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.
(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.
Full series (5-part) on Point of Total Assumption in FPIF Contracts
- Point of Total Assumption (PTA) - Test your PM Knowledge
- The Point behind Point of Total Assumption in FPIF Contracts
- Derivation of Point of Total Assumption (PTA) Formula
- Point of Total Assumption (PTA) - Interesting Facts (PMP)
- Seller Fee Calculations in FPIF Contract (you are here)
Image credit: Flickr / stevendepolo