By Anif Mehraj
The wrap rate formula compounds fringe, overhead, G&A and fee onto direct labor. See the worked build-up that turns a $50.00 hour into a $98.28 bill rate. The wrap rate formula multiplies fringe, overhead, G&A and fee onto a direct labor rate rather than adding them. Here is the arithmetic, worked line by line from a $104,000 salary to a billable hour. The wrap rate formula multiplies. It does not add. Start with the direct labor rate, then layer fringe, overhead, general and administrative expense, and fee. Apply each layer to the running subtotal, never to the original salary. Written out, the wrap rate equals (1 + fringe) x (1 + overhead) x (1 + G&A) x (1 + fee). Multiply the direct labor rate by that number and you have the fully burdened hourly rate you put in the bid. A $50.00 direct labor rate carrying a 30 percent fringe, 25 percent overhead, 12 percent G&A and 8 percent fee bills at $98.28. That is a wrap of 1.97. Most rate errors we see are not errors in the pools. They come from adding the percentages instead of compounding them. The Wrap Rate Formula The FAR tells you what the loaded rate must contain. FAR 16.601(b) (https://www.acquisition.gov/far/16.601) describes a time-and-materials contract as paying for "Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit." The payment clause says the same thing in one line. FAR 52.232-7 (https://www.acquisition.gov/far/52.232-7) (Nov 2021) states that "The hourly rates shall include wages, indirect costs, general and administrative expense, and profit." So four things sit on top of the salary. The wrap rate is the ratio between the loaded rate and the unloaded one. ! A rate build-up staircase rising from a $50.00 direct labor rate through fringe, overhead, G and A, and fee to a $98.28 billing rate (https://mhhifytmrlyksfrjacvi.supabase.co/storage/v1/object/public/blog-images/2026/10/wrap-rate-formula-figure.png) Each layer multiplies the running subtotal, so the four percentages compound to 1.97 instead of adding to 1.75. Three of the four layers are indirect rates. The fourth is fee, and fee behaves differently because it is not a cost. On a cost-plus-fixed-fee contract the fee also carries a statutory ceiling. FAR 15.404-4(c)(4)(i) (https://www.acquisition.gov/far/15.404-4) caps it at 15 percent of estimated cost for experimental, developmental or research work. Architect-engineer design services cap at 6 percent of estimated construction cost. For "other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent" of estimated cost excluding fee. A Worked Calculation Take an engineer on a $104,000 salary. Divide by 2,080 hours and the direct labor rate is $50.00. Now apply the pools in order. | Step | Rate | Base | Amount | Running total | |---|---|---|---|---| | Dir
The wrap rate formula multiplies fringe, overhead, G&A and fee onto a direct labor rate rather than adding them. Here is the arithmetic, worked line by line from a $104,000 salary to a billable hour.
The wrap rate formula multiplies. It does not add. Start with the direct labor rate, then layer fringe, overhead, general and administrative expense, and fee. Apply each layer to the running subtotal, never to the original salary. Written out, the wrap rate equals (1 + fringe) x (1 + overhead) x (1 + G&A) x (1 + fee). Multiply the direct labor rate by that number and you have the fully burdened hourly rate you put in the bid. A $50.00 direct labor rate carrying a 30 percent fringe, 25 percent overhead, 12 percent G&A and 8 percent fee bills at $98.28. That is a wrap of 1.97. Most rate errors we see are not errors in the pools. They come from adding the percentages instead of compounding them. The Wrap Rate Formula The FAR tells you what the loaded rate must contain. FAR 16.601(b) (https://www.acquisition.gov/far/16.601) describes a time-and-materials contract as paying for "Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit." The payment clause says the same thing in one line. FAR 52.232-7 (https://www.acquisition.gov/far/52.232-7) (Nov 2021) states that "The hourly rates shall include wages, indirect costs, general and administrative expense, and profit." So four things sit on top of the salary. The wrap rate is the ratio between the loaded rate and the unloaded one. ! A rate build-up staircase rising from a $50.00 direct labor rate through fringe, overhead, G and A, and fee to a $98.28 billing rate (https://mhhifytmrlyksfrjacvi.supabase.co/storage/v1/object/public/blog-images/2026/10/wrap-rate-formula-figure.png) Each layer multiplies the running subtotal, so the four percentages compound to 1.97 instead of adding to 1.75. Three of the four layers are indirect rates. The fourth is fee, and fee behaves differently because it is not a cost. On a cost-plus-fixed-fee contract the fee also carries a statutory ceiling. FAR 15.404-4(c)(4)(i) (https://www.acquisition.gov/far/15.404-4) caps it at 15 percent of estimated cost for experimental, developmental or research work. Architect-engineer design services cap at 6 percent of estimated construction cost. For "other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent" of estimated cost excluding fee. A Worked Calculation Take an engineer on a $104,000 salary. Divide by 2,080 hours and the direct labor rate is $50.00. Now apply the pools in order. | Step | Rate | Base | Amount | Running total | |---|---|---|---|---| | Dir