Most federal service contracts are priced on labor. Whether the contract is firm-fixed-price, time-and-materials or labor-hour, your price rests on hourly rates that must cover wages, benefits, overhead, company expenses and profit. This guide explains how to build those rates. For contract types and broader pricing steps, see pricing your first federal bid.
The building blocks
Direct labor rate
The hourly wage you pay the employee doing the work. Use your real payroll rates, or realistic market rates for positions you need to hire. Where a wage determination applies, the rate must be at least the determination's minimum for that classification. See wage determinations.
Fringe benefits
Costs tied to employees: employer payroll taxes, health insurance, retirement contributions, paid leave, workers' compensation. Usually expressed as a percentage of direct labor. On covered service contracts, required health and welfare, vacation and holiday benefits from the wage determination must be included.
Overhead
Indirect costs that support the work but are not charged directly to a single contract — for example, supervisors who cover several contracts, field equipment, training, or facilities used by the operations team. Expressed as a percentage of direct labor (or labor plus fringe, depending on how you build your pools).
General and administrative (G&A)
Costs of running the company as a whole: executive salaries, accounting, legal, business development, insurance, office rent. Usually applied to total cost input.
Profit or fee
Your margin. It is a business decision that should reflect risk — fixed-price work typically carries more risk than labor-hour work.
Fully burdened rates and wrap rates
A fully burdened rate is the hourly price you bill once all of the above are applied. A simple multiplicative build looks like this:
- Direct labor
- × (1 + fringe rate)
- × (1 + overhead rate)
- × (1 + G&A rate)
- × (1 + profit rate)
The wrap rate is the ratio of the fully burdened rate to the direct labor rate. If your wrap rate is 1.8, every dollar of direct wages becomes $1.80 of price. The exact structure — which costs go in which pool and what each rate is applied to — depends on your accounting system, so be consistent and document it. These figures are illustrative of the method, not benchmarks; your rates must come from your own books.
Calculating your indirect rates
- Pull a recent full year of financials.
- Sort costs into direct labor, fringe, overhead and G&A pools.
- Divide each pool by its allocation base (for example, fringe ÷ direct labor).
- Adjust for known changes: new hires, a new office, a big contract ending.
- Exclude costs the government does not allow if you are pricing cost-type work, and be aware of the cost principles in FAR Part 31. Fixed-price bids are not audited the same way, but realistic, defensible rates still matter.
From rates to a price
- Build a staffing model from the statement of work: positions, hours per year, shifts and coverage. See how to read Section C.
- Remember productive hours: an employee paid for a full year is not available every hour of it, because of leave and holidays. Make sure your coverage assumptions account for this.
- Multiply hours by fully burdened rates for each labor category.
- Add other direct costs: materials, equipment, vehicles, travel, subcontracts.
- Escalate for option years.
- Enter everything into the agency's pricing template exactly as instructed.
Reality checks
- Compare with market data. GSA's CALC+ tool (from buy.gsa.gov) shows awarded schedule labor rates for professional services; the Bureau of Labor Statistics publishes occupational wage data at bls.gov. Use them to sanity-check, not to set your price.
- Check prior awards. USAspending.gov and PinPeek's NAICS pages show past award values that hint at the price range.
- Realism. An unusually low price can lead evaluators to question whether you understand the work, or whether you can retain staff.
- Consistency. The staffing you price must match the staffing you describe in your technical volume.
Common pricing mistakes on services bids
- Using wages without fringe. Pricing only the hourly wage leaves benefits, taxes and insurance unfunded.
- Forgetting non-productive time. Leave, holidays, training and turnover all reduce the hours you can actually deliver.
- Underpricing supervision. Site leads and managers who cover the contract need to be priced somewhere — directly or in overhead.
- Ignoring transition costs. Hiring, onboarding, badging and equipment at start-up are real costs.
- Copying an incumbent's price. Their cost structure is not yours.
Document your assumptions
Keep a short pricing narrative with every bid: the wage sources you used, your indirect rates and how you calculated them, productive-hour assumptions, escalation and any risks you priced. If the agency asks questions, or you win and need to manage to the price, you will be glad you did.
Frequently asked questions
What is a wrap rate?
The ratio of the fully burdened hourly rate to the direct labor rate — how much each dollar of wages is "wrapped" with fringe, overhead, G&A and profit.
What is the difference between overhead and G&A?
Overhead supports the operational work (for example, field supervision); G&A covers running the company as a whole (for example, accounting and executive management). Both are indirect costs.
What is a good wrap rate?
There is no universal right number. It depends on your business, your accounting structure and the work. Calculate yours from your own financial records rather than using a rule of thumb.
Do I need an approved accounting system to bid services?
Not usually for firm-fixed-price or most time-and-materials work. Cost-reimbursement contracts require an accounting system adequate for determining costs (FAR 16.301-3).
This guide is general information, not legal advice. Rules change — always check the solicitation and the official sources linked here.