What are Wrap Rates?

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