Wrap Rate Explained: Turning a Salary Into a Fully Burdened Labor Rate

The number you cannot bid at

You hire an engineer and pay them $50 an hour. A government agency wants that engineer's time. So you bid $50 an hour — and quietly go out of business. The $50 covers the engineer's paycheck and nothing else: not their health insurance, not payroll taxes, not the rent on the office they sit in, not the accountant who runs the books, not the cost of writing the proposal that won the work in the first place. All of those costs are real, and all of them have to be paid out of what the contract brings in. If you bill only the raw salary, every one of those costs comes straight out of your own pocket.

The tool that fixes this is the wrap rate — a single multiplier that turns a raw labor dollar into a fully burdened labor dollar, one that carries its fair share of every indirect cost. It is one of the most important numbers a small government contractor works with, and one of the most misunderstood. Price it too low and you win work that loses money on every hour. Price it too high and you lose bids you should have won. This article explains what a wrap rate is made of, how to build one, and how it differs from the rates you actually bill with. (This is general educational information about government-contract pricing, not accounting, legal, or contracting advice — how you build and apply rates for your specific business should be confirmed with a qualified contract accountant.)

What "fully burdened" actually means

A fully burdened labor rate is the raw hourly labor cost plus every indirect cost that labor has to carry, layered on in order. For a typical small contractor those layers are the three indirect cost pools: fringe, overhead, and G&A. Each is expressed as a rate — a percentage built by dividing that pool of cost by an appropriate base — and they stack:

• Raw labor — the base hourly cost of the employee. Start here: $50.
• Fringe — the cost of employing a person beyond their wages: payroll taxes, health insurance, retirement contributions, paid time off. Fringe is applied to the raw labor. At a 30% fringe rate, the $50 becomes $65.
• Overhead — indirect costs that support the contract work generally but not one contract in particular: supervision, facilities tied to production, tools and supplies. Overhead is typically applied to labor-plus-fringe. At a 40% overhead rate, the $65 becomes $91.
• G&A — the cost of running the company itself: executive pay, accounting and legal, business insurance, the cost of bidding new work. G&A is applied to a broader base (often total cost input). At a 15% G&A rate applied to the $91, the burdened cost becomes about $104.65.

So an employee who costs you $50 an hour costs the contract about $104.65 an hour once fully burdened. Your wrap rate is that ratio: 104.65 ÷ 50 ≈ 2.09. In other words, every raw labor dollar wraps up to about $2.09 of fully burdened cost. Contractors quote wrap rates as a multiplier ("our wrap is 2.1") or as a percentage ("109% on labor") — same idea, different phrasing.

Note the order matters. The pools stack, each applied to a base that already includes the layer below it, so a small change in one rate ripples through the whole calculation. That is the same rippling effect that makes classifying every cost consistently so important — misplace one cost and it lands in the wrong pool and bends the wrap.

Cost versus price: the wrap gets you to cost, not to your bid

Here is a distinction that trips people up: the fully burdened number is your cost, not your price. The wrap rate assembles what an hour of that labor actually costs the company to deliver. It says nothing about profit. On top of the burdened cost you add a fee or profit margin, and that is the rate you actually bid.

Using the numbers above, the burdened cost is about $104.65. Add, say, an 8% fee and you bid roughly $113 an hour. The wrap rate got you honestly to cost; the fee turns cost into a price you can win with and still make money on. Keeping these two steps separate — burden first, profit second — is what stops a contractor from either forgetting to make a profit or, just as dangerous, burying profit inside an inflated "cost" number that will not survive scrutiny on a cost-type contract.

Where the rates come from — and the honesty problem

A wrap rate is only as good as the pool rates it is built from, and those rates come from your books. Fringe, overhead, and G&A rates are each a pool of actual cost divided by a base, and you cannot compute them credibly unless your chart of accounts actually segregates costs into those pools and your job-costing captures direct labor cleanly. Garbage pools produce a garbage wrap.

There is also a discipline trap worth naming. When you are bidding, there is constant pressure to shave the wrap rate down to win — assume a lower overhead rate, hope G&A comes in lean, price aggressively. That is fine as a business decision, as long as you make it honestly. What you cannot do is pretend your wrap is lower than your books support and then be shocked when reality catches up. And a wrap must be built on a clean pool: unallowable costs — the ones you cannot charge the government — have to be out of the pools before you compute any rate, or your wrap is inflated with costs you will never be allowed to recover.

Bid rates versus billing rates: two different jobs

It is easy to confuse the wrap rate you bid with the rates you bill, because both involve indirect rates, but they answer different questions.

• The wrap rate is an estimating and pricing tool. It answers: when I propose a price for this work, what does an hour of this labor cost me, fully loaded, so I can add fee and bid a number? It is often built on forward-looking or target rates for a whole period of performance.
• Provisional billing rates are a billing tool. On a cost-type or T&M contract, they are the estimated indirect rates you actually apply to your invoices each month, all year, before your real rates are known — and then reconcile to actuals at year-end.

They are related — both rest on the same fringe, overhead, and G&A structure — but one is how you win and price work, and the other is how you invoice and get paid for it. Confusing them leads to bidding at one set of rates and billing at another with no idea why the money does not tie out.

Why getting the wrap right matters

The wrap rate sits at the exact seam between your accounting and your survival as a business:

• A low wrap silently loses money. If your real burden is 2.1 and you bid at 1.8 to win, you are agreeing to eat the difference on every single hour, on every contract, for the life of the work. It does not show up as a dramatic loss — it bleeds out slowly, and a contractor can win a lot of work while going broke.
• A high wrap loses winnable bids. Padding the wrap to feel safe prices you out of competitions you could have won at an honest, profitable rate. The goal is accurate, not high.
• An unsupported wrap fails scrutiny. On cost-reimbursable work your rates get examined against your actual books. A wrap that does not match your accounting is a problem waiting to surface at year-end reconciliation or in an accounting-system review.
• It forces you to know your own costs. Building a wrap rate honestly makes you confront what it actually costs to keep the lights on and put a person to work. That number is useful far beyond government work — it is the foundation of pricing anything profitably.

The whole idea condenses to one sentence: the wage is what you pay the employee; the wrap rate is what the work actually costs, and the bid is that cost plus a profit you decided on out loud. Build the wrap from books that segregate your costs cleanly, keep unallowables out of the pools, add fee as a separate and deliberate step, and you will bid rates you can both win with and live on.

This article is general educational information about government-contract pricing and indirect-rate concepts, and is not accounting, legal, or contracting advice for your specific situation. Illustrative rates and multipliers here are examples only, not benchmarks — build and confirm your own rates with a qualified contract accountant or CPA.