How direct labor becomes a fully loaded billing rate — the cascade from wages through fringe, overhead, G&A, and profit.
A wrap rate is the fully loaded hourly cost of an employee—starting from their direct labor rate and "wrapping" on indirect costs and profit until you arrive at the rate you charge the government.
Every dollar of direct labor carries overhead that the company incurs but doesn't bill separately. The wrap rate captures all of it in a single number.
The buildup follows a specific sequence. Each layer adds to the one before it:
| Layer | What It Covers | Example |
|---|---|---|
| Direct Labor Rate | The employee's hourly wage or salary equivalent | $45.00/hr |
| + Fringe | Benefits: health insurance, PTO, 401(k), payroll taxes, workers comp | $15.75 (35% of labor) |
| = Loaded Labor | Labor + fringe | $60.75 |
| + Overhead | Facilities, IT, management, tools, training—costs of running the operation | $15.19 (25% of loaded labor) |
| = Fully Burdened | All indirect costs applied | $75.94 |
| + G&A | Corporate overhead: exec salaries, accounting, legal, BD, rent for HQ | $7.59 (10% of total cost input) |
| = Total Cost | Everything the company spends to deliver this hour | $83.53 |
| + Fee / Profit | The margin built into the rate | $8.35 (10% fee) |
| = Wrap Rate | What you charge the customer | $91.88/hr |
Indirect rates are applied in a strict sequence called the cascade:
If you apply them in the wrong order, the math breaks. Fringe doesn't include overhead, and overhead doesn't include G&A—each pool has its own base.
Provisional vs. Actual Rates: Your company submits provisional (estimated) indirect rates to DCAA at the start of each year. At year-end, actual rates are calculated from real costs. The difference creates an over/under-recovery that gets trued up. Arcvue computes rates from your actual financial data—DCAA provisionals are stored separately in Vehicle Rate Pools for pricing compliance.
SCA vs. Non-SCA: Service Contract Act (SCA) employees have government-mandated minimum wages and benefits (Health & Welfare, vacation). This means SCA fringe rates are typically higher than non-SCA. Your wrap rate differs depending on which labor type you're pricing.
Why wrap rates vary by contract vehicle: Different vehicles use different rate structures. A GSA Schedule has fixed negotiated rates. An OASIS+ task order builds rates from your current provisionals. A cost-plus contract passes through actual costs. The vehicle determines which rates apply and how they're presented.
The Operator's View
Wrap rates are simultaneously the most improperly cited number in GovCon and the least properly understood. Everyone knows roughly what a wrap rate is. Few can actually build one from its components.
The common misread is that a high wrap rate signals high-end services or a premium talent base. There’s a sliver of truth there—fringe rates do rise when you’re competing for technically coveted personnel. But that’s where it ends. For a services business, a wrap rate is better read as a measure of infrastructure bloat or a lack of multi-functional talent.
The math makes this clear: direct labor cost sits in the denominator, which already normalizes for talent level. Higher-wage employees arguably require less indirect support per FTE of revenue generated—meaning scale should compress your wrap, not expand it. What actually happens in most firms is the opposite: headcount gets thrown at problems, talent gets siloed into narrow lanes, and cross-training gets deprioritized. The wrap creeps up and nobody connects it back to those decisions.
Like most tools, the wrap rate is only as useful as the person wielding it. In the wrong hands—or hands that don’t understand what’s actually driving the number—it becomes a vanity metric instead of a management lever.