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Calculation of Point of Total assumption (the case when BAC exceeds PTA that
should be treated as a risk trigger, is shown)
Point of total assumption
From Wikipedia, the free encyclopedia
The point of total
assumption (PTA) is a point
on the cost line of the Profit-
cost curve determined by the
contract elements associated
with a fixed price plus
incentive-Firm Target
(FPI)contract above which
the seller effectively bears
all the costs of a cost
overrun. The seller bears all
of the cost risk at PTA and
beyond, due to a dollar for
dollar decrease in profit
beyond the costs at the PTA.
In addition, once the costs on
an FPI contract reach PTA,
the maximum amount the
buyer will pay is the ceiling
price. Note, however, that
between the cost at PTA and
when the cost equals the
ceiling price, the seller is still
in a profitable position; only
after costs exceed the ceiling price is the seller in a loss position.
Contents
1 Calculation of Point of Total Assumption
2 Related terms
3 History
3.1 Regulations
4 References
Calculation of Point of Total Assumption
Any FPI contract specifies a target cost, a target profit, a target price, a ceiling price, and one or more share ratios.
The PTA is the difference between the ceiling and target prices, divided by the buyer's portion of the share ratio for
that price range, plus the target cost.
PTA = ((Ceiling Price - Target Price)/buyer's Share Ratio) + Target Cost
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For example, assume:
Target Cost: 2,000,000
Target Profit: 200,000
Target Price: 2,200,000
Ceiling Price: 2,450,000
Share Ratio: 80% buyer20% seller for overruns, 50%50% for underruns
PTA = ((2,450,000 - 2,200,000)/ 0.80) + 2,000,000 = 2,312,500.
If for a moment, PTA is given and you are trying to calculate the ceiling price for the buyer (maximum amount that
the buyer will have to spend),the calculation will be
(2,000,000 (target cost) + 200,000 (the profit the buyer pays to the seller) + (2,312,500 - 2,000,000)*0.8 =
2450000.
This is a term used in project management when managing specific fixed price contracts.
The reason to calculate PTA is that when executing the contract, actual cost is the only finance measurement.
Compare this measurement with the cost base line to calculate Cost Performance Index (CPI), then we can
estimate the Budget at Completion (BAC). If BAC exceeds PTA, the buyer is expected to pay the ceiling price,
and any more overruns beyond PTA will cause a dollar for dollar decrease in profit for the seller. The profit
decrease rate become higher, and once actual cost exceeds ceiling price the seller will start losing money(and then
might stop working for the contract). For the risk management point of view, BAC should be controlled under PTA
to keep this risk far away. When "BAC exceeds PTA" is found in control cost process, it should be treated as a
risk trigger.
Related terms
For cost reimbursable contract, the Point of Total Assumption does not exist, since the buyer agrees to cover all
costs. However, a similar incentive arrangement with similar components, called a Cost-Plus-Incentive Fee (CPIF)
contract sometimes is used. The CPIF includes both a minimum fee and a maximum fee. The share line in
combination with the Target Fee, Maximum Fee and Minimum Fee can be used to easily calculate the points at
which the incentive arrangement affects fee. The range between these points is called the "range of incentive
effectiveness." Edited by oldPCO
History
The idea of a "Point of Total Assumption" is an extremely recent one. In the government's efforts to cut cost
overruns, the PTA is being introduced to FPIF contracts on an increasingly wide basis. Moreover, high-level
professional examinations for industry certification, such as the Project Management Professional certification, are
beginning to test applicants' knowledge of this concept and its application.
Regulations
For contracts subject to the Federal Acquisition Regulations, FAR 16.403-1 provides the Government description
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of FPI. The contract type is implemented by calling out FAR Clause 52.216-16 Incentive Price Revision - Firm
Target. This clause captures the Ceiling Price as well as the government share ratio(s). If multiple line items are
identified as FPI type, the individual line item information shall be included here, otherwise final contract costs and
price are reconciled at the contract level.
References
Langford, John W. (2007). Logistics: principles and applications. SOLE Press Series (2nd ed.). McGraw-Hill.
pp. 207208. ISBN 0-07-147224-X.
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Categories: Contract clauses Project management
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