Calculating point of total assumption value

Discussion in 'PMP' started by swapna_hawaldar(2506853), Dec 25, 2016.

  1. swapna_hawaldar(2506853)

    swapna_hawaldar(2506853) Well-Known Member
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    Hi,

    Will there be any questions on calculating point of total assumption value? I have not seen any formula for the same in either PMBOK guide or Simplilearn course material, except for in one of the test exams.

    Please let me know.

    Thanks!
    Swapna
     
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  2. B K S Prasad

    B K S Prasad Well-Known Member
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    Even though it is not part of PMBOK, you may get the question related to this. If you understood the concept it doesn't matter, it is there in books or not. Better to be prepared.
     
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  3. Rajan Sood

    Rajan Sood Rajan
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    As a concept, it might be important to understand what is Point of Total Assumption. But it's highly unlikely that there will be any calculation based question in the exam.
     
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  4. Priyamwada

    Priyamwada Well-Known Member
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    You can get the calculation based questions in the exam.
    We would suggest you to practice those as well.
    If you understood the concept it doesn't matter, it is better to be prepared!
     
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  5. tim jerome

    tim jerome Well-Known Member
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    As stated above, it's seen very rarely, and you won't have to memorize the formula. However, since you (and others) are curious, I've answered another thread with the below. Please feel free to ask more questions as you work through - this deserves about 45 minutes interaction in a classroom before you start seeing all the specifics -

    Incentive Fee contracts hold Sellers accountable for their purchase decisions. The way Fixed Price Incentive Fee contracts do this is using a concept called the "Point of Total Assumption" (PTA). The Point of Total Assumption determines the place where the seller assumes all cost risk. How does this work? First, we need to establish some definitions -

    Target Cost = the estimated Project Budget.

    Target Fee = the profit Buyer owes seller if Actual Cost ends up equalling Target Cost.

    Target price = Target Cost plus Target Fee. This is what the buyer will pay.

    Ceiling Price = buyer's cost limitations - "I will not pay more than this."

    Share Ratio = the commitment from the Buyer to share any savings OR overruns, defined Buyer/Seller.

    The formula is a little complicated, but let's look at this:

    PTA = ((Ceiling Price - Target Price) / Buyers Share Ratio) + Target Cost

    We are normalizing the Difference between Ceiling and Target Price by buyer's share ratio, and adding this to the Target Cost. This adjusts the Target Cost to account for any other money owed the Seller.

    IF:
    Target Cost = 150,000
    Target Fee = 30,000
    Target Price = 180,000
    Ceiling Price = 200,000
    Share Ratio = 60/40 (overruns)

    PTA =((200k-180K)/.6)+150,000
    =183,333

    This is where any overruns are owned by the seller. It can also be said that this is where the Buyer's share of overruns is frozen. If you build a spreadsheet and graph actual costs from 140,000 to 200,000, you'll see where the ceiling limits the the buyer's cost liability. Also, you'll see a small range between the Point of Total Assumption and Actual Cost equalling Price where although the ceiling has been met, there is still a little profit left. You can say:

    The PTA is the point where the share ratio ceases to operate.
    The PTA is the point where the buyer will no longer share costs with the seller.
    The PTA is expressed in terms of the actual Cost.

    PTA can be used to forecast cost risk:

    EAC < PTA means that the risk of overruns is shared.
    EAC > PTA means that all overruns moving forward are owned by the Seller.
     
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    Priyamwada and Purushotham C K_1 like this.
  6. swapna_hawaldar(2506853)

    swapna_hawaldar(2506853) Well-Known Member
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    Thank you all! Tim, thank you for the detailed answer. I will go through it and post a reply.
     
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  7. Purushotham C K_1

    Purushotham C K_1 Active Member

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  8. Priyamwada

    Priyamwada Well-Known Member
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    Thank you Purushottam for sharing the link!
     
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  9. swapna_hawaldar(2506853)

    swapna_hawaldar(2506853) Well-Known Member
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    Thanks for the link Purushottam!
     
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  10. Priyamwada

    Priyamwada Well-Known Member
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    Hope this helps!
     
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  11. swapna_hawaldar(2506853)

    swapna_hawaldar(2506853) Well-Known Member
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    Hi Tim,

    I went through the explanation given by you. The concept is clear to me now. I think this formula along with some explanation should have been included in the study material.

    Thanks a lot for your help!
    Swapna
     
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  12. tim jerome

    tim jerome Well-Known Member
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    You're welcome, Swapna. Although Point of Total Assumption could show up on the test, the probability is so much lower than the material we do cover. However:

    Everything you learn regarding business, leadership, and project management will add to your ability to pass the exam easily.

    You have the next 2 decades to learn these details - and as a PMP are under oath to contribute to this knowledge, as well as mentor and train yourself.

    Thanks for your interest and investment in your development -
     
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