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.
- 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