In my opinion, Wrap Rate is the most under appreciated statistic that you can look at when examining the health of your business. It gets to the core of what it really costs your business for every hour of work that your business does.
Let’s look at a simple example. A construction company has laborers doing work. It’s doesn’t matter what kind of work, building houses, repairing ships, digging trenches, it doesn’t matter. It’s real work that they do in the real world.
To make the math simple, we will say that for every hour that a laborer works, the construction company bills it’s customer $100 for that hour and it pays it’s employee $25 for that hour.
So… we all know that our construction company does not make $75 for every hour of work that they do. For starters, the employee probably has health insurance that the company pays for regardless of how many hours they work in a month. There are a great number of other costs that are required to be in business. There are employees in the office and in the accounting department at the construction company. There may be engineers and project managers. There are also salesmen, marketing costs, electricity at the office, the list goes on.
Over the course of the year the numbers for our construction company could be something like this.
50 laborers * 50 weeks * 40 hours per week = 100,000 hours in the year
100,000 hours in the year * $100 per hour = $10,000,000 in revenue
100,000 hours in the year * $25 per hour = $2,500,000 in direct labor costs
Assuming all other costs of $5,000,000.
Making Total Costs for the year = $7,500,000
Wrap Rate = Totals Costs / Direct Labor Costs
Wrap Rate = $7,500,000 / $2,500,000
Wrap Rate = 3
What does that mean?
That means for every hour the construction company bills out at $100, it costs them 3 times the $25 per hour they pay their laborer. (aka $75 per hour to do work) In the example the company’s billable rate of $100/hr is high enough to cover their costs as well as turn a bit of a profit.
Do you know your wrap rate for your business?
