What are Wrap Rates?

Posted by

45

Ah, price-to-win strategies, cost volumes, cost narratives, wrap rates and spreadsheets, some of the simple joys of Government contract proposal development.   Okay, I think I literally heard some snores coming from across the blogisphere.

When I first tried figuring out wrap rates, my mind practically seized up from the shear effort of trying to understand them.  The purpose of this post is to hopefully help you avoid some of the same lost in the lost in the woods feeling I had; I could find almost nothing on the internet about building up labor costs or a definition of wrap rates.

In this blog, I will attempt to guide you through some contractor pricing jargon such as wrap rate (indirect rate) [If anyone happens to be a honest-to-goodness pricer, please feel free to correct me; I will make no assumptions that the information is error free, but it is a good starting point].  I will also show you how to build up a fully burdened labor rate.

As discuss in a previous blog about Government proposals, “Sections C, L and M – What the Heck?” http://wp.me/p4xkC1-2Q, a cost volume is one of the documents you will develop and submit when you pursue a Government proposal.  The price volume normally consists of a cost narrative and spreadsheet(s) showing your cost buildup and price to the Government.

Government contractors closely guard what is commonly referred to as wrap rates.  Wrap rates are those costs that go into the final price you charge the Government for your services or products.  The wrap rate is the total percentage of indirect costs that are multiplied to by base cost to determine a sale price.  Contractor compete against each other, so having a low wrap rate is an advantage over your competitors.  FYI -aggressive contractors try to get close to a 1.6 percent wrap rate.  So what costs go into wrap rates (indirect costs)?

Overhead (O/H) cost – Costs associated with your business such as overhead salaries, recruitment, utilities, equipment, travel, office supplies.

General and Administrative (G&A) cost –  Cost for infrastructure support such as human resources, pay roll services, rent, and etc.

Fringe –  cost of employee health insurance, paid days off, holiday pay, employer sponsored retirement plan (401K) and etc.

Fee – Fee is simply your profit.

Miscellaneous cost – some companies have additional wraps they place against their price such as Material and Handling (M&H); however, what wraps you use depends upon how your company’s financials are structured.

Now you know some of the costs that go into building your price, let’s take the following example. if you are bidding on a proposal that requires the contractor to provide the labor category of administrative assistance, you will need to determine:

1.  The salary your company will propose for the admin assistant.  In our example, let’s say the average salary you can hire an admin assistant is $45,000 a year.

2.  You will divide the salary by 2080 hours.  2080 is the standard for a man year (the total hours a  person would work during a 12-month period).  This give you the hourly unburdened (no wrap) labor rate of $21.63.

3.  Let’s suppose you have the following wrap rates.  They are multiplied against the unburdened hourly labor rate:

Fringe is 30% * $21.63 = $6.49
OH is 10% * $21.63 = $2.16
G&A is 10% * $30.29 ($21.63 (Unburdened Labor) + $.6.49 (Fringe) + $2.16 (OH)) = $3.03
Fee is 10% * 33.32 = $36.65

Wrap Rate:  1.694 percent fully burdened

*You multiply the percentages by the hourly rate and then add the amounts to the hourly labor rate to develop the fully burdened rate.

The formula is $45,000.00 ÷ 2080 =$21.63+ $6.49 (Fringe)+ $2.16 (OH) +$3.03 (G&A is applied to the base plus fringe and OH) =$36.65

The bill (sell) rate of $36.65 is your fully burdened rate.

*Note: there are various ways that wraps can be applied.  This is just how I learned to build up rates.

The Government usually specifies the number of hours that they expect a contractor to work each year.  They can vary but are normally between 1860 hours at the low end to up to 1920 hours.  The difference between the allowable hours and the full man year are usually placed against the fringe cost.  Vacation and holiday hours are normally paid by the contractor.

So this is how you deconstruct a man year between billable and non-billable hours to meet a Government requirement of 1920 labor hours :

2080 (Normal man year)
-1920 (Billable hours)
= 160 (non-billable hours)

160 (non-billable hours; Fringe cost)
– 80 (vacation hours)
– 80 (holiday hours)
= 0 (all hours accounted for)

Wasn’t that fun?  As I may have alluded, I am no pricer, but as a contractor, I need to understand how rates are built up and what will be competitive and you do too.

