Look at the pieces, not just the total

A prime cost that hits target can still be hiding something. If food cost is up three points and labor is down three points, you'll see a flat total and miss a food problem that labor is covering, often because the team is short-staffed and service is suffering.

So I always look at three numbers together:

1. Food cost as a percentage of food sales
2. Beverage cost as a percentage of beverage sales
3. Total labor as a percentage of total sales

Then prime cost as the roll-up. For the details on each, see restaurant food cost percentage and how to lower labor cost without killing service.

Common mistakes that throw off the number

• Using purchases instead of COGS. Covered above, but it's the big one.
• Leaving salaried managers out of labor. It makes labor look several points better than it is.
• Inconsistent inventory. Different people counting different ways, or counting at different times of day, makes week-to-week comparisons meaningless. Same counter, same time, same count sheet.
• Valuing inventory at old prices. If your count sheet still has last year's case costs, your COGS is wrong.
• Mixing in non-food items. To-go containers, chemicals and paper goods belong in their own line, not food cost.
• Using gross sales. Use net.
• Comparing a five-week month to a four-week month. Weekly tracking solves this.

What to do with the number

Prime cost tells you where to look, not what to fix. When it's over target, I work through it in this order:

1. Split it. Is the problem food, beverage or labor?
2. Check the data first. Before you blame the kitchen, make sure inventory was counted right and invoices are all entered. A surprising share of "food cost problems" are counting problems.
3. Find the specific driver. For food: price increases, portioning, waste, theft or menu mix. For labor: overtime, schedules that don't match sales, or slow weeks you didn't adjust for.
4. Assign one owner and one fix. "Get food cost down" isn't a task. "Chef reruns yield tests on the top five proteins by Friday" is.
5. Check it again next week.

That last step is where most restaurants fall off. Anyone can look at the number once. The ones that control prime cost look at it every week, and someone is responsible for acting on it.

If you want help building that weekly rhythm, that's exactly what a Prime Cost Sprint is for. And if you're not sure where the money is going yet, an operations audit is a good place to start.