Wrap Rates 201:
Wrap Rate Types & Calculation
Wrap rate calculation is where compliance meets mathematics. Contractors layer fringe, overhead, and general and administrative expenses to determine their fully burdened labor rates. Choosing between Total Cost Input (TCI) and Value-Added (VA) structures determines how costs flow through the organization and how equitably they are distributed across contracts. Understanding how different pools, bases, and rate structures interact enables more accurate pricing and better-informed business decisions.
How to Calculate a Wrap Rate
A wrap rate is constructed by layering indirect rates onto direct labor. The general formula is:
A cost wrap includes only indirect rates (fringe, overhead, G&A) and yields a breakeven labor rate. A price wrap adds fee/profit on top of the cost wrap, producing the total selling rate. A Price Wrap rate is calculated as:
Suppose a contractor has the following rates:
Fringe rate: 28%
Overhead rate: 45%
G&A rate: 12%
Fee/Profit rate: 10%
1. Cost Wrap = (1 + 0.28) × (1 + 0.45) × (1 + 0.12) ≈ 1.28 × 1.45 × 1.12 ≈ 2.08
This means each $1 of direct labor costs $2.08 when fringe, overhead and G&A are included.
2. Price Wrap = 2.08 × (1 + 0.10) = 2.29
For every $1 of direct labor, the company should bill $2.29 to cover all costs and fee/profit.
3. Apply to labor rate:
If the unburdened wage is $50/hour, the cost wrap rate yields $50 × 2.08 = $104/hour (breakeven). The price wrap rate yields $50 × 2.29 = $114.50/hour (fully loaded with fee/profit).
Example:
Wrap Rate Calculation
Different Types of Wrap Rates:
TCI vs Value-Add
While there are three major indirect rate cost pools that compose the labor wrap rate, there is a fourth indirect cost pool:
4. Material (MH). MH includes overhead‐level expenses such as labor, equipment, and systems required to receive, store, issue, inspect and control materials, as well as the expenses related to maintaining warehouse space, material control systems, and purchasing support.
The purpose of a material handling pool is to capture manufacturing or overhead expenses separately so that the cost of managing material flow is allocated proportionally to the contracts that actually consume materials. The general rule of thumb is that anything procured — be it materials or subcontracted labor — is burdened with material handling, although exceptions can apply based on companies specific accounting practices.
In GovCon, wrap rates can be structured in two ways: Total Cost Input (TCI) or Value-Added (VA). The difference between the two is what composes the “base” for the G&A rate and how G&A is applied:
Under a TCI base, every dollar of cost entering the organization receives a proportional share of G&A. Thus, the G&A base includes material handling, materials and subcontracts. This approach is favored by auditors because it is comprehensive, stable, and equitable. However, a TCI base can disadvantage firms that rely heavily on pass-through costs (e.g., large subcontracts or material purchases) because those high-value items inflate the base and thus dilute the G&A rate, even though those transactions do not consume much administrative effort. In a VA wrap rate, the G&A base includes material handling, but does not include materials and subcontracts.
This distinction affects how materials and subcontracts are loaded with the indirect rates. In a TCI pool, since materials and subcontracts are in the G&A base, then these costs will receive material handling and full G&A. The TCI load on materials/subcontracts often can be in excess of 10% — not including any applicable profit. In a VA pool, only the material and handling on the materials/subcontracts receives G&A; The actual materials and/or subcontracts are not burdened with G&A. This can often result in a cost load on materials/subcontracts below 5%. In either a TCI or VA pool, travel and other direct costs (ODCs) are typically treated the same and fully burdened with G&A.
In practice, a TCI base is the most common and the default. TCI is simpler and often preferred by auditors for smaller or service-based contractors where labor dominates total cost. A Value-Added base becomes advantageous when a company’s contract mix involves significant procurement activity — for example, large system integrators or construction primes. In that case, the Value-Added approach better reflects the true administrative workload, ensuring that G&A costs are allocated proportionally to where the company actually adds value. To draw a real-life example, we typically see the Veterans Affairs market contain predominantly TCI wrap rates. On the other hand, under Seaport-NxG, we see an increased use of VA wrap rates due to the pass-through restrictions on the contract.
The type of wrap rate that a contractor chooses should be strategic and has downstream implications. Because VA wrap rates have a reduced base (i.e., no materials or subcontracts), the G&A rate is higher than a TCI calculation. This results in a higher wrap rate on organic labor. In comparison, while a TCI calculation will have a lower wrap rate on organic labor, the pass-through costs on materials and subcontracted labor will be significantly higher as they are burdened with full G&A. Contractors should strategically examine their operations and business portfolio when making this choice.
How Many Wrap Rates Can a Company Have?
Each government contractor may have multiple wrap rates, and that is both common and allowable under federal cost accounting principles. There is no regulatory requirement limiting a company to one wrap rate. Instead, FAR 31.203 and CAS 418 require that indirect costs be grouped logically and allocated to cost objectives in reasonable proportion to the benefits received. Together, these rules form the foundation for determining whether a contractor should have one or multiple wrap rates.
