Every labor-based government price starts with direct labor: the actual cost of the person doing the work, expressed as an hourly rate. That is only the starting point. What you bid is direct labor multiplied by a wrap rate, a multiplier that adds back everything direct labor alone does not cover: fringe benefits, overhead, general and administrative costs (G&A), and profit. Skip that multiplication and you are quoting a number that was never meant to stand on its own.
What lives inside the wrap rate
Fringe covers the cost of employing someone beyond their paycheck: payroll taxes, health insurance, paid leave, retirement contributions. Overhead covers the cost of supporting the people who do billable work: office space, equipment, supervision, indirect labor. G&A covers running the company itself: accounting, business development, executive time, the costs that exist no matter which contract you are staffing. Profit is what makes taking the risk worth it at all. Every one of those cost pools is specific to your business, so a multiplier that works for another company's cost structure will not describe yours. An accountant who understands government indirect rates, or an APEX Accelerator advisor, can help you build your own buildup rather than borrowing a number that sounds right.
Why your commercial rate underprices government work
Many small businesses bid their normal commercial hourly rate on a government proposal and assume it already includes enough margin to be safe. It often does not, because a commercial rate was priced for commercial risk and commercial payment terms, not for the specific cost structure and compliance overhead a government contract can carry: timekeeping systems, specific accounting requirements, wage floors on certain contract types, and payment cycles that are reliable but not instant. Pricing from your commercial rate instead of your actual wrap rate is one of the most common ways a small business wins a contract and then discovers it is losing money on every hour worked.
The trap of buying a contract you cannot afford to perform
Underpricing to win is a real trap, not a beginner's mistake reserved for someone else. A contract you win at a price below your true cost does not become profitable because you wanted the win. It becomes a multi-year obligation to deliver labor at a loss, with a government customer who expects the same performance regardless of whether your price was realistic. Winning the wrong price is worse than not winning at all, because losing costs you a proposal's worth of hours, and an underpriced award costs you those same hours again, every period of performance, for as long as the contract runs.
Price realism cuts both ways
A price that looks too low does not automatically read as a strength. On many procurements, especially where the work is complex or cost-reimbursable, evaluators check price realism: whether your price is credible given what you proposed to do. A number far below what the work should cost can get flagged as a risk that you do not understand the requirement, or scored down, or questioned directly during evaluation, rather than rewarded as the cheapest offer. See LPTA vs best value tradeoff for how the evaluation structure affects how much that scrutiny matters to your specific bid.