Controlling labor costs is an important responsibility for all small business owners, especially those operating restaurants. The question is what percentage of sales is the correct amount of labor expense for a restaurant.

The answer, as you might expect, is that the labor percentage varies. A standard labor percentage that would apply to all restaurants does not exist.

Each restaurant is unique and has its own particular set of operating costs and expenses. A labor percentage that might work for one restaurant and allow it to make a profit could drive another operation out of business.

Fortunately, general guidelines do exist that can aid an aspiring restaurateur in developing a profit plan and operating budget for a new restaurant.

Rules of Thumb for Labor Percentages

Restaurant industry statistics show that labor costs as a percentage of sales range from a low of 25 percent to a high of 40 percent. Full-service restaurants with white tablecloths have a higher percentage because they provide more attentive service to their customers and offer more labor-intensive made-from-scratch items. Limited-service restaurants, such as fast-food operations, have a lower percentage of labor cost.

But, the target labor cost doesn't end with these general guidelines, which don't provide much insight into the appropriate labor cost for a particular restaurant. It's a little more complex than that.

Labor cost is one component of a larger performance metric for restaurants known as prime costs.

Prime Costs for Restaurants

The prime cost for a restaurant is the sum of its cost of food, beverages and labor. Labor costs include all direct wages, payroll taxes and benefits. A general guideline for this prime cost is 55 to 65 percent of sales.

The remaining percentages are allocated to expenses such as rent, advertising, licenses, insurance, utilities and other overhead costs. Hopefully, a profit will remain after paying all costs.

Labor Cost Portion of Prime Cost

The combination of labor and food costs for a restaurant should be designed not to exceed a certain total percentage. To illustrate this principle, consider the difference in labor cost between a fine-dining restaurant and a steakhouse.

A fine-dining restaurant might have a menu with specialty main courses and made-in-house items such as breads, pastas and pastries. All of these items combined with a more intense level of attentive service will result in a higher percentage of labor costs and a lower percentage in food costs.

A steakhouse, on the other hand, has a lower labor cost. While the cost of the steak will be high, it doesn't take much labor to grill a steak and throw a potato in the oven for an hour.

Food Choice Trade-Offs

A restaurant owner has choices to make in the types of food offered to customers. Food items, such as soups, pies and cakes, can be made from scratch or they can be purchased pre-made from outside vendors.

Food that is made from scratch has a higher labor cost relative to food cost. Items purchased from distributors will cost more, but labor costs will be less.

The choice between made-from-scratch or pre-made depends on the type of restaurant and the image that the owner is trying to project to the public.

Regardless of the choices, a restaurant's prime cost should be designed not to exceed a target percentage that leaves enough cash to pay overhead expenses and produce a profit.

Working Restaurant Owners

Quite often, the restaurant owner works in the business himself, maybe as the chef or maitre d'. The owner's time is not free and must be considered when calculating labor costs.