Managing to a Competitive Wrap Rate

A wrap rate is nothing less than a cornerstone of a profitable govcon business. The right wrap rate is 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. Set pricing too low, and you won’t sustain your business. Too high, and you won’t have any business to start with. Price-to-win is a critical component of the bid process, and the wrap rate is a major factor in your pricing.

What Is a Wrap Rate?

A wrap rate is the factor you apply to a base hourly labor rate to arrive at a loaded labor rate (with or without fee). The fully-loaded labor rate includes fee and is the rate that you charge a customer for each hour of work.

Think of this as the base labor rate you pay plus the additional amounts for indirect (operating) expense and fee. Another term used interchangeably is a multiplier. A multiplier is also the number you multiply your raw labor rate by to determine your fully-loaded rate through fee or loaded rate without fee. It is critical to feed accurate numbers into the formula to set a rate that works to your market advantage.

For contracts you already have, you can calculate the effective wrap rate by labor category by taking the hourly rate bill rate divided by your raw hourly labor rate.  Based on your current and forecasted indirect rates, you can determine your resulting profit margin on existing contract labor category rates.

Whatever the terminology, the data that goes into computing a wrap rate can vary significantly from company to company and industry to industry. The rule of thumb is to review your wrap rate routinely and keep a pulse on how your wrap rate will change with fluxuative business conditions. Here’s a general outline of the process:

Know Your Costs

The adage “garbage in; garbage out” applies nowhere more than to the financial data you use to determine a wrap rate. You need accurate information that gives a clear picture of company costs. Guestimates will not do. Neither will wishful thinking that produces an unrealistically low rate. Gather your best and latest data to determine:

Direct labor rate – 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, such as vacation, sick, and family leave; payroll taxes; health benefits; and 401(k) and other employee benefit-related costs.

Overhead costs – Costs that can’t be traced to a specific contract but are needed to support all contracts. Costs may include overhead labor, bonus, and recruiting for technical staff. Infrastructure items could comprise facilities (unless you fulfill the contract at an agency site), training, supplies, and software, to mention a few.

General and administrative (G&A) costs – These expenses are items that support the company’s operations as a whole, such as executive management, accounting, legal, and HR.  It will also include related supplies, subscriptions, training, software expense, facility-related costs, and similar expenses.

Fee – Your company’s contract profit.

A wrap rate calculation may look like this:

Direct Labor Rate – $50

Fringe – 25% x 50 = $12.50

Overhead – 22% x ($50 + $12.50) = $13.75

G&A – 10% x ($50 + $12.50 + $13.75) = $7.63

Total Cost = $83.88

Fee – 8% = ($83.88 * .08) = $6.71

Total Cost Through Fee = $90.59

Wrap rate (through fee) = 1.812 (Total Cost Through Fee / Direct Labor Rate)

Or you can use the formula:

(1+Fringe)*(1+Overhead)*(1+G&A)*(1+Fee) = (1.25*1.22*1.10*1.08) = 1.812

Download the Wrap Rate Calculator. The Excel model will build your wrap rates based on company-site rates and client-site rates. Once complete, use the Calculator tab to do quick what-if assessments such as:

  • What is my bid rate? Given your wrap rate, if you hire a person for a certain salary and want to achieve a target profit %, what is your resulting bid rate.
  • What is my resulting profit margin? Given a target bid rate and salary for a position, what is the calculated profit margin based on your wrap rate?
  • What salary can I offer to make a certain profit? Determine how much can you offer if you want to fit into a certain bid rate and achieve the desired profit %.

What to Do If You Aren’t Hitting Your Mark

Know your market and the range of competitive wrap rates. If you have both company-site rates and client-site rates, there will be different target ranges. 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.”

Let’s assume you have evaluated that a competitive wrap rate is between 1.6 and 1.8. What if your calculations put your firm above that range? Here’s where having an accurate, detailed understanding of your costs comes in. A rate consists of a ratio of cost (numerator) / base (denominator). To reduce your overall wrap rate, you can either:

  1. Increase your business base (denominator) – win more work or grow existing work
  2. Decrease your operating costs (numerator) – reduce costs in your fringe, overhead, G&A or other cost pools

Increase your Business Base

Reduce your rates by increasing your cost pool base.

Win more business – More contracts mean you can divide your costs across more projects. One key area to consider is to perform a rate impact assessment.  If you are bidding on a meaningful piece of business, see what adding that business would do to your cost structure. It may very well reduce your wrap rate to within your target range. You can bid this reduced rate structure contingent on you being awarded the work. This may allow you to be more competitive, assuming you win the contract. Don’t forget to consider organic growth. Factor in new hires from open positions and known growth or follow-on work associated with existing programs.

Build a new business pipeline into your budget. A word of caution, however…

Don’t count your chickens before they hatch – When including a new business pipeline into your rate forecast, make sure you have a realistic probability of win (pWin). Factor your new business based on a realistic pWin %. Also, be realistic about the start date for contracts. It is surprising to look at a pipeline forecast that calls for ten new hires starting November 1 while you are in a review in mid-October. If you don’t have the contract and people signed to start November 1, it is likely not going to happen. Make sure you run the numbers carefully and come up with a truly realistic pWin and start date. A big miss in this area will have the biggest impact and ruin your wrap rate plans fast.

Decrease Operating Costs

Consider whether your firm has a performance differentiator that may justify higher spending by the government agency. Are you known as one of the best in your field or provide hard-to-acquire capabilities? These value propositions apply to a small percentage of acquisitions. If your company is not bidding with a niche differentiator, an evaluation of your costs is your best bet.

Eliminating unnecessary spending is a key strategy to consider. Here are some ideas about where to start:

  1. Reevaluate fringe costs – When was the last time you looked at your options for healthcare or 401(k) plans? Is your broker knowledgeable about the latest benefit packages and attuned to your company’s needs? Make sure you’re getting the best information and check to see if there are creative ways to trim your costs while still attracting key talent.
  2. Determine if outsourcing makes sense – You may get more value for dollars spent if you outsource HR, accounting, IT, and other tasks on an as-needed basis rather than maintain a full in-house staff.
  3. Lighten your infrastructure load – There are modern alternatives to carrying the cost of a traditional office, including a shared workspace and allowing employees to work remotely.
  4. Share the burden – Teaming up on a project can allow you to join forces with companies that bring expertise and cost efficiencies in areas where you may be weak. The right combination can also result in a more competitive price structure.

Contact CAVU’s govcon accounting experts to help you parse through your wrap rate calculations and come up with a competitive rate that puts you in the running for the contracts you seek. CAVU can also help you determine your current indirect rates, target and provisional rates, provide rate impact assessments and advise on alternative rate structures.