What You Need to Know About Restaurant Labor Costs

Restaurant Labor Costs May 04, 2021

Cynthia Vespia

Writer

How to Efficiently Manage Restaurant Labor Costs

Managing restaurant labor costs is a crucial step to maintaining a profit in the restaurant business. Because of the high cost involved in restaurant operations, it's important for restaurant owners to keep labor cost percentages within 20% to 30% of the total cost to stay profitable in the restaurant industry.

Because every restaurant and eatery are different, the cost percentage total will vary. For instance, there is a distinction in cost total depending on what type of cuisine is being served. A full-service restaurant will have higher operating costs than a quick-service restaurant. Each would need their restaurant management to be very different when trying to determine restaurant profitability via cost percentages.

Calculating restaurant labor costs can include-

Group Restaurant Labor Costs for Clarity
Divide labor into groups to calculate the percentage total by the total labor of each position. For example, you could group employees by hours worked. Hourly employees would be put together with salary employees in another group. And whittle down further by splitting front-of-house staff (servers, hosts, bartenders) from kitchen staff (cooks and dishwashers) and management staff.

Once the staff is divided into groups, case studies can be done by calculating the restaurant labor of each team. With a clearer picture of the costs, total changes can be made to bring labor cost total down. For instance, scheduling software could be used to try different combinations of staffing to control labor from becoming too costly.

Use a Labor Cost Formula
To calculate labor cost it's important to make sure to use a formula that includes the prime cost. Restaurant operators understand that using this type of formula to calculate restaurant labor cost is more effective to determine total revenue.

Prime costs are terms used to describe the sum of the labor costs plus COGS, which means Cost of Goods Sold. COGS is determined through inventory management and takes into account the cost of each food item on the menu. A bottom line of 60% or less of total sales should be a restaurant's prime cost. It represents cost percentage of controllable expenses. To calculate restaurant prime cost, all hourly employees, salaried employees, payroll taxes and employee benefits like health care should be listed and become the sum of total labor costs.

Calculating labor as a costs percentage of sales is useful but it doesn't provide a percentage total sales that highlights areas that need improvement. In order to truly identify where labor costs are impacting weekly sales a more detailed report is needed.

The important thing to remember is that restaurant labor costs are a singular part of total operating costs. Trying to reduce labor costs will only put a band-aid on the problem rather than fixing it.

Save on Restaurant Labor Costs With Cross Training and Scheduling
Using scheduling software helps reign in any overtime before it impacts the labor cost percentage total. By monitoring the scheduling of each employee it keeps sales labor from diminishing the overhead. Today's scheduling softwarecan come standard as part of the POS system. It turns data into visual reports and makes looking at the time period each staff members works per hour more detailed and easier to navigate.

Another viable method to save on restaurant labor costs is to cross train employees. This makes staff more productive and gives them an opportunity for growth which lessens turnover rates.

Restaurant Labor Costs Guidelines

Running a restaurant comes with costs a restaurant manager or owner needs to know how to handle. Cost of food, payment for staff and real estate expenses are all part of the expenses to run a restaurant.

Labor Costs
Restaurant labor cost percentage is a significant expense. Staff is imperative to the success of a restaurant. Even if they work minimum wage their salary will be important when calculating labor cost percentage. The cost includes payroll tax and any health benefits the employees are offered.

Cost of Food and Other Goods
The cost of food and other goods, also called COGS (cost of goods sold) is the primary expense in running a restaurant. This cost includes everything from ingredients to cleaning supplies and even incidental items like napkins or straws. An ideal COGS shouldn't be more than 40% of the restaurant revenue. Fast casual restaurants will have a lower percentage on cost of goods sold than higher-end restaurants.

Rent Costs
Rent of the building space should never be over 10% of the restaurant's revenue. The cost includes utilities, property taxes and insurance. The cost of rent or mortgage is a fixed expense where the utilities like gas and water can be fixed or variable.

Operating Costs
Total cost of operating expenses includes dishes and kitchen equipment. The operating costs will also include advertising. A general operating cost in most restaurants is a POS system. One way to keep operating expenses low is by limiting the amount of disposable items.

Conclusion to Restaurant Food Costs

Restaurant operating costs include labor costs, cost of goods sold, and rent.
To calculate labor cost the prime cost must be formulated. Prime costs is the sum of the labor costs plus Cost of Goods Sold (COGS).
A restaurant manager or restaurant operator must manage restaurant labor costs effectively to produce profit.
Labor cost percentage sales should stay within 20% to 30% of total cost.