In government contracting (GovCon) and professional services, knowing your wrap rate is essential for competitive pricing and profitability. The wrap rate serves as a multiplier that allows you to convert a base hourly salary into a fully loaded billable rate that covers all your indirect costs and profit targets.
While a standard employee might earn $50/hour, billing the client $50/hour would result in a significant loss. The wrap rate accounts for taxes, insurance, office space, management salaries, and your profit margin.
The Wrap Rate Formula
The simplest definition of a wrap rate is the ratio between your billable rate and the base pay rate:
For example, if you pay an engineer $50/hour and bill them out at $100/hour, your wrap rate is 2.00x.
Components of a Fully Burdened Rate
To calculate the rate from the bottom up (as this calculator does), you must understand the "stack" or "build-up" of indirect rates. These are typically categorized into four buckets:
Base Labor: The raw hourly wage paid to the employee.
Fringe Benefits: Costs directly associated with employment, such as payroll taxes (FICA, FUTA), health insurance, 401(k) matching, and paid time off.
Overhead: Costs required to support the workforce but not billable directly to a contract. This includes facility costs, equipment, software licenses, and training.
G&A (General & Administrative): Corporate expenses to run the entire business, such as executive salaries, legal fees, accounting, and business development.
Fee (Profit): The margin added on top of total costs to ensure business sustainability.
Step-by-Step Calculation Example
Let's assume a Base Labor rate of $50.00. Here is how a standard cost-plus build-up works:
Apply G&A ($12.00): Assuming 15% G&A applied to the subtotal (Total Direct Costs). $80.00 × 0.15 = $12.00.
Total Cost ($92.00): Subtotal + G&A.
Apply Fee ($7.36): Assuming an 8% profit target on total cost. $92.00 × 0.08 = $7.36.
Final Bill Rate ($99.36): Total Cost + Fee.
Wrap Rate: $99.36 / $50.00 = 1.9872.
Why is the Wrap Rate Important?
If your wrap rate is too high compared to competitors, you may lose contract bids. If it is too low, you may win the contract but lose money on every hour worked because you aren't covering your actual operating expenses. Government agencies often analyze wrap rates to determine if a contractor's pricing is "fair and reasonable."
Most competitive GovCon wrap rates typically fall between 1.60 and 2.50, depending on the industry (e.g., highly specialized engineering firms often have higher overheads than staffing agencies).