What is a Fully Burdened Labor Rate?
#006 Thoughts on SB wrap rate strategy and definitions.
This week I collaborated with Jean Zaky. Jean and I have worked for many years together pricing and winning small business contracts and task orders. He is a pricing expert with over 20 years’ experience. Connect with him on LinkedIn!
We kept this newsletter at a very high level, in order to help individuals understand the basic tenants of how this works. Please reach out to me for detailed examples and ways to implement.
When starting a government contracting small business, one should begin with pricing in mind.
The pricing strategy will change throughout the business lifecycle and should be well balanced for adequately paying employees and growing the organization’s foundation. Some companies attempt to price very low (i.e. 1.2-1.4 WRAP) to be aggressive in building subcontracting work. Many times, this strategy only works for a short period of time before the business encounters scalability issues as they do not have a foundation to invest forward in HQ personnel, corporate certifications, and compliance requirements. From a direct personnel perspective, in this scenario the organization likely reduced employee benefit costs which may increase turnover. This turnover then requires additional investment into recruiting, causing diminishing returns. The ability to quickly fill positions, hinges on several factors, however the most prevalent is adequate salaries and fringe benefits. DO NOT set your WRAP rate too LOW. Price for today and forward for tomorrow.
When it comes to keeping clients (prime or government) happy, two common themes have emerged during my career – timely staffing of your positions by qualified personnel and proper invoicing actions. Proper invoicing is timely, accurate, and provided to the client in the correct manner (i.e. WAWF, email, portal upload, etc). Depending on the situation, improper invoicing to the government can quickly initiate DCAA becoming involved in the process to straighten out an invoicing error.
What is a Fully Burdened Labor Rate (FBLR) or WRAP Rate?
Wrap rates, or indirect rates, are crucial to Government contract pricing. They multiply direct costs by the total percent of indirect costs to determine the final sale price. Indirect Costs come in a variety of flavors but are typically not specifically related to a contract/job/task and therefore must be allocated across all jobs in a fair and equitable manner. The government provides details on Cost Principles(Profit) in FAR Subpart 15.4 and Cost Principles in FAR Part 31.
So, which costs or chart of accounts go into indirect rates? Let’s define some terms!
Direct Costs are Labor and Other Direct Costs (ODCs) such as travel, supplies, tools etc. which are used directly for a customer on a specific contract/job/task. From a professional services standpoint, this represents an individual’s salary or hourly rate.
Fringe costs consist of medical, dental, vacation, sick holiday leave, and statutory FUI SUI FUTA and SUTA. It is typically applied to all labor.
Overhead accounts are for expenses that typically follow labor such as an unbillable PM a copier that supports the Program Management.
General and administrative (G&A) are costs that more broadly effect the company such as the executive suite corporate expenses.
Materials & Handling (M&H) are a pool of costs associated with Subcontract Administration and/or Purchasing in lieu of G&A.
Bid and Proposal Costs (B&P) are the segregation of costs of doing proposals (done usually by large companies)
Unallowables are anything fun or that does not directly benefit the Government. Examples include alcoholic beverages, entertainment costs, bad debt, compensation for personal services, etc.
Note - Many costs can fall into multiple groups depending on how it is used, Direct, Fringe if in HR, OH if Supporting Programs & G&A if support Corporate HQ)
Once you have established these groups of accounts you need to build a budget with them. Next you should begin building a revenue forecast based on current and future potential revenue via a BD pipeline. This process will assist you in establishing your indirect rates.
What is a Annual working year?
An annual working year is determined as 2080 hours. This is a figure derived from the standard of total hours a person could work during a 12-month period). Depending on circumstances the Net Productive Hours ranges from 1860 to 1920 productive (billable) hours per year with the most common government solicitations estimating 1880 or 1920 hours. Below is an sample build.
The basics - How to Calculate a FBLR
1. Your company is supporting a large services integrator and you have been asked to support a proposal. You have conducted market research for average salaries for the required position and have determined the salary target is $90,000.
2. You will divide the salary by 2080 hours. This gives you the hourly unburdened (no wrap) labor rate of $43.27.
3. Now let’s add your indirect costs. These are multiplied against the unburdened hourly labor rate determined above. (I’m using rounded numbers as an example only)
Fringe is 25% * $43.27 = $10.81
OH is 10% * $43.27 = $4.30
G&A is 15% * $58.38 ($43.27 (Unburdened Labor) + $10.81 (Fringe) + $4.30 (OH)) = $8.76
Fee is 8% * 58.38 = $4.67
No add all together to determine FBLR: $43.27 (Unburdened Labor) + $10.81 (Fringe) + $4.30 (OH) + $8.76 (G&A) + $4.67 (Fee)
FBLR is $71.81 with a WRAP rate of 1.603.
As noted at the beginning, these are the the basic tenants of how FBLR is calculated. Please reach out to me for detailed examples and ways to implement or research additional resources that can help you build your chart of accounts and determine your indirect rates!