wrap rates

Five Years; time to give back to our wonderful readers! Part 1 of 4:

As Arrowhead celebrates our 5th anniversary, we realize that we could not have done it without all the support from you – our readers and clients!

To give back, we’d like to share some government contracting tips and tricks so that you can be the best government contractor possible. Each week, throughout the month of March, we’re going to be posting 5 tips to celebrate 5 years. Cheers!

This week’s post: Government Contracting: Tips and Tricks Part 1 – DCAA and Government Accounting

#1: Ask “How would we fair during a DCAA audit?” Not sure? Try a mock audit with Arrowhead’s experts on the other side of the table before there is DCAA in the picture.

#2: Make sure you know what wrap rate means. Need a refresher?

#3: Be familiar with indirect and direct rates. Read On…

#4: Read RFQs carefully – response instructions must be followed exactly as stated.

#5: Make sure to time your GSA proposal right  (if you have one). Not sure? Just call Arrowhead and we’ll help you sort it out. Don’t know if you really need a GSA? You could be right. Not all companies can benefit from being on a GSA Schedule. Arrowhead will also help you sort this out.

Don’t forget to follow Arrowhead Solutions on Twitter (@arrowheadllc) for daily tips, too!

See you next week!

What Does The Term Wrap Rate Mean?

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.

What’s Influencing Your Wrap Rates?

So I know the obvious “influencer” of wrap rates for small businesses is making sure you max out on direct labor – but aren’t there other things you should consider in managing the indirect cost portion of the indirect rate calculation?

Here are a few to consider:
1. Executives Billable : For smaller companies, what % of time do your executives spend in direct labor vs. G&A? – As a small government contractor you cannot afford to have a lot of executive time that is not billable.

2. Budgeting: Do you perform zero based budgeting or do you just add “x”% on to last year? If your rates were wrong last year, just adding an “x”% to last year’s actuals will produce the same problem. Really take a look at what you are spending and make thoughtful decisions about that spending.

3. Cost Segregation: Are you properly segregating costs based on your indirect pool definitions?

4. Fixed Assets: Have you classified asset purchases and depreciation correctly?

5. Unallowables: Have you properly classified unallowable expenses?

The most important thing small businesses can do is to properly budget their costs and then to monitor their actuals against them throughout the year.
I have seen clients who have had 25 – 30 % swings between their  Provisional Billing Rates (PBR) and their actual rates! That can be a very costly difference when you have to reconcile your rates to actual.

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).

What is an acceptable wrap rate for small government contractors?

I have had this question from several clients lately because they are concerned;

  1. Their rate is too high to be competitive
  2. Their rate is too low
  3. They have no idea why they should be concerned…

I counsel them that the wrap rate (fully burdened rate) needs to fairly represent their indirect costs that they incur while staying competitive in the market; after all they are competing in a market where all other things being equal, the low price will win.

What are you seeing for rates in your clients and are you seeing any trends?