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Cost and Pricing

Wrap Rates - Multipliers - Whats the Deal?

Paul Gunn Sr

— 1 min read

INQUIRY: I have seen different options for developing Wrap Rates or Multipliers using compounding factors.

Is there a difference in the resultant Wrap Rate or Multiplier based on a firms choice to compound using a base for the Overhead Pool of either 1) Direct Labor or 2) Direct labor + Fringe Benefits?

RESPONSE: The quick and simple answer is no. But the devil is in the details. So if you dare, read on because it gets very interesting.

What is a Wrap Rate or Multiplier? It is a method of calculating a factor that is typically applied to a direct labor base to determine the fully burdened cost (when factor excludes fee) or price (when factor includes fee) to the customer.

For example: If I have a Wrap Rate of 2.1 (includes fee) and my base Direct Labor is $10.00 per hour, then my price to the customer is $21.00 per hour (2.1 x $10.00).

Now, some firms use different bases for their Overhead Pool calculation. Therefore, in their development of a Wrap Rate, they compund their numbers slightly differently. The question proposed is, does it make a difference in what method of compounding they choose?

Let's look at two contractors: [Contractor 1 (C1)] uses Direct Labor (D/L) as a base and [Contractor 2 (C2)] uses D/L+Fringe as their base.  If, for illustrative purposes, we assume all Indirect Rates are the same for both contractors, than the compounding method chosen would make a difference in the resultant wrap/multiplier factors.

However, the difference is because C2's costs are higher than C1's, and not because they used one method of compounding over the other.

Check it out for yourself: Lets convert the indirect rate percentages into dollars using the different Overhead bases for each contractor. Remember we are assuming all of the rates used are equal.  Due to its' length and details, I have created an excel spreadsheet that shows the comparison in greater detail.  Follow the link here to download the spreadsheet.  Take your time, analyze, and enjoy the learning experience!

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