W7-Musalllam Al Awaid-Point of Total Assumption Calculation


1.Problem Definition

 

The point of total assumption (PTA) is a price determined by a fixed price plus incentive fee contract (FPIF) above which the seller bears all the loss of a cost overrun. It is also known as the “most pessimistic cost” because it represents the highest point beyond which costs are not expected to rise, given reasonable issues. It is considered as a risk trigger as beyond this Point, the seller’s profitability decreases, and their initiative and interest to complete the project may diminish too. So, we should know very well how to calculate this point to take all care not to approach it in the project course.

2.Feasible options Identification

As any FPIF 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

3. Development of the outcome for the alternative

When the point of total assumption is calculated, the outcomes are (as illustrated in the figure below):

  1. Incurred cost is below target cost.
  2. Incurred cost is above target cost and below PTA.
  3. Incurred cost is above PTA.

800px-PMP_FPIF_Contracts_-_BAC_exceeds_PTA

 4. Selection of acceptable criteria

The cost is acceptable if it is below PTA.

5. Analysis and Comparison of the Alternatives

For instance, if the Target Cost: 1,000,000 OMR, Target Profit for Seller: 100,000 OMR, Target Price: 1,100,000 OMR (Target Cost + Profit for Seller), Ceiling Price: 1,300,000 OMR ( the maximum the buyer will pay), Share Ratio: 80% buyer–20% seller for over-runs & 50%–50% for under-runs.

Then, PTA = ((1,300,000 – 1,100,000)/ 0.80) + 1,000,000 = 1,250,000 OMR.

6. Selection of the preferred option

It is best to manage the contract to get the cost under target cost with zero compromising on quality.

7. Performance Monitoring and the Post Evaluation of Result.

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

Reference:

  1. Pmzilla Admin (2014). Point of Total Assumption. Retrieved on 18th Jul 2014 from http://pmzilla.com/point-total-assumption-pmp
  1. Vinai Prakash (2014). Point of Total Assumption Calculations on PMP Exam. Retrieved on 18th Jul 2014 from http://www.pmchamp.com/point-of-total-assumption-calculations-on-pmp-exam/
  2. Google.com (2014). Point of total assumption. Retrieved on 18th Jul 2014 from https://www.google.com/search?q=point+of+total+assumption&source=lnms&tbm=isch&sa=X&ei=75rJU-afE4_A7Aai-IGoBQ&sqi=2&ved=0CAYQ_AUoAQ&biw=1280&bih=683#facrc=_&imgdii=_&imgrc=Tig2rBtlrbDPUM%253A%3B8xWsehPr1f6YeM%3Bhttp%253A%252F%252Fupload.wikimedia.org%252Fwikipedia%252Fcommons%252F3%252F3a%252FPMP_FPIF_Contracts_-_BAC_exceeds_PTA.jpg%3Bhttp%253A%252F%252Fen.wikipedia.org%252Fwiki%252FPoint_of_total_assumption%3B2558%3B1937

 

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2 thoughts on “W7-Musalllam Al Awaid-Point of Total Assumption Calculation

  1. EXCELLENT case study, Musallam!!! My only comment or suggestion is why didn’t you reference my handouts, Day 5, slides #52-55? I can almost guarantee you that you are going to have one or more problems on your PMP exam on this topic.

    One question? Is incentive contracting legal or allowed in Oman? If yes, is it actually being used? If not, any idea why?

    Great topic to explore in one or more future blog postings….

    BR,
    Dr. PDG, Jakarta

  2. Pingback: W13_Hassan Albarrami_ POINT OF TOTAL ASSUMPTION (PTA) | PMI-Oman 2014

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