Point of Total Assumption

point of total assumption - Point of Total Assumption

Point of Total Assumption abbreviated as PTA, although not an important topic from PMP exam perspective, can come across as a convoluted concept. Few things that you should know before understanding this topic are,

Profit – This is the amount that the seller has left over after all costs are paid

Price – This is the amount that the seller charges the buyer. Profit is included in it

Cost – This is the amount that the seller needs to spend to create, develop or purchase items required to do the job. A Target Cost would be the amount that the seller expects to spend to accomplish the job

Target Price – This is the amount that the buyer expects to pay the seller

Ceiling Price – This is the highest amount that the buyer will pay the seller in case there are cost overruns

Sharing Ratio – Sharing Ratio basically describes how cost overruns (or cost savings) will be shared between the buyer and the seller. A Sharing Ratio of 60/40 would mean Buyer would pay 60% and Seller would pay 40% in case of cost overrun or take back to the bank in case of cost savings

Now, we are ready to discuss Point of Total Assumption. The formula for PTA is,

PTA = [ (Ceiling Price – Target Price) / Buyer’s share ratio ] + Target cost

PTA applies only to fixed price incentive fee contracts. Basically it helps you calculate the amount above which the seller has to bear all the loss of a cost overrun.

You should not expect a question that requires you to use this formula in the PMP exam but it will be handy to remember it

Check more articles on Procurement Management

One Comment on “Point of Total Assumption”

Leave a Reply

Your email address will not be published.