· Harwinder Singh · PMP · 3 min read
Point of Total Assumption (PTA) - Introduction
PMP Formulas based sample questions on Point of Total Assumption (PTA) calculation in Fixed Priced Incentive Fee (FPIF) Contracts for Project Procurement Management.
Point of Total Assumption (Part 1): In a Fixed Price Incentive Fee (FPIF) Contract, Point of Total Assumption (PTA) is the total cost above which seller bears all the costs of a cost overrun. In other words, any cost overrun above the PTA is not shared by the buyer and totally absorbed by the seller. This post is the first in a series of posts on PTA. In this post, we’ll look at the formula for PTA and I’ll leave you with a few quiz questions that we’ll address in the other posts of the series.
Formula to calculate PTA
PTA = ((Ceiling Price - Target Price)/Buyer’s Share Ratio) + Target Cost
(we’ll also look at how this formula is derived, in a future post)
To start with, I’m throwing a few PTA related questions for PMP aspirants to ponder over and answer. We’ll tally our notes after I see a certain number of responses.
Quiz Time
- Is PTA always between Target Price and Ceiling Price?
- Can PTA be higher (or more) than the Ceiling Price?
- Can PTA be lower (or less) than the Target Price?
- Is PTA the same as the point of no profit / no loss for the seller?
- Who is more concerned about PTA - buyer or seller - and why?
- What is the buyer/seller share ratio for the cost overruns exceeding PTA?
- Can seller be already in losses (profit below zero) at PTA?
- What is the contract price when the actual costs exceed the PTA?
- At what point does a Fixed Price Incentive Fee (FPIF) contract become a Firm Fixed Price (FFP) contract?
- When does PTA assume more importance - in cost underruns or overruns?
I plan to do several detailed posts on Point of Total Assumption. This post is just an appetizer. So, keep the forks and spoons!
Go ahead and post your responses. Anyone who makes a sincere attempt to answer these questions qualifies for a $10 Gift Certificate, which can used toward the purchase of PM Prepcast.
- Point of Total Assumption (PTA) - Introduction (you are here)
- 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
Image credit: Flickr / Stefan Baudy
19 Comments
Moderated — submissions appear after approval.
- Anonymous imported
Hello, At which page in the PMBOK is PTA covered ? I didn't find it (or was too tired) Thanks !
- Harwinder Singh imported
Hello Anonymous, It's not mentioned in the PMBOK Guide, Fourth Edition, but often seen on the PMP exam. All the best !
- Dr. PDG imported
Hi Brain, These are EXCELLENT questions!!! You forced me to go back to my textbooks and work through them. Keep up the good work and let me see what I can come up with for answers.... Will be curious to compare notes with you.... BTW- despite the fact that I have done innumerable contracts for the US government over the past 45 years or so, I have NEVER worked on a contract of this type. So while I agree with you it often appears on the PMP exam, I have to question the relevance of this to most practitioners..... BR, Dr. PDG, Jakarta http://www.getpmcertified.com
- Harwinder Singh imported
Hello Dr. PDG, Thanks for your encouraging feedback. I'm waiting for some answers to be posted before I post mine. Yes, it will be interesting to compare notes with you. You always have a different perspective. Surprisingly, no one has even tried to answer these questions yet. Either they are too difficult or simply irrelevant :) Thanks !
- Anonymous imported
Hi, Can someone please help answer questions above... To my understanding I am still confused over PTA - although very well explained on this blog... but I still have some doubts. Regards, Suniil
- Harwinder Singh imported
Hello Sunil, I did a series of posts recently on PTA. You can find all the answers on these 2 posts: 1. http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-formula.html 2. http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-facts.html Let me know if you still have any doubts. Regards.
- Anonymous imported
Hi Sir Excellent questions! I am still waiting to see the answers. Rahul
- Harwinder Singh imported
Hello Rahul, Thanks for your feedback. As I mentioned on my previous comment (on Oct 23, 2009), the answers are posted in the follow up posts. I also gave the links to those posts. If you go through those 2 posts, you can find all the answers. Let me know if you still have any questions. Thanks !
- Anonymous imported
PTA = (CP-TP) -------- + TC buyer/seller 1. no 2. yes 3. no 4. no 5. seller 6. buyer/seller = 0:100 7. no 8. PTA 9. at PTA 10. cost overruns
- Harwinder Singh imported
This comment has been removed by the author.
- Chelluri imported
Harry, below are my answers.. 1. Yes 2. Yes 3. No 4. Yes 5. Seller, because cost overrun above the PTA is not shared by the buyer. 6. Buyer:Seller = 0:100 7. No 8. Target Price + Cost overrun. 9. Above PTA 10. Cost Overrun
- Gaspo imported
Hi, really didactic the way you explained the PTA concept. Here my answers: 1. No 2. Yes 3. No 4. No 5. The seller, as this will assume 100% of costs above the PTA 6. 0:100 7. Yes 8. Ceiling Price 9. At PTA 10. Cost Overrun I await your response. Gaston Blanco Massani
- Harwinder Singh imported
Hello Gaspo, Excellent! The answers are available in other blog posts. See the links in my comments of Oct 23 (above). Thanks.
- Rookie imported
Hi Harry, On question 3) Can PTA be lower than Target Price? I believe the answer is Yes. 2 reasons for that - PTA is a "cost" figure, not a "price" figure. So it is possible that PTA is below Target Price - In your example 2 at http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-facts.html , PTA is indeed below Target Price If the question was 3) Can PTA be lower than Target Cost?, then the answer is No. I believe there is a typo above? Thanks.
- Harwinder Singh imported
Hello Rookie, The question doesn't have a typo, but the answer does :) You are absolutely right in all the points you made. PTA is indeed a "cost" figure and not a "price" figure. I scrolled up (to one of my previous comments) and noticed that I said "no" was the correct answer to Question 3. I'm not sure what I was thinking then, but that's not correct and I have proven that in the other post, as you pointed out. I have removed the previous comment to avoid confusion. Here are all the answers: 1. No 2. Yes 3. Yes 4. No 5. Seller, because cost overrun above PTA is not shared by the buyer 6. Buyer:Seller = 0:100 7. Yes 8. Ceiling Price 9. At PTA 10. Cost overruns Let me know if you find any discrepancies now.
- Harwinder Singh imported
Rookie - BTW, thanks for pointing it out !
- Anonymous imported
the posts on PTA have been very helpful. Thanks.
- Anonymous imported
How can the PTA be higher then the ceiling price ?
- Jared Peterson imported
Thank you SO much for that! I've been obsessing over this formula for days, convinced that there's no way in the world it makes any sense...but now I get it, since you pointed out that it is a cost figure. Otherwise, PTA would just be the ceiling price.
