Point of Total Assumption (PTA)

February 2, 2012 | Author: PM Hut | Filed under: Project Management Definitions

Point of Total Assumption (PTA)
By Mamun Shaheed

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

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

Now the seller needs to closely watch the cost of the project. As soon as the cost hits the buyer’s ceiling price (even though initially the buyer agreed to bear 70% of the cost overrun), the buyer stops taking over any additional cost. At that point and onward the seller starts bearing 100% of any additional cost. This point is the Point of Total Assumption.

PTA calculation

Point of Total Assumption

Figure 1: Point of Total Assumption

From the above image we know the following:

  • The estimated cost of the project is $30,000. This is the target cost.
  • The fee of the seller is $10,000. This is the target fee.
  • Total estimated cost of the project i.e. target cost + target fee is $40,000 ($30,000 + $10,000). This is the target price.
  • Cost overrun share ratio is 70% for the buyer, 30% for the seller.
  • Maximum price of the project the buyer agrees on is $50,000. This is the ceiling price.

Since PTA only comes in picture in case of cost overrun, it can be assumed that PTA will be more then target cost. So…

  • cost overrun at PTA = PTA – target cost
  • Total price that buyer pays at PTA = (target cost + target fee) + buyer’s share of cost overrun
  • As (target cost + target fee) = target price and cost overrun at PTA ((PTA – target cost) x buyer’s share ratio) is buyer’s share of cost over run, therefore
  • Total price that buyer pays at PTA = target price + (PTA - target cost) x buyer’s share ratio
  • Now the Total price that buyer pays 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.

Mamun Shaheed is a senior IT Infrastructure Manager. He has nearly a decade of proven project management experience.

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1 person has left a comment

Nice description. I had not seen the algebraic basis for the formula elsewhere. May I suggest 2 things to improve this:
1) The graphic in the Wikipedia article on PTA is clearer ((http://en.wikipedia.org/wiki/Point_of_total_assumption).

2) May I suggest adding to your definition this phrase: “The PTA is The point on the SELLER’S Cost Curve where the total Price (to the Buyer) reaches the Ceiling Price.” Then you can continue to explain, as you do, that at that point the buyer stops sharing in additional costs, so any further increased cost is born 100% by the Seller.

Thanks again.

Mike Cohen wrote on June 24, 2013 - 4:37 pm | Visit Link

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