It’s a Wrap: Determining Wrap Rates to Price Competitively

Competitively pricing your bid for a Federal services contract requires special costing formulas called wrap rates.

Learn what they are, and how to calculate yours for the win.

The costing formulas known as wrap rates are critical to survival in this cost-competitive environment. The wrap rate, done right, is the key to creating a profitable government contracting business. Price too high, and you won’t be a contender. Price too low, and you won’t be profitable.

The difference between winning and losing often comes down to a few percentage points on that wrap rate. Successful companies master accurate forecasting as well as cost control.

So what goes into an effective wrap rate?

Before we dive into the math, let’s look at some definitions, components, and scenarios that can be determining factors for your win.

What exactly is a wrap rate? 

A wrap rate is a factor you apply to a base hourly labor rate, plus indirect expenses, to arrive at a “loaded” labor rate—with a profit amount then added on top. The resulting fully loaded labor rate is the rate that you charge a government customer for each hour of work. To calculate a wrap rate, divide the fully loaded rate by your base hourly labor rate. Typically, a competitive wrap rate will be somewhere between “1” and “2.”

The right wrap rate can give you a double win: more contracts, and more profit. 

The right wrap rate will give you a significant advantage in the competitive Federal market. If you know the market and the right competitive price, you’ll set your company up to reap double benefits: by winning more contracts and running a more efficient business.

Above all, know what your accurate allowable costs are. 

Wrap rates are simple concepts with complex challenges. Determining an accurate wrap rate starts with precise data on your actual direct and indirect costs and overhead.

There is no “ballpark figure” here. Approximations and tiny errors can easily create unrealistically low (or high!) rates that have a massive impact, especially on large, multi-year contract.

If you’re not an expert on cost accounting for Federal contracts, get professional help. You need to be sure, before you start organizing your data to create a Federal contract wrap rate, that you’re including only allowable costs as defined in Federal Acquisition Regulation Subpart 31.205!

Ready? Gather your data to determine:

• Direct labor rate. This is the composite hourly wage rate for employees who can be charged directly to the contract. For a professional position with an annual salary, divide that number by the standard 2,080 hours in a work year.
  
• Fringe. Employee fringe benefits are made up of the values attributed to vacation, sick and family leave, payroll taxes, health benefits, and 401(k) and other employee benefit costs. 
• Overhead costs. The specific contract’s operating expenses. These costs may include overhead labor, bonus, travel, and technical staff recruitment. Examples of infrastructure items might be the cost of facilities (unless you fulfill the contract at an Agency site), supplies, or software. 
•  General & administrative (G&A) costs. This line item is the contract’s contribution to cover the costs that support your company’s operations as a whole. Those include executive and management salaries and benefits,, accounting, legal, and human resources administration. G&A costs also include  subscriptions, training, business development and marketing.
•  Fee. Your company’s profit.

Done manually, a typical wrap is fairly easy to calculate.