Have you ever heard the term “wrap rate” or FBLR and thought, what is that?
I bet you’ve heard this term many times in your CovGon career, but do you really understand what a wrap rate is?
Very simply, it’s the multiplier between what an employer pays for an employee’s service and the price that the employer charges the client.
For example, John gets paid $50 / hr and John’s employer charges the customer $100 / hr. John’s employer’s wrap rate is 2.0 (100 / 50.) Make sense so far? Great! Now let’s do some more digging into what a wrap rate entails.
So while John gets paid $50 (less applicable taxes) directly from his employer, there are some additional costs associated with his employment. Some of these costs are mandated by law (payroll taxes/FICA/SUTA) and some of these costs are employer choices (insurance, 401K plans, other benefits) in order to attract and retain a top-notch workforce. These indirect costs are called fringe costs. Let’s say this is 40%.
There are other costs that are necessary for the employer to pay to equip John with the tools and an office he needs to perform the work for the client. For example, John will need a computer and a smartphone in order to effectively serve the client and the employer pays for this. Perhaps the employer will also need an office (and associated utilities) for John to work out of along with his teammates and maybe to host clients from time-to-time. These indirect costs are called overhead (OH) costs. Let’s say this is 20%.
There are other costs of doing business such as marketing and travel expenses, back office functions and outsourced consulting services (legal & accounting) that are necessary to run the business. These costs are call general and administrative (G&A) costs. Let’s say this 10%.
Lastly, companies need to make a profit and all these factors (direct labor, fringe, OH, G&A, and profit) are all considered in a wrap rate.
Direct labor + fringe costs + OH costs + G&A costs + profit
$50 * 1.4 *1.2 *1.1 * 1.08
$50 + $20 + $14 + $8.4 + $7.4 = $100 (rounded)
I believe that wrap rate is indicative of a company’s culture and impacts their ability to compete. Careful indirect rate management is key to be able to afford to execute to a given wrap rate.