# 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.

## PMP® Exam Formula Cheat Sheet

Learn how to successfully use project management formulas after reading this cheat sheet.

## 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.

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.

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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

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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Author profile
##### Megan Bell
Project Manager & Writer at Project Management Academy