During the PMP exam, is possible to encounter questions related to Point of Total Assumptions (PTA). I think the PTA concept needs an additional introduction, due to its unpopularity in the practical usage. PTA is used strictly connected with Fixed Price Incentive Fee (FPIF) contracts. These types of contracts motivate the seller to control the cost, in order to maintain his profit, by sharing the risks between buyers and sellers, based on a dynamic formula.  However, FPIF contracts are not so “fixed” as the name implies. The only “fixed” part of these types of contracts is represented by the Ceiling Price, the highest price the buyer will pay in the worst-case scenario.

      In order to understand what “the worst-case scenario” means, it’s necessary to define the terms used by FPIF:
Target Cost (TC) – is the negotiated cost that the contract is based on, and the point against which both profit and the ceiling price are being calculated.
Target Fee (TF) – is the negotiated profit assuming the target cost is met.
Target Price (TP) – is the sum of Target Cost and Target Fee.
Ceiling Price (CP) – is the maximum price the buyer expects to pay regardless of cost overruns. After the Ceiling Price is reached, the seller is responsible for all remaining costs. In most of the cases, the Ceiling Price is calculated based on the Target Cost.
Sharing Ratio – represents the negotiated ratio for sharing cost overruns. This ratio is typically expressed as something like 60/40 or 50/50 where the buyer’s share (BSR) is on the left and the seller’s share (SSR) is on the right.
Finally, Point of Total Assumptions (PTA) – represents the threshold for the actual costs beyond which all overruns are borne solely by the seller.

     Considering the example below:
Target Cost = €100,000
Target Fee = €10,000
Ceiling Price = €119,000
Sharing Ratio = 60/40,
The costs distribution, the impact on the profit and PTA will look as following:

Line 1 shows the case when there are no overruns, so the actual cost is the same as the planned cost. The seller will take the target fee he planned for and the buyer will pay the target price.

Lines 2 and 3 show what is happening with the price and the fee when the actual cost exceeds the target cost with €5,000 (line 2) and €10,000 (line 3). Based on the sharing ratio, 60% of overruns are paid by the buyer and 40% are paid by the seller. For €5,000 overruns we are still under the Ceiling Price, so the buyer pays 0.6 X €5,000 = €3,000 and the seller pays 0.4 X €5,000 = €2,000. The adjusted profit (fee) would be target fee minus seller share, that means: €10,000 – €2,000 = €8,000. The contract price will be the combination of actual cost and the seller adjusted profit (€105,000+ €8,000 = €113,000).

Line 4 shows the case where the overruns take the contract price to the Ceiling Price. In this case, the actual cost represents Point of Total Assumptions. For our example, the PTA is €115,000.

  Any additional cost above PTA will be borne solely by the seller as in lines 5 and 6. A graphical representation of this situation is shown below:

     The PTA formula based on the terms defined above is:
PTA= (Ceiling Price – Target Price)/BSR + Target Cost and is relevant for both buyer and seller because it represents the point from which the risks are all in seller’s garden.

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