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Point of Assumption

Different types of contracts have different requirements and budget impacts. Project Managers who are working towards earning the Project Management Institute (PMI)’s Project Management Professional (PMP)® certification should have a basic understanding of contracts and project formulas connected to different types of contracts. For instance, the point of total assumption calculation can be used with fixed-price incentive fee contracts. Although it has been deemphasized in recent years by the PMI itself, the point of total assumption (PTA) formula may be used by some companies.

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Point of Total Assumption (PTA)

There is not a point of total assumption formula needed for the PMP exam (a “PTA formula PMP” in other words), but there is a core definition that drives the calculation of this concept. PTA applies only in incentive fee contracts in which the buyer and seller have a fixed price, and the buyer agrees to repay an agreed-upon percentage of any cost overrun to a maximum point. Although not included in the PMI online lexicon nor as a term within the PMP® certification exam, project managers should know the PTA is the cost point at which the seller has agreed to cover all cost overruns.

POINT OF TOTAL ASSUMPTION
The amount above which the seller bears all the losses of an additional cost overrun; only related to fixed-price incentive fee contracts
– Source https://www.izenbridge.com/blog/pmp-exam-point-of-total-assumption

No one wants to incur additional costs, so the fixed-price incentive contract provides a financial incentive to motivate teams to stay on budget.

Fixed-Price Incentive Fee (FPIF) Contracts

The fixed-price incentive fee contract must be carefully designed with very specific terms in place. If an FPIF contract is well planned, “when the cost equals the ceiling price, the seller should still be in a profitable position (but with reduced profits); only after costs exceed the ceiling price should the seller be in a loss position.”  Below find listed core terms reflective of the FPIF contract and the point of total assumption. Note, these terms are not included in the PMI online lexicon nor as a term within the PMP certification exam at this time.

TERMDEFINITION
TARGET PRICE• Sum total of Target Cost + Target Fee
• Both seller and buyer use as a benchmark
• If the final project cost less than this price, the buyer and seller will share the profit as per the profit-sharing agreement. If the price goes beyond the target price, buyer and seller share the cost as per the cost-sharing agreement (subject to the maximum ceiling of the selling price).
Source: www.izenbridge.com/blog/pmp-exam-point-of-total-assumption/

TARGET FEE
• Fee which the seller wants to charge for the work
• Planned fee, and the actual fee will depend upon how well the seller manages the project (cost overruns)
Source: www.izenbridge.com/blog/pmp-exam-point-of-total-assumption/
TARGET COST• The estimated budget, which the seller has planned for delivering the given project
• Shared with the buyer
Source: www.izenbridge.com/blog/pmp-exam-point-of-total-assumption/
CEILING PRICE• Target Cost, plus the Buyer’s Share of the cost overruns, plus the seller’s Target Profit
• The maximum the buyer is expected to pay regardless of cost overruns
• Defined as the Target Price plus a percentage
• May be adjusted for authorized scope changes and other approved variations to the contract, but not for cost overruns associated with the original scope of work
Source: https://mosaicprojects.com.au/WhitePapers/WP1061_PTA.pdf
GUARANTEED MAXIMUM PRICE• Frequently used outside of the USA
• Represents the maximum project value after which the buyer has no more to pay
• Set in the contract and a ‘profit share’ agreed for the expected cost underruns.
• GMP contracts may include target costs or may simply include a share ratio for any cost under-runs
Source: https://mosaicprojects.com.au/WhitePapers/WP1061_PTA.pdf
SHARE RATIO• Compares the actual cost at completion with the target price and divides the benefit of
• There are two types of ratios:

1. One for sharing profit, when the project cost less than the target cost, and
2. Another is the cost-sharing ratio when the project costs more than the target cost.

• A typical set of share ratios are 80% buyer – 20% seller for overruns and 50% – 50% for underruns. This means the seller (contractor) contributes 20% of any cost overruns (usually from its planned profit) up to the ceiling but receives 50% of any cost savings (underruns).
• Consequently, the seller is incentivized to achieve underruns but not heavily penalized for cost overruns until the cost ceiling is reached
Source: www.izenbridge.com/blog/pmp-exam-point-of-total-assumption/

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Point of Total Assumption (PTA) Formula

Although the Point of Total Assumption is not in the sixth edition of the PMI’s A Guide to the Project Management Body of Knowledge (PMBOK® Guide), project managers may find situations in their professional life that may benefit from a basic understanding of the PTA formula. An FPIF contract will specify a target cost, a target profit, a target price, a ceiling price, and one or more of the sharing ratios. The PTA formula requires the ceiling price, target price, buyer’s share ratio, and the target cost.

The mathematical calculation for PTA is relatively straightforward. Examples of the PTA formula calculations show it is dependent upon the figures determined in the FPIF contract.

Point of Total Assumption Calculation Example 1

Review below from the examples provided by the PMChamp.com site:

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

What is the Point of Total Assumption for this project with these contract terms?

Point of Total Assumption Calculation Example 2

For other examples, review this information from Deep Fried Brain Project.com:

  • Target Cost: $60,000
  • Target Fee: $15,000
  • Target Price: $75,000
  • Ceiling Price: $100,000
  • Buyer-Seller Share Ratio: 60:40

What is the Point of Total Assumption for this project with these contract terms?

The formula is straightforward. The challenge is in finding the needed data from the project contract and budget documentation.

Conclusion

The Project Point of Total Assumption is in fact, not an “assumption” as in a guess. It is a very specific figure determined by calculations driven by a specific formula. Although there may not be a PTA section of questions on the PMP® certification exam or a “point of total assumption PMP” definition, there could be organizational value derived from knowledge of the values used within a fixed-price incentive fee (FPIF) contract.

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Megan Bell
Megan Bell