We are going to continue our accounting series by discussing wrap rates. No, I am not talking about wrapping a car. Before we go any further, I must tell you I am not an expert in this field. All I can do is explain wrap rates as they were explained to me a long time ago. If you need to figure out your wrap rates for your business, I would recommend that you hire a professional. Your goal is to have a competitive wrap rate. If your wrap rate is too high, you will not be competitive. If your wrap rate is too low, then you will lose money on the project by not covering all your costs.
What Are Wrap Rates?
Wrap Rates refers to the hourly labor rates that include all costs such as salary, fringe benefits, overhead, G&A, and profit. Usually, a wrap rate is associated with Labor categories like Program Manager, Senior Engineer, and Junior Analyst. These job titles will match a specific proposal or contract based on average rates that you pay your employees.
Wrap Rates are also known by the following names: Loaded Labor Rates (with or without fee), Fully Loaded Rate, Fully Burdened Rate, and Billing Rate.
Wrap rates can mean something different to different individuals. When discussing the wrap rate, make sure to ask if it includes the fee or not. Also, government contractors will not tell you their wrap rates. They consider this highly confidential information. However, a wrap rate of 2 or less is ideal. Now those contractors who are aggressive in the bidding will aim for a wrap rate of 1.6. Do yourself a favor and don’t estimate your wrap rate. Figure it out.
Important Definitions – Wrap Rates
Before we can go any further, we need to go over a few definitions and calculations.
Direct labor is the cost of the labor itself. For example, you have a Program Manager with an annual salary of $94,000. To determine the labor hours, we need to divide the annual salary by 2080 hours. 2080 Hours is the number of hours a full-time employee will work within one year.
$45.19 per hour.
Indirect Costs – Also called Burdens. Burdens are support costs like fringe benefits, overhead and general and administrative costs (G&A).
Fee. A fee is a Profit. In Government contracting, profit percentages are low. Generally, 8-10% profit (Fee) is considered excellent. At the same time, the fee in the commercial market is a lot higher, like 30%. So, a wrap rate is what you bill your customer to recover the cost of the employee pay, plus fringe benefits plus an amount for overhead, plus G&A costs, and profit. As you can tell, there are a lot of components that make up your wrap rates. You need to ensure that the wrap rate includes all components.
Cost Control For Lower Wrap Rates
The aim is to control your costs. The lower your expenses, the lower your wrap rate will be. Remember, most contractors aim for a wrap rate of less than two. Indirect costs such as support staff can quickly push your contract proposals out of the competitive range. Consider outsourcing staff as it will allow your business to focus on development and delivery while scaling to meet demands.
Wrap Rate Calculations
Let’s walk through an example. You are responding to a Time and Materials Cost Proposal. We know that John has an hourly wage of $100.00 an hour. At what rate must the company bill out John’s time to cover its costs?
The T&M rate for John must cover:
- His Base Wage
- Associated fringe or overhead
- G&A expenses incurred by your organization
In our example we will use the following rates:
- $100.00 hr. labor rate
- Fringe Rate 10%
- G&A Rate 25%
Which of the above components cover the wrap rate? That would be the fringe and G&A. So, in this example, we would multiple the fringe rate of 10% by the G&A rate of 25%
Wrap Rate is (1.10) *(1.25) = 1.375
Therefore, we must bill John out at ($100 * 1.375) = $137.50 before profit to cover our indirect (burden) costs.
In review, wrap rates refer to the hourly labor rates include all costs such as salary, fringe benefits, overhead, G&A, and profit. The lower your expenses are, the lower your wrap rate. Try to get a wrap rate below two to be competitive. The best advice I can give you is to take your time and hire a professional to help you with your wrap rates. Remember to leave a comment if you have any questions.
Also, check out our other articles.