Also referred to as the direct labor “multiplier”, it is a fully burdened labor rate – the rate at which an organization must bill out its direct labor units to cover its direct and indirect costs; before any profit is made.
For an organization to break even on a total cost basis – each unit of direct labor must cover the direct costs of that labor plus a proportionate share of the organizations indirects – fringe, overhead, g&a etc.
Understanding how to calculate these rates is crucial for a services based organization. Simply guessing at a labor rate in a proposal could be disastrous and costly for an organization, especially in a multiyear proposal where rates are locked in for several years.
Make sure you start with a solid budget. Understand what your staffing costs are and how they will change in the budget period.
Understand what your fringe benefits, overhead costs and g&a costs are comprised of and if they will change as your organization grows.
So the wrap rate for $1 of direct labor is the burdened rate that effectively covers all the direct and indirect costs necessary to support that labor, it could typically be anywhere from $1.50 to $2.25 for a small business.