From time to time we will be spotlighting guest bloggers in order to provide expanded insight into the world of government contracting. Today’s guest blog comes to us from Linda Mahnke of Mahnke Consulting. Linda’s experience in government accounting provides her with the background to discuss the topic of wrap rates.
Top 5 Wrap Rate Pitfalls a Small Business Should Avoid – By Linda Mahnke of Mahnke Consulting
1. The small business wins the award, at a loss to the company.
Many small businesses bid a wrap rate they believe rivals competition, with no understanding of the actual costs (e.g., bookkeeping, rent) included in that rate.
2. The small business does not follow directions.
The solicitation (e.g., RFB, RFP) details what is and what is not included in the wrap rate. Usually, materials and travel are bid separately – but might be included in the rate.
3. The small business sees more value in technical quality than in managing the business.
By their nature, small businesses have room for few top executives – at least one of whom should be an administrative professional. Providing the customer better quality than expected, does not prevent suspension, debarment, and/or bankruptcy.
4. The small business is not prepared for a DCAA audit of the Accounting System and the Estimating System.
Even if all current awards, funded by the U.S. Government, are competitive, Fixed Price – growing small businesses want options. Consistent practices that reflect “the Government way” open opportunities for more types of awards. Actual incurred costs must be compliant (e.g. FAR, FAR supplements, labor laws, etc.), before using them as a basis for proposed estimates, especially wrap rates.
5. The small business builds the wrap rate on managers’ experience.
Build the wrap rate on supportable, auditable, general ledger data that both a) uses Job Cost Accounting (not accounting for the whole company), and b) a Chart of Accounts that encourages compliant recording of unallowable costs (per FAR 32.2).
Summary – The overall suggestion to avoid all five pitfalls above is to understand what should and should not be included in a wrap rate, understand the necessity of a solid wrap rate, and be able to support that wrap rate.