Grow Fed Biz

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.

Wrap Rate Calculation

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.

If you’re not in the wrap-rate zone for a contract dimension, economize.   

If you’re not competitive in a certain geographic area – for example, your wrap rate is at 1.7 and most competitors are between 1.4 and 1.6 – you may need to lower your costs. Where might you trim?
  1. 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.
  2. 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.
  3. 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.
  4. Team up for success. Sometimes 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.

Building Blocks of a Winning Proposal

On-demand training program, plus action guide, and proposal deconstruct

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? One option is to work with a company that combines data and current financial forecasting to build custom wrap rates.

Another option is to find a knowledgeable expert who can work with you to research, accurately calculate, and then optimize wrap rates, so you stay one step ahead of your competition.

My top referral partner for strategic pricing for Federal contracts is Marsha Lindquist, CEO of Granite Leadership Strategies. Her new book, Secrets of Strategic Pricing, is an Amazon #1 Bestseller. Learn more, and tap her blog for us on Value Propositions, too!

Consider software that can automate wrap analyses for each cost category.

Some 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.

For example, ProPricer Contractor Edition can automate your wrap rates based on specific cost differentials like 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?”  Request a ProPricer Contractor Edition demo here.

Got your pricing dialed in? Take the next step to success.

Ever lose to a competitor whose prices are higher than yours? How does that even happen? At the end of the day, GovCon is not just about the price. In the long run, this is a relationship game.

Successful GovCons are constantly building relationships at all levels of the account, long before the solicitation hits the street. The most successful vendors are creating opportunities and shaping requirements to position for the win.

Ready to do that? Help is here.

Get the Tools to Win New Business in the Federal 4th Quarter

Success like this comes from a lot of small moves in the right order at the right time.

Discover ten steps that you can start today to get on track for that kind of success.

Conclusion

Underpricing your proposal can lead to exciting wins that don’t cover your costs, and damage your company’s future! Overpricing can put you out of the running completely. Develop accurate wrap rates and competitive analyses to win more contracts—while still clearing expenses and making a profit. Get the tools and expertise that are right for you:
  • Make sure your accounting systems are accurate give you easy access to cost accounting data that’s compliant with the Federal Acquisition Regulations’ definitions.
  • Do what you can with in-house expertise.
  • Interview and check references before hiring an outside expert on strategic pricing.
  • Automate where you can with tested and proven tools.

Tackling GovCon’s #1 Challenge: Getting in front of the right people sooner

Learn more about the Federal Business Intensive

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