Contractors must structure their indirect cost pools and allocation bases to reflect the true economic and operational relationships between activities and their supporting expenses. If a single rate would distort cost recovery across materially different business lines or operating environments, the company is expected to maintain separate pools and rate structures to ensure equitable allocation. Smaller firms may use a single corporate wrap rate for simplicity, while larger organizations typically maintain separate wrap rates for distinct business units or cost centers whose activities exhibit different cost behaviors.
Lines of Business, Cost Centers, & Profit Centers
From a financial governance perspective, a line of business (e.g., professional services, system integration, logistics, or manufacturing) represents the broadest operational category. Within that, companies often define business units or profit centers — organizational segments responsible for generating revenue and managing profitability. Each profit center may consist of one or more cost centers, which accumulate and allocate costs according to their operational functions.
In government contracting, these financial structures align with cost accounting principles under CAS 403 and 418, where indirect expenses must be accumulated and allocated within homogeneous cost groupings. The relationship is hierarchical:
Line of Business → Business Unit → Profit Center → Cost Center → (potentially associated) CAGE Code
A Commercial and Government Entity (CAGE) code often serves as the external contract-level identifier for one or more of these entities but does not, by itself, dictate cost accounting segmentation.
Creating distinct indirect cost pools can be both compliant and strategic as well. This is why larger federal contractors often maintain separate wrap rates for “services” and “solutions”, even within the same CAGE code. Service bids — such as professional, analytical, or advisory support — tend to be labor-driven, with higher overhead from personnel, training, and travel but lower material content. These contracts are more price sensitive. Solution bids, on the other hand, typically combine labor with technology, integration, or equipment, creating a different cost-behavior profile. These efforts rely more heavily on engineering, subcontracted material, and capital assets, and thus the overhead and G&A relationships differ substantially.
Because the cost drivers, facilities usage, and sales support differ so substantially between these models, maintaining distinct wrap rate structures within the same CAGE code ensures that indirect costs are allocated equitably and reflect the true economics of each offering. In practice, it is common for a single CAGE code to have both a services wrap rate and a solutions wrap rate. This approach maintains compliance with CAS 418’s homogeneity requirement while supporting more accurate pricing and cost recovery. From a strategic perspective, the companies get the advantage of having a more aggressive wrap rate for service bids that are more price competitive, as opposed to solution bids where the wrap rate is not the primary lever.
Consider a contractor performing both software engineering and construction contracts.
The software division operates primarily with remote employees, incurs substantial marketing and proposal costs, and has minimal facilities expense.
The construction division, however, maintains heavy equipment, uses large on-site labor forces, and relies heavily on field supervision and material handling.
While both share a common fringe pool — since all employees receive similar benefits — the overhead and G&A cost drivers differ significantly. Under CAS 418, these differences create non-homogeneous relationships between the cost objectives and their supporting costs. As a result, the contractor should establish separate overhead pools for software and construction, and likely separate G&A pools. This ensures that each line of business absorbs only the indirect costs that it actually causes or benefits from.
Example:
When Multiple Pools are Required
Variations Within a Cost Center or CAGE Code
A CAGE code often represents a logical boundary for indirect cost allocation, but it does not mandate a single wrap rate. Each CAGE code typically corresponds to a cost or profit center within the corporate hierarchy, meaning it may include multiple wrap rates derived from its internal cost environment. For example, within a single CAGE code, contractors may have different fringe or overhead rates:
Fringe Rates: Full-time, part-time, Service Contract Act (SCA), union, and OCONUS (Outside Continental United States) employees often receive different benefit structures. Since fringe costs are driven by compensation and benefits, each group may warrant a unique fringe rate to reflect true cost differences.
Overhead Rates: Contractors may have a single overhead rate or may maintain multiple overhead rates to reflect varying work environments — such as client-site, company-site, or shop/manufacturing. Each environment has different overhead cost drivers. Client-site work may have minimal facility expense, whereas company-site work includes more utilities, rent, and administrative support.
Each rate structure reflects a different cost driver — benefits for labor groups, or facilities and supervision for work environments.
When combined, these different fringe and overhead structures can yield several unique wrap rate calculations within a single cost center or CAGE code. Each wrap rate represents the total cost multiplier for a particular combination of fringe, overhead, G&A, and fee — ensuring costs are distributed fairly and transparently across contracts.
In practice, a contractor’s number of wrap rates depends on the complexity of its operations and the diversity of its cost structures, not on company size or regulatory limits. The key is consistency and equity: As long as each pool and rate reflects a logical cost relationship, the structure — whether one or many — remains fully compliant with the FAR and CAS.
Let’s discuss your next opportunity!
GET IN TOUCH
We partner with capture teams, pricing leads, and executives who need sharp, strategic insights to gain a winning edge in competitive pursuits.
