W13_Hassan Albarrami_ POINT OF TOTAL ASSUMPTION (PTA)
- Problem Definition
To understand the PTA, we need to understand the Fixed Price Incentive Fee Contract (FPIF). 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. The cost rises beyond PTA because of mis-management at the Seller’s end, thus, the seller has to bear all the extra costs beyond this point.
On the other hand the seller will gain if he finishes work at lower cost.
- Feasible options Identification
In FPIF contracts, we need to specify 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
- Development of the outcome for the alternative
The figure below is illustrating the out comes from PTA calculations .
- Incurred cost is below target cost.
- Incurred cost is above target cost and below PTA.
- Incurred cost is above PTA.
Figure 1. PTA calculation
- Selection of acceptable criteria
The cost is acceptable if it is below PTA.
- Analysis and Comparison of the Alternatives
If we assume that my construction building is subjected to this type of contracts then the case will be as following. The Target Cost: 110,000 OMR, Target Profit for Seller: 20,000 OMR, Target Price: 130,000 OMR (Target Cost + Profit for Seller), Ceiling Price: 140, 000 OMR (the maximum the buyer will pay), Share Ratio: 80% buyer–20% seller for over-runs & 50%–50% for under-runs.
Then, PTA = ((140,000 – 130,000)/ 0.80) + 110,000 = 122500 OMR.
- Selection of the preferred option
It is recommended to manage the contract to get the cost under target cost with zero compromising on quality.
- Performance Monitoring and the Post Evaluation of Result.
Beyond the Point of Total Assumption, the seller’s profitability starts to decrease, hence losing interest to complete the project. We can say that PTA is a risk trigger. The project risk increases as this point is reached. More attention is needed to complete the project at the earliest, with minimum cost deviation.
- Pmzilla Admin (2014), Point of Total Assumption, Retrieved on 17.08.2014 from http://pmzilla.com/point-total-assumption-pmp
- Vinai Prakash (2014). Point of Total Assumption Calculations on PMP Exam. Retrieved on17.08.2014 from http://www.pmchamp.com/point-of-total-assumption-calculations-on-pmp-exam/
- PMI-Oman 2014, W7-Musalllam Al Awaid-Point of Total Assumption Calculation, Retrieved on 17.08.2014 from https://pmioman14.wordpress.com/2014/07/19/w7-musalllam-al-awaid-point-of-total-assumption-calculation/
- PMP – refer here, PMP -POINT OF TOTAL ASSUMPTION, Retrieved on 17.08.2014 from http://er-sspawar.blogspot.com/2012/04/pmp-point-of-total-assumption.html