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Wrap Rates for Federal Contractors, Explained

A wrap rate is the number every federal contractor needs to know and most can't confidently defend. This is the version I wish someone had written for me the first time a government customer asked for a labor category breakdown.

What is a wrap rate?

A wrap rate — also called a loaded labor rate or fully-burdened rate — is the total hourly cost of an employee working on a federal contract. It's what you actually pay to have that person sitting in the seat for an hour, including everything that wraps around their base salary.

Specifically, it's direct labor plus every layer of indirect cost that touches that labor:

Why federal contractors need it

Three reasons, and you'll bump into all of them.

Proposals. Every cost volume on a federal bid needs loaded rates. If you propose a labor category at $110/hr, you have to show the government how that number was built — direct labor plus each indirect layer, each with a documented methodology. “Because my accountant said so” is not a methodology.

Billing. Cost-plus and T&M contracts bill at provisional rates monthly and reconcile to actuals at year-end. If your wrap rate is wrong, you're either leaving money on the table or over-billing the government. Both are bad, in different ways.

Audit. DCAA (Defense Contract Audit Agency) will eventually ask how your rates are built. Not if you've ever worked on a cost-type contract — when. They want to see pool definitions, allocation bases, and reconciliations. A spreadsheet that only outputs a number doesn't survive.

Cascading vs. additive: the one thing people get wrong

This is the single most common mistake I see. Contractors plug their rates into a simple formula and get a number that looks reasonable, but they're using the wrong structure and don't know it.

Cascading (what most federal contractors actually use)

Each layer compounds on the previous running total:

Loaded = DL × (1 + Fringe) × (1 + OH) × (1 + G&A) × (1 + Fee)

Example: $50 direct labor, 30% fringe, 40% overhead, 8% G&A, 10% fee.
$50 × 1.30 = $65 (with fringe)
$65 × 1.40 = $91 (with overhead)
$91 × 1.08 = $98.28 (with G&A)
$98.28 × 1.10 = $108.11 (loaded rate)

The effective indirect rate is 116.22% — you more than doubled direct labor. That feels high until you realize it's normal for federal work.

Additive (less common, usually wrong)

Each percentage applies directly to direct labor, no compounding:

Loaded = DL × (1 + Fringe + OH + G&A + Fee)

Same inputs: $50 × (1 + 0.30 + 0.40 + 0.08 + 0.10) = $94. That's $14 lower than the cascading version.

If you bid using additive when your actual cost structure is cascading, you're under-pricing by ~13%. On a $5M contract that's $650K of margin evaporating. If you reconcile to actuals at year-end and your actual rates are cascading, you owe the government the difference.

Cascading is the default for federal contractors. Use additive only if your approved cost accounting structure says so, and document why.

Typical rates by contractor size

These are ranges, not targets. Your rates depend on your cost structure, labor mix, overhead burden, and customer base.

If your multiplier is below the range for your size, your rates may be under-recovering indirect cost. If it's above, you're probably winning fewer bids than you should. Neither is automatically wrong, but both deserve a hard look.

Common mistakes

1. Mixing up pools and rates

A pool is a bucket of costs. A rate is a percentage — pool cost divided by allocation base. People say “my overhead rate is 40%” when they mean “my overhead pool was $400K against a $1M direct labor base last year.” Those are different statements and DCAA cares which one you mean.

2. Putting the wrong costs in the wrong pool

Business development labor is G&A. Project management labor is often overhead. Direct-charged labor that actually supports multiple projects is probably overhead, not direct. Mis-pooling is a leading cause of questioned costs in audit.

3. Using provisional rates as if they're final

The rates you bill with during the year are provisional. Your actual rates are whatever falls out of your books when the year closes. You owe the delta back to the government (or they owe you). Treating provisional as final is how you end up with six-figure disallowances two years later.

4. Forgetting the allocation base

Fringe typically allocates on total labor. Overhead allocates on direct labor. G&A allocates on total cost input (sometimes value-added). Change the base, you change the rate. Pick one, document it, don't switch mid-year.

5. Building rates once and never revisiting

Your labor mix changes. Your overhead grows. Your contract mix shifts. A wrap rate calculated in 2023 is not your wrap rate in 2026. Recalculate at least annually, and update provisional rates whenever your actuals are drifting >5% from provisional.

Try the calculator

Run your numbers through the Wrap Rate Calculator. Toggle cascading vs additive to see the delta. Share the URL or download the PDF for your proposal files.

If you're setting up indirect rate pools for the first time, or reworking them for DCAA audit, that's a different problem than calculation — it's a policy and compliance problem, and spreadsheets don't solve it. FieldLedger's Indirect Rate Engine handles pool definition, cost allocation, and provisional rate tracking for federal contractors.