Managing Labor Costs

Labor Cost is both one of the major cost centers in a foodservice operation and one of the most difficult to control. In this Enterprise Insight, we will discuss labor costs on the monthly P&L statement, labor by the hour, and the importance of scheduling.

The Monthly P&L Statement: At this level, operators can really only glean two significant bits of information about their labor cost: what percentage of total sales is hourly cost and what percentage is management. And, yes, you can find out if you’re keeping within the general rules—25% hourly and 10% management. However, this analysis is insufficient for three reasons:

  1. It’s the view from 50,000 feet. In order to accurately and effectively control costs, you need to know how and why you spent the money you did on labor—but this ratio doesn’t provide that level of detail.
  2. The ratio looks backward. If, at the end of the month, you find that you’re way out-of-bounds with your labor costs, it’s already too late, and the cost percent of total sales won’t tell you why.
  3. The payroll-to-sales ratio fluctuates depending on internal and external changes in revenue. For example, if you have a great month of sales that stretched your labor force, your cost will shrink as a percentage—but not because scheduling was done accurately.

Thus, it’s importance to calculate and analyze labor not just as a percent of sales on a monthly basis but on a more detailed level.

Labor by the Hour: Tracking labor by the hour allows you to examine, in detail, your labor cost and adjust as necessary:

  1. Individuals and Job Types: Knowing what hours individuals and groups worked can help you find fat in your schedule. For instance, if you are drilling down into this data on a weekly basis and see that the hours for kitchen staff are higher than the previous week, you can start to determine why and what needs to change.
  2. Variance: Every week, it is important to compare the actual worked hours to the forecasted hours from the schedule. This is important to track because it can alert you to differences that might be occurring at the individual or department level on a consistent basis.
  3. Labor Cost Per Labor Hour: Divide the labor cost for a given time period by the corresponding number of hours worked. This ratio will tell you the average cost of your labor per hour. It is easy to monitor week-to-week and quickly spot positive and negative changes, and maintain an appropriate budget.

Knowing the actual labor hours worked by the team provides the granular data necessary to make informed conclusions about your labor cost. Without it, an operator can only guess what’s happening!

Scheduling: Scheduling is the most important part of managing labor cost because salaries and wages can’t be adjusted week to week according to volume, but labor hours can. Labor cost is driven by labor hours, not by pay. To schedule properly, it is necessary to determine labor pars, forecast sales, and cost the schedule.

It is necessary to determine labor pars because part of your labor cost is always going to be fixed. If, for example, an operation needs at a minimum one manager, one receiver, one prep cook, and one service staff to open the business, then you can flesh out a schedule based on that in relation to the sales forecast.

It is necessary to forecast sales each week to determine the number of labor hours to schedule. Forecasting should take into account the sales of the previous week, the same week last year, the weather, external factors such as holidays or regional events, internal factors such as a change in operating hours, and anything else that might affect revenue stream for the time period.

Lastly, it is important to cost the schedule and calculate labor hours every week to have an idea of what the labor expense will be. This gives an operator the chance to be on the offensive—finding flaws in the schedule before it is too late and making adjustments based on how the forecast is actually playing out.


In order to manage labor effectively, operators should be proactive rather than reactive by starting with the schedule and tracking labor hours rather than relying on the end of month P&L labor cost percentage.

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