Overhead Restaurant Rate

A financial metric reflecting the total fixed and variable costs required to operate a restaurant, excluding direct costs of goods sold, crucial for pricing and profitability analysis.


What is the Overhead Restaurant Rate?

The Overhead Restaurant Rate encompasses all operational expenses a restaurant incurs that are not directly tied to the production of the food itself. This includes rent or mortgage for the space, utilities, insurance, salaries for administrative and front-of-house staff, marketing, and equipment maintenance. Understanding and managing this rate is essential for setting menu prices that cover costs while generating profit and for making informed decisions about operational efficiencies and potential areas for cost reduction.

Components of Overhead Restaurant Rate:

  1. Rent or Mortgage: The cost of leasing or owning the restaurant space, often one of the largest fixed expenses.
  2. Utilities: Electricity, gas, water, and internet services necessary for restaurant operations.
  3. Salaries and Wages: Payments to non-kitchen staff, including managers, servers, and cleaning personnel.
  4. Insurance: Various types of insurance, such as property, liability, and workers’ compensation.
  5. Marketing and Advertising: Costs associated with promoting the restaurant, including social media, print advertising, and promotional events.
  6. Repairs and Maintenance: Regular upkeep and emergency repairs for kitchen equipment, dining area, and the building itself.
  7. Licenses and Permits: Fees for required legal documentation to operate, including health permits, liquor licenses, and business licenses.

How to calculate the overhead cost? 

To calculate the overhead rate, divide the indirect costs by the direct costs and multiply by 100. If your overhead rate is 20%, it means the business spends 20% of its revenue on producing goods or providing services. Here’s what the formula looks like,

Overhead Rate = Total indirect cost for a specific time period/ Allocation measure for the time period

For example, determined that your overhead costs consist of the following:

  • Rent: $14,000
  • Utilities: $8,045
  • Taxes: $9,400
  • Alcohol licenses: $1,000 (this includes only the license to sell alcohol, not your license to bartend)

To get your total overhead cost, let’s add them up.

Total Overhead Cost = Rent + Utilities + Taxes + Licenses

Total Overhead Cost = $14,000 + $8,045 + $9,400 + $1,000

Total Overhead Cost = $32,445

The total overhead cost for the bar is $32,445. Now we need to know what that means against your revenue. Let’s assume that your POS suggests sales worth $235,000.

Now we’ll use these two numbers in the overhead rate formula from above.

Overhead Rate = Overhead Costs / Income From Sales

Overhead Rate = $32,445 / $235,000

Overhead Rate =  .138 or 13.8%

Your overhead rate is 13.8%. This means you spent 13.8 cents on overhead costs for every dollar you made.

Strategies to Optimize Overhead Restaurant Rate:

  • Lease Negotiation: Regularly review and negotiate lease terms to ensure they remain competitive and reflective of current market conditions.
  • Energy Efficiency: Invest in energy-efficient appliances and lighting to reduce utility costs.
  • Staff Training: Train staff in multiple roles to optimize labor costs, especially during off-peak hours.
  • Preventive Maintenance: Implement a routine maintenance schedule to prevent costly emergency repairs.
  • Marketing ROI: Focus on marketing strategies with measurable returns to ensure efficient use of advertising budgets.
  • Technology Utilization: Adopt technology solutions that streamline operations, such as reservation systems, inventory management software, and POS systems, to reduce labor costs and improve accuracy.
We’re here for you