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  Seller Fee Calculations in FPIF Contract

Seller Fee Calculation and Point of Total Assumption in FPIF Contracts for PMP Point of Total Assumption (Part 5): In past, we have looked at the concept of Point of Total Assumption in a Fixed Price Incentive Fee (FPIF) contracts, in great detail. In this article, we'll look at some examples related to Seller Fee (profit and loss) calculations. For a quick recap of terms such as Target Cost, Target Fee, Target Price etc., review the article Point of Total Assumption - Formula.

In the worksheet shown below, the Target Cost, Seller Fee, Target Price, Ceiling Price and Share Ratio have been kept constant. We start with a simple case with no cost overrun, i.e. Actual Cost is exactly the same as Target Cost. In this case, Seller gets the full fee. As cost overrun increases, it starts eating into Seller's Fee. At a particular point, the Seller Fee drops to zero (no profit or loss). Further cost increase beyond this point, leads to net loss for the Seller. Here's the worksheet with all the calculations.

Seller Fee Calculation and Point of Total Assumption in Fixed Price Incentive Fee Contracts
(click image to view or download the file)

In these examples, you'll notice the following points:
  • When Actual Cost is equal to Target Cost, Seller gets the full fee, and Buyer pays the Target Price.
  • Point of Total Assumption is NOT the same as point of zero profit or loss for the Seller.
  • Seller may be in losses even before the Actual Cost hits the Point of Total Assumption.
  • When Actual Cost equals Point of Total Assumption, Buyer Price equals Ceiling Price. In other words, at or beyond Point of Total Assumption, Buyer Price equals Ceiling Price.
I hope now you can understand the calculations and formulas involved in a Fixed Price Incentive Fee contracts better. Feel free to share your comments.

Full series (5-part) on Point of Total Assumption in FPIF Contracts

  1. Point of Total Assumption (PTA) - Test your PM Knowledge
  2. The Point behind Point of Total Assumption in FPIF Contracts
  3. Derivation of Point of Total Assumption (PTA) Formula
  4. Point of Total Assumption (PTA) - Interesting Facts (PMP)
  5. Seller Fee Calculations in FPIF Contract (you are here)
Last Update:
Image credit: Flickr / stevendepolo

14 comments:

  1. SIRS;

    This explanation doesn't appear to agree with that found on http://pmi.books24x7.com/viewer.asp?bookid=8442&chunkid=845042298

    PLEASE HELP !!! That PMI example appears to be showing a Buyer price LESS than your formula of BP = TP + BS. WHAT IS GOING ON PLEASE ??? Using your formula, I would get a Buyer Price of $101K.


    Fixed Price Incentive Example
    Scenario: A supplier is awarded an FPI contract to build a special facility with certain specified features and functions. The contract cost (risk) sharing parameters are negotiated between the project and the contractor. In this example the parameters are as follows: the contracted target price (TP) is $100,000, the target cost (TC) is $85,000, the target fee (TF) is $15,000, the target return on cost (ROC) is equal to 15/85 = 17.6%, the ceiling price (CPr) is $110,000, and the sharing ratio (SR) is 80%/20% applied to cost. The schedule is 120 days.

    In this example, the facility is ready in time with all required features and functions. Actual cost is denoted AC, the contractor's share is denoted SRc, and in this example SRc is equal to 20%.

    The FPI formula is:

    Contractor payable = (TC - AC) * SRc + AC + TF ≤ CPr

    Case 1. The supplier announces that the actual cost was only $80,000, $5,000 below target cost; the supplier is paid according to the formula

    Contractor payable ($000) = ($85 - $80) * 0.2 + $80 + $15 = $96 ≤ $110

    ROC = (96 - 80)/80 = 20%

    ReplyDelete
    Replies
    1. I must have totally overlooked this comment. Anyway, I'm replying to it after more than a year and a half.

      In this question, there's a cost underrun. So, BP would be TP - BS = $100,000 - $4,000 = $96,000.

      Delete
  2. Thanks for the article.

    Can you please discuss the Rita Book Exercise on Fixed price incentive fee calaculation where the cieling price is $200,000 and the actual cost is $210,000.