For simple proposals, I develop the costing myself, but for complicated proposals or efforts where I need to ensure that I am not placing the company in financial jeopardy,  I hire a professional to build the proposal spreadsheets.  They can also offer strategies on reducing your wrap rate and lowering costs.  The bottom line is do not risk under pricing a proposal that may break the bank and endanger your company’s financial health.

Proposals can be a huge drain on a start-up’s limited financial resources, so if you have someone build your spreadsheets for you, try to understand how the spreadsheet works so that you can reuse it on various bids.

Besides labor costs, there may be Other Direct Costs (ODCs).  ODCs are costs such as travel, vehicle rental, housing, allowances or special overseas workman compensation type insurance know as Defense Base Act (DBA). The Government does not allow fee on ODCs — only allows G&A and M&H cost to be applied.  Fee is only applied to labor for service type contracts.

As I stated earlier, along with the pricing spreadsheet, you will need to provide a cost narrative.  This is a text document that explains how your OH, G&A, and other costs are set up.  It also states whether you are Defense Contract Audit Agency (DCAA) compliant.  You can find checklists and tools that may be helpful here: http://www.dcaa.mil/checklist_and_tools.html

This is a link to a sample spreadsheet from the US Army.  It may scare you more than help! http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDMQFjAA&url=http%3A%2F%2Fwww.smdc.army.mil%2FContracts%2FSETAC10%2FRFP%2FATTACHMENT%252010%2520-%2520COST_PRICE%2520PROPOSAL%2520WORKSHEET.xlsx&ei=Kl6WU6DzA8ymyASsv4DIBw&usg=AFQjCNHzl3zYems__18y23SfZzDqQM6LtA&sig2=vXzrvKzGCtNGg0dXsVJGTg&bvm=bv.68445247,d.aWw&cad=rja

This is my down and dirty primer on wrap rates and labor cost build ups.  I hope it is of some use to you as you make your way to the world of a Government Contractor.

Remember:  take action each and every day to keep your dreams alive.  Stay persistent and you can achieve great things!

With Love and Respect,

Gary

45 thoughts on “What are Wrap Rates?”

  1. Thx for the post! Even though you account for fed holidays and PTO in Fringe, 1920 (by your example) would still be your denominator to calculate the billable rate to the customer, correct?

    Like

    Reply

    • Hi Mike –

      1920 are the total allowable hours per year you can bill the Government in my example. So you would multiply your bill rate by 1920.

      2080 are the total number of manhours per year. The difference between the two are holidays and Paid time off you provide as a fringe benefit to your employees. You need to include the fringe hours in your rate buildup.

      All the Best,

      Gary

      Like

      Reply

    • PTO and Holidays are included in Fringe POOL so they cannot also be in the Fringe BASE. Fringe base is most often total “productive” labor, meaning excluding all Paid Absences.

      Like

      Reply

  2. Gary,

    I think I found a small oversight. In your formula:

    “The formula is $45,000.00 ÷ 2080 =$21.63+ $6.49 (Fringe)+ $2.16 (OH) +$3.03 (G&A is applied to the base plus fringe and OH) =$36.65”

    you should have included “+ $3.33 (Fee)”. Your result if correct, but your formula did not include fee.

    –David
    Tilson Technology Management (SDVOSB)

    Like

    Reply

    • Hi Nicole – Depending on which taxes you are referring to, the answer might be different here. State Franchise Taxes are usually G&A. Sales and Use taxes s/b coded same as purchased item so if the purchase was to OH that tax would be too, if purchase was G&A tax is G&A too. Federal Income taxes are always Unallowable G&A. I’m not a tax expert, but 99% sure here.
      If you have further tax questions, I highly recommend my tax lady: jaime@finfrocktax.com.

      Like

      Reply

  8. Thank you for the write up. I was just wondering if you had the formula to reverse engineer a wrap rate. For example, if I know the Target Bill Rate and the Direct Labor Rate, how do I calculate what wrap rate was used? Thank you.

