TCI vs Value-Added Wrap Rate Structures

TCI vs. Value-Added Wrap Rate Structures: A Strategic Pricing Lever in GovCon

Every government contractor knows that winning bids isn’t just about a great technical proposal – it’s also about getting the price right. One often overlooked strategic lever in pricing is the choice of wrap rate structure, specifically whether to use a Total Cost Input (TCI) or a Value-Added (VA) base for calculating your indirect rates. This decision, essentially how you structure your General & Administrative (G&A) cost base, can have far-reaching impacts on competitive pricing, subcontractor strategy, and bid positioning. It’s a choice that capture, pricing, and finance professionals in the GovCon sector should weigh carefully and collaboratively.

Understanding TCI vs. VA Wrap Rate Structures

In a TCI-based wrap rate, every dollar of cost flowing through the organization – from direct labor to materials and subcontractor costs – receives a proportional share of G&A. In other words, the G&A “base” includes all costs (labor, fringe, overhead, travel, Other Direct Costs, materials, and subcontract dollars). This comprehensive base means the G&A rate percentage itself is relatively lower, since it’s spread across a broad base. TCI is the most common and default approach for many contractors, especially smaller firms or service-centric businesses where labor dominates costs. Auditors (like DCAA) often prefer TCI for its simplicity and perceived equitability in allocating overhead costs.

 By contrast, a Value-Added base wrap rate deliberately excludes direct materials and subcontract costs from the G&A base (while still including any material handling overhead on those items). G&A is applied only to the portions of work where the company “adds value” – typically direct labor and related indirect costs. This yields a much narrower base for G&A allocation, resulting in a higher G&A percentage applied to internal costs, but no G&A burden on the pass-through costs of materials and subcontracts. Both TCI and VA structures are compliant under FAR 31.203 and CAS 418; the difference lies in how they reflect your business model and contract mix.

Competitive Pricing Implications

Choosing TCI vs. VA has direct implications on your pricing competitiveness. Under a TCI structure, pass-through expenses like major subcontracts or purchased materials carry the full freight of your G&A load. For example, in a TCI model a subcontractor’s cost might be burdened with material handling plus the full G&A rate – often adding 10%+ on top of the raw subcontract cost (before any profit). In a VA model, only the material handling portion on that subcontract is subject to G&A, and the subcontract dollars themselves are not burdened by G&A – yielding a much lower effective markup, sometimes under 5%. The net effect: if your proposal involves significant material or subcontract content, a VA structure can make your pass-through costs noticeably cheaper to the customer than they would appear under a TCI structure. This can be a decisive advantage in price-sensitive competitions with large procurement components.

 On the other hand, because the VA approach removes those pass-through costs from the G&A base, the G&A rate on your organic labor will be higher to recover the same pool of indirect costs over a smaller base. That means your fully burdened labor rates (wrap rates on your in-house effort) will come out higher than they would under TCI. For labor-intensive bids with minimal subcontracting, a TCI wrap rate often results in a more competitive labor rate, whereas a VA contractor might appear expensive on labor. Thus, the optimal structure aligns with your competitive strategy and market: use TCI when you need to keep labor rates low and you have minimal pass-through costs, and consider VA when large subcontract or material dollars are in play and total bid price must stay low on those items.

 This strategic lever becomes especially apparent in certain markets. For instance, many pure services contracts (e.g. in the Veterans Affairs sector) predominantly use TCI rates, since pass-throughs are limited and keeping labor costs low is key. In contrast, some large IDIQ vehicles or systems integration programs (like the Navy’s SeaPort-NxG) see increased use of VA structures precisely because they involve significant pass-through restrictions or large material/ODC/travel/NTE content. The choice of structure can thus directly impact how competitive your pricing is in a given context, and savvy GovCon firms treat it as a strategic decision, not just an accounting preference.

Subcontractor Strategy and Teaming Considerations

Your wrap rate structure also affects how you strategize the use of subcontractors and partners on a bid. If you operate with a TCI wrap rate, every dollar you subcontract out will still carry your full G&A in the cost build-up. This can make extensive subcontracting a more expensive proposition in your bid model, potentially influencing your teaming decisions. For example, as a prime you might think twice about subcontracting large portions of work if each subcontracted dollar is marked up by your overhead – it could price you out unless the subcontractor brings exceptional value. Some primes in TCI mode have to find creative workarounds (such as limiting fee or using contract-specific exclusions) to minimize the cost impact of big subcontractor pass-throughs, which isn’t always sustainable.

 With a VA structure, however, you can incorporate significant subcontractor content with far less cost penalty. Because only the value you add to subs (like managing them, via a material handling pool) gets G&A, you can more freely allocate work to teaming partners without bloating the Total Evaluated Price. In a competitive teaming scenario, this means a VA-structured prime can offer more workshare to specialized subcontractors and still keep the overall bid price lean. The distinction between TCI and VA is therefore vitally important in understanding “team wrap rates” – the blended rate of prime and subs in your bid. It influences not only cost structure but also how you negotiate workshare: a TCI prime might prefer to perform more work in-house (to avoid heavy markup on subs), whereas a VA prime can subcontract a larger portion while remaining price-competitive. Aligning your indirect rate structure with your subcontracting strategy can be a subtle but powerful way to position your team optimally for a win.

Conclusion and Next Steps

Choosing between a TCI or Value-Added wrap rate structure is more than an accounting technicality – it’s a strategic lever that can tilt the playing field in a competitive government bid. The distinction influences how you price your work, how you partner with other companies, and how you recover your costs over the long run. By understanding the trade-offs and aligning the decision with your contract mix, you can optimize both your bid competitiveness and your cost recovery. There is no one-size-fits-all answer to whether TCI or VA is “better” – it truly depends on your contract mix and business profile.

Interested in learning more? This discussion is just one slice of the broader world of wrap rate strategy. To dive deeper into wrap rate fundamentals, advanced pricing tactics, and real-world examples, download the full “Government Wrap Rates: 100-, 200-, and 300-Level Crash Course” white paper from BlackFlag Advisors. It’s available in our Resources section and packed with insights on TCI vs. VA, cost allocation, FAR/CAS compliance, and using wrap rates to sharpen your competitive edge. Equip yourself and your team with the knowledge to bid smarter – access the full white paper now and take your wrap rate mastery to the next level.