Most restaurant owners track revenue. Many track food cost. Fewer track prime cost — and that is a problem, because prime cost is the single most important number in food service.

Prime cost is the combination of your two largest controllable expenses: food cost and labor cost. Together, they typically represent 55–65% of revenue in a well-run restaurant. When prime cost gets too high, no amount of revenue growth fixes the problem.

What prime cost includes

Prime cost = Cost of Goods Sold (food and beverage) + Total Labor Cost

Total labor cost includes:

• Hourly wages for kitchen and front-of-house staff
• Salaried manager compensation
• Payroll taxes (employer portion of FICA, FUTA, SUTA)
• Employee benefits (health insurance, paid leave)
• Workers' compensation insurance

Many restaurant owners calculate labor cost using only wages — excluding payroll taxes and benefits. This understates true labor cost by 20–30% and produces a prime cost number that looks better than it actually is.

What prime cost percentage means

Prime cost is most useful as a percentage of revenue:

Prime Cost % = Prime Cost ÷ Total Revenue × 100

Industry benchmarks vary by restaurant type, but general targets are:

• Full-service restaurants: 55–65%
• Quick-service and fast casual: 50–60%
• Fine dining: 60–70% (higher labor, lower food cost)
• Bars and nightclubs: 40–55% (lower food cost, higher beverage margin)

A prime cost above 65% leaves very little margin to cover occupancy, utilities, marketing, and profit. A prime cost above 70% is a serious problem that requires immediate attention.

Food cost vs. beverage cost

Food cost and beverage cost should be tracked separately because they have different margin profiles. Beverage — especially alcohol — typically has a much lower cost percentage than food. Blending them together obscures what is actually happening in each category.

Typical targets:

• Food cost: 28–35% of food revenue
• Beverage cost: 18–24% of beverage revenue
• Alcohol cost: 18–22% of alcohol revenue

A restaurant with a 32% blended food and beverage cost may have a 38% food cost and a 22% beverage cost. The blended number looks acceptable; the food cost number signals a problem.

Calculating food cost correctly

Food cost is not simply what you spent on food purchases. It is the cost of food actually consumed — which requires tracking inventory.

Cost of Goods Sold = Beginning Inventory + Purchases − Ending Inventory

If you do not take a physical inventory count at the beginning and end of each period, you cannot calculate true food cost. Many restaurant owners use purchases as a proxy for food cost — which is inaccurate when inventory levels are changing.

A weekly inventory count is the standard in well-run restaurants. It takes 30–60 minutes and produces the data you need to manage food cost in real time.

Labor cost management

Labor cost is more controllable than most restaurant owners believe. The key levers are:

• Scheduling efficiency: matching labor hours to projected sales volume by shift and day
• Overtime management: overtime at 1.5x rate significantly increases labor cost percentage
• Tip credit: in New York, the tip credit allows employers to pay tipped employees a lower cash wage — but the rules are specific and must be followed correctly
• Manager-to-staff ratio: too many salaried managers relative to revenue inflates labor cost

Labor cost should be reviewed weekly — not monthly. By the time a monthly report shows a labor cost problem, you have already paid for four weeks of overstaffing.

New York-specific considerations

New York's minimum wage and tip credit rules are more complex than federal rules. The minimum wage varies by employer size and location (New York City vs. rest of state). The tip credit — the amount by which the cash wage can be reduced for tipped employees — is lower in New York than the federal standard.

New York also has strict requirements around tip pooling, service charges, and the treatment of credit card processing fees on tips. Mishandling any of these creates wage and hour liability that can be significant.

Using prime cost to make decisions

Prime cost is not just a reporting metric — it is a decision-making tool. When prime cost is too high, the question is whether the problem is in food cost, labor cost, or both.

If food cost is high: review portion sizes, purchasing prices, waste and spoilage, theft, and menu pricing. A menu engineering analysis — looking at the margin and popularity of each item — often reveals that high-cost, low-margin items are dragging down overall food cost percentage.

If labor cost is high: review scheduling, overtime, and whether your sales volume justifies your current staffing model. A restaurant doing $800,000 in annual revenue with the staffing model of a $1.2 million restaurant will have a labor cost problem regardless of how efficiently the staff works.

Prime cost is the number that tells you whether your restaurant is structurally profitable. Revenue growth does not fix a prime cost problem — it just makes the problem bigger.