    Like

    Reply

      • When I read Tiffany’s question, my thoughts went immediately to the components that make up the ‘wrap’, so my thinking is ‘almost’. You can calculate the overall wrap rate like Gary shows, but you cannot discern the components (fringe, indirect, G&A, fee) without input from other areas of your company (HR, Finance, Sr. Management).

        Like

      • Correct. Also, If I have the target rate and know what my Indirect %’s are, I’d like to be able to be able to back into the salary using a formula.

        Like

      • I don’t want to take over Gary’s blog… 😉

        To get from target rate back to salary, you can just use the wrap rate to arrive at direct rate, but you need to know annual hours assumed in the target rate. You and I get paid for 2,080 hours per year, but most government contracts only allow you bill 1,920 hours or, more recently, as little as 1,880 and 1,800 hours! That pushes more cost recovery back into your fringe and indirect in the form of PTO and “bench time”.

        Like

      • David – I very much appreciate you jumping in. For the adders, you just need to make an assumption to fringe, G&A, O/H and fee for someone else’s wrap, but knowing a competitor wrap rate is a huge competitive advantage.

        Like

      • Thank you all for the input and Gary for sharing the spreadsheet if you find it. These LPTA’s and SCA contracts are so difficult to win. Every penny seems to count these days! : )

        Like

  9. Hi Gary – I agree, good explanation of wrap rates. My client shared your blog with me last night while working on proposal after I sent him my SS to calc rates and he confirmed we matched. 🙂 However, I disagree on response to Nicole on taxes, so I sent reply and hope you don’t mind. Keep up the good work, there is alot of bad crap out there that I see clients trying to use.

    Like

    Reply

  10. Hi Gary – I am very new in the Government Contracting industry. Very new as in June 14th, 2019 type new. I have no experience what so ever with contracting. I have a question and was hoping someone on here to give me advice or point me in the right direction. I have been tasked with creating a template to show how we as a company are doing in regards to making or losing money on contracts. I need to create a template showing the following:

    Revenue Projected
    Revenue Actual
    Expenses Projected
    Expenses Actual
    % Labor Invoiced
    % Labor Remaining
    $ Labor Invoiced
    $ Labor Remaining

    I understand that Revenue Projected is your fee on top of Fringe, Overhead and G&A which equals your Wrap Rate. I need some help trying to get all of these figured out. This is my first time posting so I was hoping to get some valuable feedback. Thanks again and thank you for posting this article!

    Rob

    Like

    Reply

    • Hi Robert and welcome to the world of government contracting. I’m not a price by any stretch of the imagination. I would suggest hiring a government contracting consultant who specializes in helping new companies build their projections. This will help you in anticipating your costs, revenue, and profit or loss. As a small business, I rely on consultant to help me move my business forward. Message me on Linkedin (https://www.linkedin.com/in/wayne-ackerman-11a70b183/) and I’ll provide a recommendation and also send you a spreadsheet if you are determined to do run the numbers yourself.

      All the Best,

      Gary

      Like

      Reply

      • Hi Gary – You are a better “price” guy than you may think since knowing how to compute them correctly is the majority of price!

        Like

    • Revenue Actual and Expenses Actual need to come from your accounting system actual data which would be required to compute Revenue Projected and Expenses Projected. % Labor Invoiced and % Labor Remaining would be computed from $ Labor Invoiced and $ Labor Remaining. What is the source of the data you are going to use within this template?

      Like

      Reply

  11. Hi Gary,

    I’ve been using the same formula for years, but recently my partner insists that the Overhead rate should include direct rate + fringe. So in your example it would be
    OH is 10% * ($21.63+6.49) = $2.81

    Not sure where he gets this, have you seen this, any thoughts?

    Andy

    Like

    Reply

    • Hi Andy,

      Sorry about the slow response but I’ve been busy working on Business Development. I would separate each element of your rate buildup. The buildup percentages are sometimes required when you submit pricing on Government contracts. I’ve included a simple sample below showing a fringe at 22%, Overhead 10%, G&A 15%. These are all adders to your base rate (the hourly salary cost of your employee). You would then add fee the your burdened cost (salary plus fringe, overhead, and G&A). The advantage of calculating wrap this way is your can determine your overall wrap rate with and without fee helps adjust fee and other adders to be more cost competitive.

