Point of Total Assumption(PTA) - Fixed Price Incentive Fee (FPIF) contract type - In this contract, the buyer agrees to pay a fixed price, and a maximum price for cost overruns. This is called the Most Pessimistic View of Costs. Beyond this point, if the cost rises, it will most likely be because of mis-management at the Seller’s end, thus, the seller has to bear all the extra costs beyond this point.
Beyond the Point of Total Assumption, the seller’s profitability decreases, and their initiative and interest to complete the project may diminish too. Therefore, the PTA is also a risk trigger. As this point is reached, the project risk increases, and more attention is needed to complete the project at the earliest, with as little cost deviation as possible.
Formula of PTA:
PTA = (Ceiling Price – Target Price) / Buyer’s Share Ration + Target Cost
# A fixed-price-plus-incentive-fee (FPI. contract has a target cost of $130,000, a target profit of $15,000, a target price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000. How much profit does the seller make?
a) $10,000
b) $15,000
c) $0
d) $5,000
WITHOUT any formula:
---------------------
target cost of $130,000,
target profit of $15,000
target price of $145,000
ceiling price of $160,000
share ratio of 80/20
actual cost of the project was $150,000
actual cost is 150K. i.e 20K more than the target cost. Now for this 20K, buyer is going to pay ONLY the buyer share.... i.e 80% of 20K = 16K
so total buyer would pay= target cost + share + target profit = 130k+16K+15K = 161K (NOW... this is MORE than ceiling... so of course, buyer pays only 160K)-
so final profit = 160K that the seller received minus cost of 150K = 10K
USING PTA formula:
--------------------
PTA = ((celing - targetprice)/buyershare ) + targetcost
PTA = ((160k - 145k)/0.8 ) + 130 == 148,750.
PTA is 18,750 more than target cost. So of 18,750, seller has to share 20% of the burden i.e $3750. This reduces his profit by this amount.
After PTA, any cost is seller's cost. Actual cost is 150,000. So another $1250 seller has to bear the burden, all from his/her pocket.
Final profit = 15,000 - ($3750 seller share) - ($1250 seller full after pta)
= 10K
Procurement Closure or Contract Closure is done before the project can be closed completely.
Procurement Closure may be done multiple times ( once for each contract) during the lifecycle of a project.
Procurement Negotiation: The fait accompli is one of three common tactics that managers should be aware of, including the frontal attack and divide & conquer. The fait accompli tactic is a dirty trick and it is unfair, but one project managers should be proactive against. The term comes from the French term “an accomplished fact” and is defined a few different ways:
A scheme which has been already carried out with success.
A fait accompli refers to an action which would be difficult to undo and which therefore becomes the basis for future negotiations and discussions.
Too late, we're already past that.
You don't have any say in this matter.
Force Majeure: When The Unforeseen Happens On The Project! These are contractual clauses designed to minimize the liability and risk to the contractors in such situations as natural catastrophes or unavoidable circumstances, which interfere with the planned course of events that make it difficult for stakeholders to fulfill their obligations.
Beyond the Point of Total Assumption, the seller’s profitability decreases, and their initiative and interest to complete the project may diminish too. Therefore, the PTA is also a risk trigger. As this point is reached, the project risk increases, and more attention is needed to complete the project at the earliest, with as little cost deviation as possible.
Formula of PTA:
PTA = (Ceiling Price – Target Price) / Buyer’s Share Ration + Target Cost
# A fixed-price-plus-incentive-fee (FPI. contract has a target cost of $130,000, a target profit of $15,000, a target price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000. How much profit does the seller make?
a) $10,000
b) $15,000
c) $0
d) $5,000
WITHOUT any formula:
---------------------
target cost of $130,000,
target profit of $15,000
target price of $145,000
ceiling price of $160,000
share ratio of 80/20
actual cost of the project was $150,000
actual cost is 150K. i.e 20K more than the target cost. Now for this 20K, buyer is going to pay ONLY the buyer share.... i.e 80% of 20K = 16K
so total buyer would pay= target cost + share + target profit = 130k+16K+15K = 161K (NOW... this is MORE than ceiling... so of course, buyer pays only 160K)-
so final profit = 160K that the seller received minus cost of 150K = 10K
USING PTA formula:
--------------------
PTA = ((celing - targetprice)/buyershare ) + targetcost
PTA = ((160k - 145k)/0.8 ) + 130 == 148,750.
PTA is 18,750 more than target cost. So of 18,750, seller has to share 20% of the burden i.e $3750. This reduces his profit by this amount.
After PTA, any cost is seller's cost. Actual cost is 150,000. So another $1250 seller has to bear the burden, all from his/her pocket.
Final profit = 15,000 - ($3750 seller share) - ($1250 seller full after pta)
= 10K
Procurement Closure or Contract Closure is done before the project can be closed completely.
Procurement Closure may be done multiple times ( once for each contract) during the lifecycle of a project.
Procurement Negotiation: The fait accompli is one of three common tactics that managers should be aware of, including the frontal attack and divide & conquer. The fait accompli tactic is a dirty trick and it is unfair, but one project managers should be proactive against. The term comes from the French term “an accomplished fact” and is defined a few different ways:
A scheme which has been already carried out with success.
A fait accompli refers to an action which would be difficult to undo and which therefore becomes the basis for future negotiations and discussions.
Too late, we're already past that.
You don't have any say in this matter.
Force Majeure: When The Unforeseen Happens On The Project! These are contractual clauses designed to minimize the liability and risk to the contractors in such situations as natural catastrophes or unavoidable circumstances, which interfere with the planned course of events that make it difficult for stakeholders to fulfill their obligations.
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