Budgets are tightening. Agencies are feeling the pinch by awarding more contracts on the basis of lowest price, combined with technical acceptability. When margins narrow, how do you develop viable proposals while maintaining company profits? (5)
Your bid requires wrap rates, formulas that are critical to survival in this cost-competitive environment. Simply: The wrap rate is your catalyst for creating a profitable government contracting business. But take care to price your rate appropriately. Price too high, and you won’t be a contender. Price too low, and you won’t be profitable. (2)
When it comes to bidding on government contracts, the difference between winning and losing often comes down to a few percentage points on your wrap. So beware of inaccurate forecasting and control your costs. Competitive pricing models today must include very accurate wrap rates—as contracts now tolerate a narrow margin for error. (3)
So how do you calculate 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?
For new contracts, 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 resultant “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, more efficiency.
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. Price-to-win is a critical component of the bid process, and the wrap rate is a major factor in your pricing. (1) (3)
Above anything, know what your accurate costs look like.
Wrap rates are simple concepts with complex challenges. Determining an accurate wrap rate requires an accurate view of your finances and overhead. There is no “ballpark figure” here—approximations will result in unrealistically low rates. Again, you’re dealing with a tiny margin for error, so keep impeccable records and 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. Your operating expenses. These costs may include overhead labor, bonus, travel, and technical staff recruitment. Infrastructure items may include facilities (unless you fulfill the contract at an Agency site), supplies, software, etc.
General & administrative (G&A) costs. The line items that support your company’s operations as a whole, such as executive management, accounting, legal, and HR. G&A costs also include related subscriptions, training, and similar expenses.
Fee. Your company’s profit. (1)
Done manually, a typical wrap is fairly easy to calculate.
Rate Tip: Research your market and the range of competitive wrap rates. Certain types of services require different cost structures and therefore, different bid rates. Make sure you understand the market you are entering to know that you are “in the range.”
Pricing: You’ll want to come in with a wrap rate that’s lower than “2” to be under consideration at all for a contract win. (2)
If you’re not in the wrap-rate zone for a contract dimension, economize.
Don’t miss out on valuable contracts. If you’re not competitive in a certain area, i.e., your wrap rate is at 1.7 and most competitors are between 1.4 and 1.6, you’ll need to lower your costs. Where can you trim?
- Look at fringe costs again. Have you reevaluated your options for 401(k)or healthcare plans? Is your broker offering competitive benefits packages and staying attuned to your company’s needs? Find a balance between minimizing overhead and figuring out creative ways to cut costs while still attracting key talent.
- See if outsourcing can be an option. Scale your staffing requirements and outsource HR, accounting, IT, and other tasks on an as-needed basis to reduce your full-time payroll. With accessible online marketplaces and vetted professionals available, outsourcing is more successful than ever before.
- Reduce your workplace overhead. There are modern alternatives to carrying the cost of a traditional office, including a shared workspace or a hybrid environment. For sure, 2020 saw a paradigm shift in traditional office setups. As the workforce swiftly migrated to telework, companies started to reduce space and overall operating costs. Remote offices drastically decreased operating budgets—and are often a valuable recruitment perk.
- Team up for success. They say “many hands make for light work” and often, teaming up on a project will save you overhead and time. Joining forces with another firm to augment your existing team’s expertise can increase cost savings over the course of your engagement. The right combination could deliver on both large projects and simplified deliverables, through a more competitive price structure. (1)
You can outsource wrap rate analysis & buy insights into competitive wrap rates.
Many vendors maintain a library of hundreds of competitors’ wrap analyses to secure their own bidding positions. Ideal wrap rates change every year so it’s crucial that you update your rates annually with industry data. Where do you start? Find a company that combines data and current financial forecasting to build custom wrap rates. (3)
Key Wrap Rate Analysis Takeaway: Do your research, find a knowledgeable expert to provide accurate wrap rates, and stay one step ahead of your competition.
Start with software that can automate wrap analyses for each cost category.
Successful government contractors build repeatable pricing models to keep a competitive edge in the price-to-win process. Implementing user-friendly software to determine your cost narrative and financial future is key. The ProPricer Contractor Edition can automate your wrap rates based on specific cost differentials, i.e., company-site rates versus client-site rates. The program can also perform, quick “what-if” assessments, such as “What is my resulting profit margin?” or “What salary can I offer to make a certain profit?”
Be your best competition. Request a ProPricer Contractor Edition demo here.
Remember, underpricing your proposal can place a financial burden on your company’s future. Automate where you can with tested and proven tools. Develop accurate wrap rates and competitive analyses to win more contracts—while still clearing expenses and making a profit. (4)