      Sample Calculation of a Wrap rate:
      22.00% 10.00% 15.00% 7.00%
      Base Rate Fringe Overhead G&A Burdened Cost Fee Bill Rate
      $79.49 $17.49 $9.70 $16.00 $122.68 $8.59 $131.26

      Cost Wrap Percentage: 1.54
      Price Wrap Percentage: 1.65

      All the Best,

      Gary

      Liked by 1 person

      Reply

    • Hi Andy – Contractor can choose whether to have OH base that is labor only or labor plus fringe. Wrap rates use the latter. I see this about 50/50 split between the 90+ contractors I have worked with.
      Personally, I prefer to apply OH to labor only since it is simpler to verify correct from accounting POV since you can calc it visually.

      For example with your numbers above, easier to verify:
      $21.63 Labor * OH 10% = $2.16 vs.
      ($21.63 + 6.49) * 10% = $2.81

      One advantage to the latter is that the larger base produces an OH rate that looks lower, even if cost are exact same just computed as % differently. So may be perceived as lower but anyone who does indirect rates knows the difference so can compare accordingly.

      Like

      Reply

      • I should add that once a contractor makes a selection, proposal and actuals should be computed the same way and consistently going forward. If contractor makes changes to that rate structure later, there are likely requirements to be met with regard to those changes as far as notification to DCAA and potentially customers on cost-type contract. As example for companies subject to CAS (Cost Accounting Standards) where they must submit their CAS Disclosure Statement to DCAA for audit, changes may require them to conduct a ‘cost impact analysis’ to analyze impacts of those changes to indirect rate structure on all current customer contracts as well as proposals in process, which can be a PITA. Best to make selection early in biz before CAS DS complicates.

        Like

  12. Not sure how the question above appeared in my mailbox, I thought it was from NCMA site and replied.and then to a couple more and saw I was on your site. Sorry about that, but love to chat on this stuff anytime, especially since the GovCon groups on LinkedIn are no fun anymore, all just ads, no discussions, what a shame.

    Like

    Reply

  13. Hi Teri – I love it when folks interact with me via the blog. My goal is to help folks – veterans and non-veterans – who are looking to launch their own business. My other goal is to inspire anyone who feels that they cannot better their lives. Everyone is has so much potential that they might be unaware of or how to access it.

    Liked by 1 person

    Reply

    • Agree. I work with GovCon biz owners on accounting/compliance and they are often surprised by how much they can learn so easy with just a little guidance and then put in use to better manage biz, love to see the lightbulbs come on when they see all tie together!

      Like

      Reply

  14. Hi. I am trying to learn about wrap rates. The article states that the wrap rate is 1.694 percent. 1.694 percent is 0.01694. That’s a tiny number. Is it possible that the decimal point in the article is in the wrong place (i.e, there’s a typo)? Should the wrap rate be reported as 169.4%? Or maybe expressed simply as 1.694 (without the word percent)? The article has been up for several years so it doesn’t seem likely that there is a very simple typo in the most important number. What am I missing? Thank you.

    Like

    Reply

    • Hi Steve,

      The wrap rate is not a percent but a factor of of your costs that includes employee salary and benefits, costs to run the company e.g. rent, utilities, insurance, supplies, website, recruitment, accounting, legal, and salaries for the folks supporting the company such as reception, accounting, and the other overhead employees. So if you pay an employee $100,000 a year along with benefits (health insurance, vacation time, holiday pay and etc.), you would add your wrap rate to show the total cost of that employee. You would multiply the 1.694 wrap rate by the $100,000 salary; with wrap, your cost to employ that person is $169,400.00. You would then need to add profit, say 10% for a cost of $186,340.00 a year. So the wrap rate inclusive of fee will be 1.8634. For the billable hourly rate, I used 1920 hours to calculate a bill rate of $97.05 an hour. I hope this helps!

      Liked by 1 person

      Reply

Leave a reply to Gary Ackerman Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.