How to Calculate the Ceiling Price

Discussion in 'PMP' started by venkata kishna r koppir, Aug 11, 2017.

  1. venkata kishna r koppir

    venkata kishna r koppir Active Member

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    In this fixed price incentive fee contract, the target cost is estimated at $150,000 and the target fee at $30,000. The project is over, and the buyer has agreed the costs were, in fact $210,000. Because the seller's costs came in higher than the target cost, the seller shares in the added cost:60 percent to the buyer and 40 percent to the seller. Calculate the final fee, the final price, and the point of total assumption.

    I did not understand how they got $200,000 ???

    upload_2017-8-11_15-47-57.png
     
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  2. Priyamwada

    Priyamwada Well-Known Member
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    Hi Venkat,

    We have received your query and have forwarded the same to our trainer.
    Kindly allow us 24 hrs. of time while we revert with a resolution.

    Happy Learning!!
    Priyamwada Singh - Global Teaching Assistant
     
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  3. Chandra M R(4723)

    Chandra M R(4723) Consultant & Trainer
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    Dear Venkata,

    Where did you find this question.. It seems to incomplete. Check if it has the information about the ceiling price. Besides, the explanation is very clear about calculating Final fee, Final price & Point of Assumption.

    Just recheck the question once. It should be there.

    Rgrds
    Chandra M R
     
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  4. venkata kishna r koppir

    venkata kishna r koppir Active Member

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    This is from Rita PMP 8th edition Book. This is the complete question.
     
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  5. venkata kishna r koppir

    venkata kishna r koppir Active Member

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    upload_2017-8-12_15-7-57.png

    This is the complete Question
     
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  6. tim jerome

    tim jerome Well-Known Member
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    To continue the thought - ceiling price is a value that the buyer cannot or will not pay beyond. It's based on Buyer's perception of the value of the work. For our purposes, it will always be provided.

    If you wish to discuss the questions, ask and we'll decompose the logic and problem.

    Thanks,
     
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  7. venkata kishna r koppir

    venkata kishna r koppir Active Member

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    Please explain the answer for me thanks.
     
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  8. tim jerome

    tim jerome Well-Known Member
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    Here are the data - I've simplified the details, and laid out clearly.

    The PTA is interesting, as it states exactly where the Seller will assumes all future overruns.
    To that point, the seller at this point still is making a little profit, but that profit will be spent if there are more costs.


    target cost $150,000
    target fee $ 30,000.
    Ceiling $200,000

    The project is over,

    Actual costs $210,000
    Share Ratio 60/40
    Overrun $ 60,000
    Seller's share $ 24,000

    Because the seller's costs came in higher than the target cost, the seller shares in the added cost:60 percent to the buyer and 40 percent to the seller.


    final fee = the sum of:
    Target Fee $ 30,000
    Seller's share -$ 24,000
    ----------------------------------------

    $ 6,000

    final price = the sum of:
    Actual Cost $210,000
    Target Fee $ 30,000
    Seller's share -$ 24,000
    ----------------------------------------
    $270,000

    point of total assumption (PTA) -

    [(Ceiling Price - Target Price) / Buyer's share] + Target Cost

    Target Price = Target Cost + Target Fee

    [($200,000 - ($150,000+$30,000) / .6] + $150,000

    $183,333
    This is the point where the seller will assume future overruns.
     
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