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Point of Total Assumption
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PTA Background

The U. S. Government generally enters into contracts with an official philosophy of risk-aversion with respect to cost overrun. Within the Department of Defense, in particular, documents have been published to guide government contract agents and commercial contractors toward an appropriate balance of contract risk with the government's stewardship responsibility for public funds. Fixed price - incentive fee (FPIF) contracts are specifically mentioned in these documents as potential sources of cost overrun to the detriment of the government. According to the U. S. Army Forces Command (FORSCOM) handbook for its contracting agency: "If the Government were to share in overruns until the point at which the contractor's profit is zero, the contract could actually cost more than the established ceiling price. Therefore, there must be a 'break' in the share line such that profit reaches zero at the ceiling price." [Source: FORSCOM Handbook, February 2004. Downloaded from http://aca.saalt.army.mil.]

FPIF contracts define this "break point" as the point of total assumption (PTA). According to the Society of Cost Estimating and Analysis: "The break point is defined as the point in a cost-sharing relationship when a program goes from an incentive-type relationship to a fixed-price relationship." [Source: The Society of Cost Estimating and Analysis. Downloaded from http://www.sceaonline.org/prof_dev/glossary-b.cfm.] In other words, the incentive/penalty curve is discontinuous at the point of total assumption. This means that from the PTA onward, the contractor loses a dollar of profit for each additional dollar spent.

Point of Total Assumption Formula

The formula for calculating the point of total assumption for an FPIF contract is as follows:


project management learning center resource, point of total assumption, pta, point of total assumption formula, point of total assumption graph, how to calculate point of total assumption

The contract owner is the buyer in the buyer-seller relationship. The ceiling price is the maximum price beyond which the owner is unwilling to go. Negotiation determines the target price and the target cost, as well as the risk-sharing ratio distributed between the buyer and the seller. A share ratio defines the level of participation for both parties in cost underrun and overrun. Normally, the contract owner (the buyer) takes the lion's share of the benefit.

Negotiating an FPIF contract is a very complex process with a great deal of uncertainty affecting the parties. The point of total assumption is just one of many tools which may be used. The point of total assumption calculation is an aid to determining whether or not the contract terms are equitable, or fair to the parties. The parties must know how to interpret the calculated point of total assumption in order to make appropriate adjustments to the negotiation.

The following figure illustrates this formula and shows you how to calculate the point of total assumption.

Point of Total Assumption formula

View a larger image of the PTA formula illustration.

Point of Total Assumption Table

The table, below, places the point of total assumption just to the left of the midpoint. Just to the right of the midpoint is the break-even point (B/E). Note that the PTA does not equal the B/E. Moving left from the PTA, the table gives percentage reductions in projected final cost, yielding greater profit. Moving right from the B/E, the table gives percentage increases in projected final cost, yielding greater loss.

Point of Total Assumption table

View a larger image of the PTA table.

Point of Total Assumption Graph

The point of total assumption may be thought of as the "head room" remaining after the projected final price (cost plus profit) is compared to the ceiling price. The PTA has no head room because the final price equals the ceiling price. In the graph, below, the projected final which is fourth from the left is the PTA. Green segments represent profit, including incentive. Red segments represent loss.

Compare the graph below with the table above. Notice that the graph is a column-for-column visual representation of the table.

point of total assumption graph

View a larger image of the PTA graph.

Learn More About the Point of Total Assumption

To learn the effective techniques to negotiate an FPIF contract, including how to determine the fairness factor for the point of total assumption, just click the orange send-an-email icon at the top of this page.

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