Point of Total Assumption (PTA) - Introduction

2 minute read    Updated:    Harwinder Singh

Point of Total Assumption for PMP and CAPM - Sample Questions

Point of Total Assumption (Part 1): In a Fixed Price Incentive Fee (FPIF) Contract, Point of Total Assumption (PTA) is the total cost above which seller bears all the costs of a cost overrun. In other words, any cost overrun above the PTA is not shared by the buyer and totally absorbed by the seller. This post is the first in a series of posts on PTA. In this post, we’ll look at the formula for PTA and I’ll leave you with a few quiz questions that we’ll address in the other posts of the series.

Formula to calculate PTA


PTA = ((Ceiling Price - Target Price)/Buyer’s Share Ratio) + Target Cost

(we’ll also look at how this formula is derived, in a future post)

To start with, I’m throwing a few PTA related questions for PMP aspirants to ponder over and answer. We’ll tally our notes after I see a certain number of responses.

Quiz Time

  1. Is PTA always between Target Price and Ceiling Price?
  2. Can PTA be higher (or more) than the Ceiling Price?
  3. Can PTA be lower (or less) than the Target Price?
  4. Is PTA the same as the point of no profit / no loss for the seller?
  5. Who is more concerned about PTA - buyer or seller - and why?
  6. What is the buyer/seller share ratio for the cost overruns exceeding PTA?
  7. Can seller be already in losses (profit below zero) at PTA?
  8. What is the contract price when the actual costs exceed the PTA?
  9. At what point does a Fixed Price Incentive Fee (FPIF) contract become a Firm Fixed Price (FFP) contract?
  10. When does PTA assume more importance - in cost underruns or overruns?

I plan to do several detailed posts on Point of Total Assumption. This post is just an appetizer. So, keep the forks and spoons!

Go ahead and post your responses. Anyone who makes a sincere attempt to answer these questions qualifies for a $10 Gift Certificate, which can used toward the purchase of PM Prepcast.

5-part series on Point of Total Assumption in FPIF Contracts
  1. Point of Total Assumption (PTA) - Introduction (you are here)
  2. The Point behind Point of Total Assumption in FPIF Contracts
  3. Derivation of Point of Total Assumption (PTA) Formula
  4. Point of Total Assumption (PTA) - Interesting Facts (PMP)
  5. Seller Fee Calculations in FPIF Contract

Image credit: Flickr / Stefan Baudy

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19 Comments

Hi Brain,
These are EXCELLENT questions!!! You forced me to go back to my textbooks and work through them.

Keep up the good work and let me see what I can come up with for answers.... Will be curious to compare notes with you....

BTW- despite the fact that I have done innumerable contracts for the US government over the past 45 years or so, I have NEVER worked on a contract of this type. So while I agree with you it often appears on the PMP exam, I have to question the relevance of this to most practitioners.....

BR,
Dr. PDG, Jakarta
http://www.getpmcertified.com

Reply to Dr. PDG
Harwinder Singh Avatar

Hello Dr. PDG,

Thanks for your encouraging feedback. I'm waiting for some answers to be posted before I post mine. Yes, it will be interesting to compare notes with you. You always have a different perspective.

Surprisingly, no one has even tried to answer these questions yet. Either they are too difficult or simply irrelevant :)

Thanks !

Reply to Harwinder Singh
Harwinder Singh Avatar

Hello Sunil,

I did a series of posts recently on PTA. You can find all the answers on these 2 posts:

1. http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-formula.html

2. http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-facts.html

Let me know if you still have any doubts.

Regards.

Reply to Harwinder Singh
Harwinder Singh Avatar

Hello Rahul,

Thanks for your feedback.

As I mentioned on my previous comment (on Oct 23, 2009), the answers are posted in the follow up posts. I also gave the links to those posts. If you go through those 2 posts, you can find all the answers. Let me know if you still have any questions.

Thanks !

Reply to Harwinder Singh
Missing Avatar

Hi, really didactic the way you explained the PTA concept.

Here my answers:

1. No
2. Yes
3. No
4. No
5. The seller, as this will assume 100% of costs above the PTA
6. 0:100
7. Yes
8. Ceiling Price
9. At PTA
10. Cost Overrun

I await your response.

Gaston Blanco Massani

Reply to Gaspo
Missing Avatar

Hi Harry,

On question 3) Can PTA be lower than Target Price? I believe the answer is Yes. 2 reasons for that
- PTA is a "cost" figure, not a "price" figure. So it is possible that PTA is below Target Price
- In your example 2 at http://www.deepfriedbrainproject.com/2009/10/point-of-total-assumption-pta-facts.html , PTA is indeed below Target Price

If the question was 3) Can PTA be lower than Target Cost?, then the answer is No.

I believe there is a typo above?

Thanks.

Reply to Rookie
Harwinder Singh Avatar

Hello Rookie,

The question doesn't have a typo, but the answer does :) You are absolutely right in all the points you made. PTA is indeed a "cost" figure and not a "price" figure.

I scrolled up (to one of my previous comments) and noticed that I said "no" was the correct answer to Question 3. I'm not sure what I was thinking then, but that's not correct and I have proven that in the other post, as you pointed out. I have removed the previous comment to avoid confusion.

Here are all the answers:

1. No
2. Yes
3. Yes
4. No
5. Seller, because cost overrun above PTA is not shared by the buyer
6. Buyer:Seller = 0:100
7. Yes
8. Ceiling Price
9. At PTA
10. Cost overruns

Let me know if you find any discrepancies now.

Reply to Harwinder Singh