The wrap rate is a method of calculating the cost of employee labor used in bidding projects. Generally, the unit cost is multiplied by an employee’s base pay to determine a base dollar cost for that unit of labor. In addition, indirect expenses are added as pools and allocated according to certain bases. Typically, fringe, overhead, and G&A expenses are then applied. Once the indirect costs are determined, they are added to the base dollar cost giving a total cost for each hourly unit of labor. By understanding how to calculate a wrap rate, contractors can accurately reflect their current job costs, helping them more accurately calculate project bids.
Calculating wrap rates can be complex, but it doesn’t have to be daunting since there are usually only three direct expense types applied (fringe, overhead, and G&A). It is essential for accurate job costing and newer project estimates that business owners understand what goes into determining their indirect expenses as well as getting familiar with allocating those indirect costs to applicable platforms or jobs. By understanding how all these calculations work together, one will be better equipped to measure their actual costs enabling them to estimate future projects on task and with greater accuracy.
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Wrap Rate Calculations
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When responding to a Time and Materials Cost Proposal, it is essential to calculate the wrap rate for the employee to cover costs. The wrap rate is the hourly rate at which the company bills out its resources in response to a T&M proposal. An excellent place to start would be by considering an employee’s hourly wage, like a $100/hour wage. This base rate needs to be used when calculating this specific employee’s T&M rate since it covers his base wage and other associated costs.
The wrap rate calculation for this employee, therefore, would need to incorporate not just his $100/hour wage but also figure in relevant taxes due along with any fringe benefit cost factors such as employer contributions for health insurance or retirement benefits that have been negotiated in collective bargaining agreements or promised by employers. When these other cost areas are considered, the result will reveal what the overall billable T&M contract hour rate should be set at for the employer organization to realize an acceptable profit while innovatively meeting client expectations.
Apply Predetermined Overhead and G&A Rates
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Using the cost build-up method to apply predetermined overhead and G&A rates is beneficial for calculating the overhead and G&A (General and Administrative) burden associated with base pay. This method begins with creating two pools, one for each type of expense. The costs in these pools are then allocated to related tasks via an allocation base, typically based on time, employee classification, or materials used. Predicted rates are essential to ensure that the correct rate is applied to reflect your indirect costs accurately.
For example, let’s say that after calculations, you find that the government site overhead burden is 27.42%, and the G&A burden is 8.10%. To achieve this wrap rate, a predetermined cost build-up needs to occur. You must first create two distinct indirect cost pools, one for overhead and one for G&A expenses, and then create an allocation base to associate various costs with specific tasks or employees. Once this process is complete, you can use Deltek Costpoint ERP for Government Contractors to make your calculations more accurate. It will be easier to see what each task or employee category should charge for these indirect costs.
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