Wrap Rates Part 2: Why Develop and Monitor Wrap Rates?

For small contractors this question is huge!

It is hard enough to be competitive in delivering the highest quality products or services, but how do I stay competitive with my rates and still make a profit?

For small contractors (and I mean small) wrap rates (before profit) anywhere between 1.5 and 2.1 are not unusual.

But even .6 can mean a big difference between covering your costs and losing your shirt.

Calculating and monitoring wrap rates is something that all small contractors should be doing whether or not they have cost type contracts.

Why?

Because when you bid on T&M or FFP contracts, you have (theoretically) developed your proposed costs based on actual labor rates plus your indirects plus some nominal profit margin.

Let’s see what happens in the case that you are not really calculating your rates, but are sort of “conjecturing” as to what they are (you know your costs right?):

FFP contract:

Basis of Bid & Award:                                                                                    Actual Costs

Labor:                  $50,000                                                                             $50,000

OH (25%):            $12,500                                                                    (35%)  $17,500

G&A (40%):        $25,000                                                                      (45%)  $30,375

Total cost             $87,500                                                                              $97,875

Profit (10%):       $  8,750                                                                   Loss:    ($  1,625)

Total Award:        $96,250                                                                                 $96,250

You did not budget you rates accurately and / or you were not monitoring your actuals! Your profit just went from 10% profit to a 1.66% LOSS!

Remember, it’s a Fixed Price Contract – you are only getting the $96,250. If you overrun your indirects, it comes right out of your profit!!!

So what influences wrap rates and how can you monitor them? (Come back on Wednesday for that discussion).

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About Stephanie Amend

Stephanie is the Principal and CEO of Arrowhead Solutions, LLC, a solutions firm specializing in assisting established small businesses be successful government contractors.

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