    Please note my comments as follows:
    Seller fee = 30,000 (fixed)
    Extra money paid by the seller (210,000-200,000)+(200,000-150,000)*0.40 = 30,000.
    Therefore, final fee for the seller should be $0.
    However, according to rita it is $6,000.

    I would apprciate if you can provide your expert opinion on this.

    Thanks & regards,
    syed

    ReplyDelete
    Replies
    1. Hello Syed,

      I found some time today to review this question. As far as my calculation goes, the seller fee is -$10,000 (loss). Seller spent $210,000 from his pocket, and got $200,000 from the buyer. So, the seller made a net loss of -$10,000.

      I don't see any other way of looking at this problem. Correct me if I'm wrong.

      Best regards.

      Delete
    2. Rita's answer ($6,000) would have been correct if no Ceiling Price was set. Though the question explicitly mentions the Ceiling Price, the first part of the answer ignores it.

      Delete
  3. Hi,

    Can you please respond to the above query. I have exam in few days.

    Thanks & Regards,
    Syed

    ReplyDelete
  4. I didn't find any such detailing in PMBOK 4 regarding this concept. Also,the PTA concept isn't there in the PMBOK 4.

    wHAT SHOULD i DO? I am taking my exam after 5 days from today...at my witts end!

    ReplyDelete
    Replies
    1. Sorry to as well for the late response. I guess you would have taken the exam by now. Let me answer your question for the benefit of other readers.

      Lot of concepts covered in the exam are outside of the PMBOK Guide. PTA is one such concept.

      Delete
  5. Hi
    Harvinder I made a graphical presentation of PTA . please look here -http://er-sspawar.blogspot.in/2012/04/pmp-point-of-total-assumption.html
    I have 2 questions -
    1.PTA is not AC but an assumed cost at a point, which decide the CP


    2. If AC in FPIF accurs at below TC. What amount seller will get:
    i. TC + TF (Profit) = TP
    ii. AC + TF ( Fixed Profit)
    iii. It is an imaginary event
    iv. can't say.

    ReplyDelete
  6. This comment has been removed by the author.

    ReplyDelete
  7. Harvinder,

    It would be nice if all comments must be listed in descending order of date. This is confusing. Another issue is that you need to refer all your stuff as per PMBOK v5. Every time, you state PMBOK v4 or reference to it is confusing. I decided to leave the site because of this but I needed to inform you what the problem. Why would I be interested in reading about PMBOK v4?.

    ReplyDelete
    Replies
    1. Hi Cecil,

      Thanks for your feedback. Both comments are fair and valid. Let me offer my side of the story.

      1. I fully agree with your comment about the order of the comments. It should be in reverse chronological order (latest one first), but unfortunately, Google's Blogger platform doesn't allow it out of the box. I'll check if there's any hack available.

      2. About references to PMBOK 4 - Since this is a blog and not a regular website (with collection of pages), the older posts are generally not deleted. In a few cases, I have updated the older posts or added links to the newer versions of the post, but I admit that there are a lot of posts that have not been updated. I suggest that you look at the date it was posted on. Anything posted before Aug 2013 may have references to PMBOK v4 unless it states "Last Updated on {date}".

      An example that comes to mind is a series of posts on Work Performance Information, Work Performance Reports and Work Performance Reports, which I did in 2009 (PMBOK v4). In that series, I had highlighted many holes in PMBOK v4. PMI fixed many of those issues in PMBOK v5 and in 2014 I did a new post to cover the updates. So the original series doesn't have much relevance now, but I would not delete it. I should however post a link to the latest post on each article of the series (I haven't done that but will do it soon).

      Therefore, my suggestion is to pay attention to the date of each post. If you come across a post that is in need of an update, drop a comment. Even if I don't fix it, the comment will serve as a warning to other readers that the content is out of date. However, there are several posts on topics such as PERT, Standard Deviation, which were posted several years ago but are still relevant.

      Thanks again for your feedback.

      Harwinder

      Delete
    2. Hello Cecil,

      Your feedback did wonders. In the past few weeks, I have revamped the entire blog and updating every single post. I'm more than 50% through, and hope to complete the exercise by end of this month. I also added a few new posts this month. Take a look and let me know what you think.

      Thanks for your feedback.

      Harwinder

      P.S.: Displaying comments in the reverse chronological order is still not supported. I hope Google will support it in future.

      Delete

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