Point of total assumption (PTA)

In a fixed price incentive free (FPIF) contract, the point where buyer stops bearing cost is the Point of total assumption (PTA). In other word, it is the point, up to where buyer
bears the cost, however any cost above the PTA is not shared by buyer and totally imbibed by the seller. Surprisingly there is no discussion on “point of total assumption” in PMBOK, even the term is also absent there, but there is a possibility of having question in PMP exam on PTA, (though I didn’t get any in my exam).

Let’s take an example of PTA. The project is estimated to the cost of $30,000 and the seller (contractor) will get $10,000 as fee. The project scope is clearly defined and seller agrees on the scope. However as there is always a possibility of unknown risk and hence cost overrun, buyer agrees on bearing 70% of cost overrun and rest 30% goes on seller. At the same time buyer puts the cost limit of $50,000 for the project that includes project
cost, seller’s fee plus cost overrun share. So the ceiling price of the contract s $50,000.

Point of Total Assumption

Now seller needs to closely watch the cost of the project. Though initially buyer bear the 70% of the cost over run, but as soon as the ost hits buyers ceiling price, buyer stop taking over any additional cost. At that point and onward seller starts bearing 100% of additional cost. This point is the point of total assumption.

 PTA calculation

From the above example we get few points.

  1. The estimated cost of the project i.e. $30,000. This is the target cost.
  2. The fee of the seller i.e. $10,000. This is the target fee.
  3. Total estimated cost of the project i.e. target cost + target fee ($30,000 + $10,000). This is the Target price
  4. Cost overrun share ratio i.e. 70% buyer, 30% seller.
  5. Max price of project buyer agrees on is $50,000. This is the ceiling price.

As PTA only comes in picture in case of cost over run
therefore it can be assumed that PTA will be more then target cost. So

  • cost over run at PTA = PTA – target cost
  • Total price that buyer pay at PTA = (target cost + target fee) + buyer’s share of cost over run
  • as (target cost + target fee) = target price and cost over run at PTA ((PTA – target cost) x buyer’s share ratio) is buyer’s share of cost over run, therefore
  • Total price that buyer pay at PTA = target price + (PTA-target cost) x buyer’s share ratio
  • Now the Total price that buyer pay at PTA = ceiling price
  • so ceiling price = target price + (PTA-target cost) X buyer’s share ratio

or in other way

  • target price + (PTA-target cost) x buyer’s share ratio = ceiling price
  • (PTA-target cost) x buyer’s share ratio = ceiling price – target price
  • PTA-target cost = (ceiling price – target price)/buyer’s share ratio
  • PTA = ((ceiling price – target price) / buyer’s share ratio) + target cost

Hope it helps you understand the concept and calculation of PTA.

That’s all folks……………….

Advertisements

About Mamun Shaheed

I love to imagine....I guess thats the only thing that keeps me going and going and going....
This entry was posted in Project Management and tagged , . Bookmark the permalink.

2 Responses to Point of total assumption (PTA)

  1. PM Hut says:

    Hi Mamun,

    This is an excellent article that will benefit a lot of project managers. There are many project managers who don’t know what a point of total assumption means, and that’s why I would like to republish your post on PM Hut ( http://www.pmhut.com ). Please either email me or contact me through the “Contact Us” form on the PM Hut website in case you’re OK with this.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s