The point of total assumption (PTA) is a point on the cost line of the profit-cost curve determined by the contract elements associated with a fixed price plus incentive-Firm Target (FPI) contract above which the seller effectively bears all the costs of a cost overrun. 

In the contract, the buyer agrees to pay a fixed price and a maximum price for cost overruns. This is called the Most Pessimistic View of Costs. Beyond this point, if the cost rises, it will most likely be because of mismanagement at the Seller’s end, thus, the seller has to bear all the extra costs beyond this point

This Point of Total Assumption does not come up in a Cost Reimbursable Contract, because in a Cost Plus type of contract, the buyer agrees to pay off all the costs.

Target Cost: This is the estimated budget, that the seller has planned for delivering the given project

Target Fee: This is the fee which the seller wants to charge for the work he is doing. It is the planned fee, and the actual fee will depend upon how well the seller manages the project (cost overruns)

Target Price: It is the price the buyer is looking towards. And, it is a sum total of Target Cost + Target Fee, both seller and buyer use this as a benchmark. 

Share ratio: There are two types of ratio:

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

Calculation

To calculate the PTA, the contractor considers all the costs associated with a project, including direct costs such as labor, materials, and equipment, as well as indirect costs such as overhead expenses. The contractor also considers the potential risks associated with the project, such as schedule delays, material shortages, or unforeseen circumstances that could increase costs. Based on these factors, the contractor determines the maximum amount they are willing to spend before they start losing money.

Any FPI contract specifies a target cost, a target profit, a target price, a ceiling price, and one or more share ratios. The PTA is the difference between the ceiling and target prices, divided by the buyer’s portion of the share ratio for that price range, plus the target cost.

PTA = ((Ceiling Price – Target Price)/buyer’s Share Ratio) + Target Cost

In simpler terms, PTA is the maximum amount a contractor is willing to spend
on a project before they start losing money. It represents the point
where the contractor’s profit margin is reduced to zero.

Another example

Point of Total Assumption Calculation Example 2

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

Further Readings

What Is The Point Of Total Assumption (PTA) – iZenBridge