Point of Total Assumption (Part 5): In the 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.
Seller Fee Calculation in FPIF Contracts
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.
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.
With this we’ve come to the end of the 5-part 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.
- 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)
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