By Vern Edwards on Tuesday, October 01, 2002 - 01:34 pm:

Ceiling rate is an informal term which usually means a contractual agreement to the effect that the contractor's compensation is limited to either an agreed-upon rate or an actual rate, whichever is less. It can refer to a direct cost, such as a labor rate, or an indirect cost, such as an overhead rate.

By AnonYmus on Tuesday, October 01, 2002 - 02:04 pm:

Anon--

1. "Wrap rates" generally refer to labor rates that are calculated to include all costs -- such as salary, fringe benefits, overhead, G&A and profit. In some cases, they also include a pro rata share of ODCs and/or material costs. Often, a wrap rate can be calculated by dividing (a) total price, or (b) total labor costs through G&A & profit, by the number of labor hours (or hours by category in some cases).

2. As Vern correctly noted, ceiling rates are different. The ceiling rate is explicitly described in contract Ts & Cs. Normally, the ceiling rate sets the top limit for the indirect rate that the contractor may bill in a cost-plus or FPI contract. For instance if the contractor has a provisional overhead rate of 100 percent but its final overhead rate (calculated after the books close) is 150 percent, then it bills the 150 percent. But if the contract has a ceiling rate of 125 percent, the contractor bills 125 percent because that is the ceiling.

Again, as Vern correctly noted, ceilings can also apply to other elements of cost, though I have seen them most often applied to indirect cost rates.

By Anonymous on Thursday, October 03, 2002 - 10:45 am:

Thanks, Anon and Vern!
So, let me get this straight, wrap rates are burdened, because they are a compilation of all costs -- even if you were able to calculate a wrap rate, you would still be unable to "back into" the method a contractor used to formulate it. In other words, knowing the wrap rate doesn't necessarily tell you anything about the contractor's underlying operation. If you were trying to bid against that contractor, you might be able to duplicate the wrap rate monetarily, but you would not be able to duplicate the exact method of formulating that rate (you would not know what percentage of the wrap rate is being allocated to various expenses).

Ceiling rates, on the other hand, are just a maximum rate that the contractor can charge. Since the ceiling rate = the profit margin, I assume it's more sensitive than a wrap rate. Is that correct?

By Vern Edwards on Thursday, October 03, 2002 - 02:09 pm:

Anonymous:

As AnonYmus defined it, a "wrap rate" is a burdened rate, i.e., it includes overhead and profit. If all you have is the rate, then you cannot determine its constituent elements.

Ceiling rate does not equal profit margin.

By AnonYmus on Thursday, October 03, 2002 - 02:41 pm:

I agree with Vern. The wrap rate is a handy metric but doesn't provide much insight into the details.

Ceiling rate does NOT equal profit margin. The formula for calculation a project's gross margin is

Revenue less Direct Costs

Further,

Gross Margin less indirect costs (esp. G&A) equals op profit.

The ceiling rate helps to establish the top-line revenue number (in conjunction with allowable direct costs) but, by itself, does not determine profit.

Ceiling rates are used by customers to protect themselves against significant price increases that might stem from growth of the contractor's indirect cost rates. They can also operate in conjunction with price realism analyses.

For example, if a contractor is proposing an indirect cost rate that is significantly lower than what recent history would lead one to expect, then a ceiling rate would protect against the contractor "buying in" but subsequently "getting well" through billing the final, actual indirect cost rates.

Does this help clarify?

By Anon on Thursday, October 03, 2002 - 03:56 pm:

And if a contractor experiences indirect costs higher than the established ceiling, then it would have a negative impact on profit/fee.