Point of total assumption

Point of total assumption

The point of total assumption (PTA) is a point on the cost line of the Profit-cost curve determined by the contract elements associated with a fixed price plus incentive-Firm Target (FPI)contract above which the seller effectively bears all the costs of a cost overrun. The seller bears all of the cost risk at PTA and beyond, due to a dollar for dollar decrease in profit beyond the costs at the PTA. In addition, once the costs on an FPI contract reach PTA, the maximum amount the buyer will pay is the ceiling price. Note, however, that between the cost at PTA and when the cost equals the ceiling price, the seller is still in a profitable position; only after costs exceed the ceiling price is the seller in a loss position.

Any FPI 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

For example, assume:

PTA = ((2,450,000 - 2,200,000)/ 0.80) + 2,000,000 = 2,312,500

This is a term used in project management when managing specific fixed price contracts.

For cost reimbursable contract, the Point of Total Assumption does not exist, since the buyer agrees to cover all costs. However, a similar incentive arrangement with similar components, called a Cost Plus Incentive Fee (CPIF) contract sometimes is used. The CPIF includes both a minimum fee and a maximum fee. The share line in combination with the Target Fee, Maximum Fee and Minimum Fee can be used to easily calculate the points at which the incentive arrangement affects fee. The range between these points is called the "range of incentive effectiveness." Edited by oldPCO

For contracts subject to the Federal Acquisition Regulations, FAR 16.403-1 provides the Government description of FPI. The contract type is implemented by calling out FAR Clause 52.216-16 Incentive Price Revision - Firm Target. This clause captures the Ceiling Price as well as the government share ratio(s). If multiple line items are identified as FPI type, the individual line item information shall be included here, otherwise final contract costs and price are reconciled at the contract level.

The idea of a "Point of Total Assumption" is an extremely recent one, and even high-level government logistics specialists often don't know what the term means, or how to calculate it. In the government's efforts to cut cost overruns, however, the PTA is being introduced to FPIF contracts on an increasingly wide basis. Moreover, high-level professional examinations for industry certification, such as the Project Management Professional certification, are beginning to test applicants' knowledge of this concept and its application.

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