Point of Total Assumption (PTA) - Interesting Facts

In this article, we'll learn some interesting facts about Point of Total Assumption (PTA) by working through some numerical problems. Before you read further, I suggest you review the PTA Formula.


The formula for PTA is:

PTA = (Ceiling Price - Target Price) / BSR + Target Cost

Example 1

Target Cost: $60,000
Target Fee: $15,000
Target Price: $75,000
Ceiling Price: $100,000
Buyer-Seller Share Ratio: 60:40

Q1.1 What is the PTA?
Q1.2 How much does the buyer pay when the actual cost reaches PTA?
Q1.3 How much profit/loss does the seller make when actual cost reaches PTA?

A1.1 By substituting the values in the PTA formula above, we get:

PTA = (100,000 - 75,000) / 0.6 + 60,000
= 25,000 / 0.6 + 60,000
= 41,666 + 60,000
= $101,666

A1.2 Cost overrun = 101,666 - 60,000 = 41,666
Buyer share ratio (BSR) = 60% or 0.6
Buyer's share of cost overrun = Cost overrun x BSR = 41,666 * 0.6 = 25,000
Amount buyer pays at PTA = Target Price + Buyer's share of cost overrun
= 75,000 + 25,000
= $100,000 (= Ceiling Price)

From here on, even if the actual cost rises to $150,000 (or more), buyer still pays $100,000 only. Do you know what this implies? Refer the conclusion section at the end of this post.

A1.3 The amount seller spent (actual cost) = $101,666
The amount seller received = the amount buyer pays = $100,000
So, the amount seller makes = 100,000 - 101,666 = - $1,666 (net loss).

So, in this case, seller is already in losses when the cost reaches PTA.

Now, let's modify the terms of the contract slightly.

Example 2

Target Cost: $60,000
Target Fee: $15,000
Target Price: $75,000
Ceiling Price: $80,000
Buyer-Seller Share Ratio: 60:40

Q2.1 What is the PTA?
Q2.2 How much does the buyer pay when the actual cost reaches PTA?
Q2.3 How much profit/loss does the seller make when actual cost reaches PTA?

A2.1 By substituting the values in the PTA formula above, we get:

PTA = (80,000 - 75,000) / 0.6 + 60,000
= 5,000 / 0.6 + 60,000
= 8,333 + 60,000
= $68,333

A2.2 Cost overrun = 68,333 - 60,000 = 8,333
Buyer share ratio (BSR) = 60% or 0.6
Buyer's share of cost overrun = Cost overrun x BSR = 8,333 * 0.6 = 5,000
Amount buyer pays at PTA = Target Price + Buyer's share of cost overrun
= 75,000 + 5,000
= $80,000 (= Ceiling Price)

A2.3 The amount seller spent (actual cost) = $68,333
The amount seller received = the amount buyer pays = $80,000
So, the amount seller makes = 80,000 - 68,333 = + $11,666 (net profit).

So, in this case, seller is making some profit even when the actual cost reaches PTA.

Conclusions

1. PTA can be more than the Ceiling Price

2. At or above PTA, buyer pays the Ceiling Price

3. At or above PTA, the contract price is fixed, and is equal to the Ceiling Price

4. At PTA, Buyer-Seller share ratio becomes 0:100

5. At PTA, a Fixed Price Incentive Fee (FPIF) contract becomes a Firm Fixed Price (FFP) contract

6. PTA doesn't mean point of zero profit for the seller. At PTA, seller may be making profit or loss, or no profit and no loss.

7. Beyond PTA, all costs on the project are completely borne by the seller.

8. Seller is usually more concerned about the PTA.

We have come to the end of this series on PTA. I learned a lot about this topic while writing these articles and hope you learned as much as I did, reading them.

If you found these posts useful, do post your comments and let me know.

Related Articles: Image Credit: Flickr / Seige N. Gin