Analysing Point of Total Assumption for Projects
Point of Total Assumption is a price determined by a Fixed Price contract 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 expected to rise, given reasonable issues.
If the cost goes beyond Point of Total Assumption, they are assumed to be due to mismanagement rather than a worst-case set of difficulties. The seller bears all the cost risks at PTA and beyond.
Any FPIF contract specifies a target cost, a target profit, a target price, a ceiling price, and one or more share ratios. The Point of Total Assumption is the difference between the ceiling and the target prices, divided by the buyer’s portion of the share ratios for that price range, plus the target cost.
PTA= -(Ceiling Price + Target Price Price) / Buyer Share Ratio ) + Target Cost
Target cost : $56,000
Target Profit: $6,000
Target Price : $63,000
Share Ratio :70% buyer and 30% seller
PTA = (65,000-63,000)/ 0.7) + 60000 = $62,857
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