Money For Old Wrap Rates (5-27-10)

A couple of weeks ago, a customer showed me a Wrap Rate report on one of their competitors that they had purchased over the Web. This document purported to provide the target company's prevailing on- and off-customer site wrap rates in two flavors, DoD-specific and non-DOD specific. My customer had paid several thousand dollars for this product, for which they received 3 pages of unsubstantiated company wrap rate data benchmarked against unsubstantiated market segment average data. And this as an afterthought to a several-page litany of unwanted, and mainly irrelevant, contract information. What a crock!

Perhaps if you had just come down from Mars and wanted to find out the range of possible wrap rates, this could be helpful. (By the way, wrap rate uplifts range from a low in the 30th percentile, that barely covers statutory taxes, to 200%, or more, for the C-level trenchcoat and briefcase brigades.) But if you are looking for the wrap rate that a specific competitor is likely to bid for a specific opportunity, you won't find it by buying anyone's view of history. To accomplish that goal, you will have to understand opportunity specifics and the future we all face. Here's why...

In our seminar "How To Do Competitive Analysis & Price To Win (PTW)," we stress that when pricing bids (as either an incumbent or an insurgent), the Wayne Gretzky rule should be followed. A sports reporter once told the hockey great that his success was down to always being where the puck was. In his response, Gretzky provided great insight by stating that his success was not due to being where the puck was, but being where it was going to be. So it is with wrap rates. Anyone who bids a 5-year (or longer) contract using his own or a competitor's historical, or even prevailing, wrap rates, is a loser. The secret is to bid tomorrow's wrap rates based on the assumption that the job will be won.

There is a lot more to this issue. PTW clients often ask what Competitor X's wrap rate is, as if knowing this would be helpful in developing a pricing strategy. Wrap rates alone, however, are relatively useless information. First, there is the issue of teaming. With the exception of a small business bidding a small job, most bid teams comprise multiple member companies that bid composite labor rates for each labor category, never a one-size-fits-all wrap rate.

Moreover, a low wrap rate can be achieved by staffing a project with very high-salary individuals. Many fringe (e.g., healthcare) costs and overhead uplifts are fixed dollar amounts; consequently, they form a smaller percentage of high salaries leading to a lower wrap rate. Thus, we have a situation where a low wrap rate is associated with a (relatively) high price. The converse could be true as well: a high wrap rate might be associated with a low price.

Furthermore, since an overall wrap rate is a weighted average of a number of individual wraps, it can be skewed higher or lower as a result of the mix of individuals involved. In this connection, it must be noted that a wrap rate developed for one labor category mix cannot be used to uplift the direct labor costs of a different mix.

PTW and pricing professionals typically examine as many as 50 different micro wrap rate elements to understand how bids should be priced. The guiding principle is this: PTW and bid pricing should be based on where reality will be, not where it has been, or is presently.

Good luck and happy hunting!