A correction, up front.
In issue #4, back in May, I gave you the wrap rate in a single line:
Direct labor × (1 + Fringe) × (1 + Overhead) × (1 + G&A) = fully burdened labor cost.
Then I moved on to the next section. Two things wrong with that.
The first is that it was one line. The number that sits underneath every price you submit got one sentence and no worked example. That's not an explanation — it's a formula you have to already understand in order to use.
The second is more useful to you. That formula quietly assumes overhead is applied to direct labor plus fringe. That's a real structure and plenty of contractors run it. But it isn't the only one, and it isn't what I've most often seen in small shops, where overhead sits on direct labor alone. Same three rates, different answer. If you took that line at face value and your overhead base is direct labor only, I handed you a number that runs high.
I also left fee out entirely — which means the thing I called a wrap rate wasn't the number you actually compare across bids.
So here's the version I should have written in May.
The build-up, one line at a time
$100,000 of direct labor, on a cost-plus contract, overhead applied to direct labor only:
Cost element | Calculation | Amount | Running total |
|---|---|---|---|
Direct labor | Given | $100,000 | $100,000 |
Fringe (25.4%) | $100,000 × 25.4% | $25,400 | $125,400 |
Overhead (36.8%) | $100,000 × 36.8% | $36,800 | $162,200 |
Subtotal before G&A | $162,200 | ||
G&A (22.6%) | $162,200 × 22.6% | $36,657 | $198,857 |
Total allowable cost | $198,857 | ||
Fee (8%) | $198,857 × 8% | $15,909 | $214,766 |
TOTAL PRICE | $214,766 |
Rates here are illustrative — a teaching example, not any particular company's actuals.
Wrap rate = $214,766 ÷ $100,000 = 2.148.
Add the rates together instead — 25.4 + 36.8 + 22.6 + 8 — and you get 1.928. That gap is $22,000 on one labor category, and $440,000 on a bid carrying $2 million of direct labor.
The reason is that each layer sits on a base that already contains the layer beneath it. G&A isn't 22.6% of your direct labor; it's 22.6% of direct labor plus fringe plus overhead. Fee isn't 8% of direct labor either. It compounds, like interest — and the further down the stack a rate sits, the more the shortcut costs you.
Which is the part I got right in May. Rates stack, they don't add. What I skipped is that the stack depends entirely on what each pool sits on — and that's a decision your company made once and probably hasn't revisited.
So: state your base. Before you quote a wrap rate to anyone — a teammate, a prime, yourself in a go/no-go meeting — know whether your overhead base is direct labor or direct labor plus fringe, and whether the number you're quoting includes fee. Two people using the same three rates can be eight points apart and both be right.
Where the error actually costs you
Your pricing system does this correctly. Costpoint will build the price right whether or not anyone in the room understands why.
The error lives in the conversations that happen before the model gets opened. The go/no-go call. The can-we-get-under-that-ceiling-rate question. The salary you're deciding whether you can afford to offer. Those get answered from the number in someone's head — and if that number came from adding rates together, it's low, and the decision gets made on it.
And then it moves
One more thing I should have said in May: the wrap rate isn't a property of your company. It's a snapshot of your current mix.
Win a task order carrying $500,000 of subcontract and your direct labor stays flat. Your total cost input base grows by the full amount, your G&A pool doesn't move, and your G&A rate falls several points. Your wrap rate drops. You look more competitive — and you're recovering less G&A per labor dollar than you were last month. Those costs are still real. They come out of fee on the subcontract work now, or they don't come back.
Run it the other way. A contract ends, direct labor drops ten percent, and overhead — rent, IT, indirect salaries — doesn't drop with it. Your overhead rate climbs and so does your wrap. You're least competitive at the exact moment you most need to win work.
Which is why comparing your wrap rate to a competitor's published number is close to meaningless. You don't know their base, their pool structure, or what their mix looked like the day they calculated it.
One thing to do this week
Build the stack on paper. $100,000 of direct labor, your current provisional rates, one line at a time — and write down what each pool sits on as you go. Then compare the result to the number you've been saying out loud in meetings.
What's the GovCon finance question you can't get a straight answer to? Reply and I'll answer one.
— Michael
Before you go —
Want the whole system? The blueprints, templates, and checklists behind these issues live in The GovCon Finance OS — bookkeeper foundations through CFO-level strategy.
Need hands-on help? When your firm needs a GovCon finance pro in the room, that's what I do at 4G Consulting. Reply to this email and let's talk.
Found this useful? Forward it to one person in GovCon finance who needs it — that's how this grows.
—Michael Harris, Founder/CEO, 4G Consulting, LLC