Point of Total Assumption is included in PMP exam as it is a component of US Federal Acquisition Regulation 16.4 related to Fixed-Price Incentive Fee Contracts. The FAR covers a variety of incentive contracts but the one that interests us is a Fixed Price Incentive Fee (FPIF). A fixed-price incentive (firm target) contract specifies a target cost, a target profit, a price ceiling (but not a profit ceiling or floor), and a profit adjustment formula. These elements are all negotiated at the outset of the contract. The price ceiling is the maximum that may be paid to the contractor, except for any adjustment under other contract clauses. When the contractor completes performance, the parties negotiate the final cost, and the final price is established by applying the formula. When the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit; conversely, when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss. If the final negotiated cost exceeds the price ceiling, the contractor absorbs the difference as a loss. Because the profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for the contractor to control costs. And here is where PTA enters the game. PTA is the point in time at which the share ratio ceases to operate and $1 of added cost results in $1 of decreased payment to the contractor, in other words if you have a sharing ratio of 80/20 (for each additional 100$ gov will pay 80 bucks and the rest 20 will have to be assumed by the supplier, and visa versa, if you are performing well 80% savings will go to gov and 20% will be additional profit for you). So PTA is the threshold when this rule stops to operate. To calculate the PTA you can use the following formula: PTA = (Ceiling Price – Target Price)/Government Share Ratio + Target Cost. Example: Target Cost: 2,000,000 Target Profit: 200,000 Target Price: 2,200,000 Ceiling Price: 2,450,000 Share Ratio: 80% buyer–20% seller for overruns, 50%–50% for underruns PTA = ((2,450,000 – 2,200,000)/ 0.80) + 2,000,000 = 2,312,500

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