There are several other names for wrap rates:
Loaded Labor Rate
Fully Burdened Rate
Fully Loaded Rate
With or Without fee – be sure to clarify whether fee (profit) should be included.
Components of a Wrap Rate are Direct Labor, Fringe, Overhead, General & Administrative (G&A) and Fee (Profit.)
Let’s Start with Some Definitions
Before we start on wrap rates – we need to make a few definitions
Direct Labor is the cost of the labor itself – so that pay for the Program Manager – annual salary divided by 2080 hours per year.
Indirect Costs – which are also called Burdens – are support costs, and we’ll go through them but these are generically fringe benefits, overhead and general and administrative or G&A costs.
Fee is profit. By the way, the fee percentages in federal contracting are low compared to the commercial market – 8 to 10 % fee is considered good.
A wrap rate is what you bill your customer in order to recover the cost of the employee pay, plus fringe benefits, plus an amount for overhead to cost facilities and support costs, plus corporate expenses for general and administrative costs like accounting and executive management, plus an amount for profit, or fee. Whenever you are discussing wrap rates, be sure you understand what components are included. Like the terms onsite and offsite, wrap rates mean different things to different people – make sure you know whether the wrap rate just covers costs or covers costs and fee.
There are a few variations of wrap rates, but generally the wrap rate calculation starts with the cost of the employee, which is their hourly pay rate. If you have professional employees, they are usually on a salary, so your first calculation is to take the employee’s annual salary and divide by 2080 to calculate it on an hourly basis.
The second component of the wrap rate is how much you need to allow to cover the employee’s fringe benefits, or fringe. Fringe includes payroll taxes, leave and group benefits.
Wrap rates include a percentage for overhead costs. Overhead costs include facilities expenses unless the work is at a government or client site. Overhead would also cover training, supplies, software, recruiting and other costs. Overhead amount vary significantly depending on the work your company does.
Wrap rates also include a percentage to cover General & Administrative Costs (G&A) which are corporate expenses. Think of the back office that provides services internally, such as accounting, human resources and executive management.
Let’s give some examples
If you look at other businesses, you’ll find “rules of thumb” for how they price. A jewelry store has a “markup” and that is comparable to what we call a multiplier in the federal contracting industry. For a jewelry store, let’s say that the markup or multiplier is 5. That means whatever is being sold, you take the cost of the item times 5 and that is what you need to charge for it to cover the cost of the item plus the support costs and profit.
Let’s talk about a jewelry store. You have a ring selling for $500. The cost of the ring itself – the stone and the setting, may be $100. The other $400 is to cover the cost of the store, the inventory, the sales people, advertising, company management and profit. The markup on the $100 ring cost is a multiplier of 5. Sometimes we have to calculate that the other way – we know that we can sell a ring for $500, but what is the most we should pay for the cost of the stone and setting to make sure we make our planned profit.
In order to make the profit you plan, you need to understand what your costs are for your company for each fiscal year, and come up with a multiplier. For a typical small business that has employees and office space, the multiplier might be around 2. So that means that an employee who is paid $50 per hour needs to be billed out at $100 in order to cover your costs and planned profit. When you are bidding, you use that multiplier to figure out how much to charge for your services. Every time you get a project that is under that multiplier, you are reducing the profit that your company will make on the project.