“Never test the depth of river with both feet.” Warren Buffet
“Winners are simply willing to do what losers won't.” Prachi Patel
The content of the Project Management Professional (PMP®) exam is the subject of constant speculation. The Project Management Institute (PMI®) forbids students from sharing information about their exam experience, so details around specific areas of focus are open to interpretation. Further adding to the exam’s mystique, PMI says that the questions are not limited to the content in the Project Management Body of Knowledge (PMBOK®).
The “Point of Total Assumption” (PTA) calculation is widely regarded as necessary and likely to show up on the exam. The formula is not in the PMBOK 6th Edition, and I was unable to find it specifically referenced on the PMI website. However, an internet search quickly revealed scores of Project Management experts who are all sure that the formula is required.
Maybe.
But as I tell the PMP candidates that I instruct, all learning is a good thing! If there is a chance it is on there, you should learn it.
So, let us learn it!
In a Fixed Price Incentive Fee contract, the buyer agrees to pay a fixed price but wants to incentivize cost savings by the seller. That is why it is called an “incentive fee” contract! They buyer and seller agree to 5 things:
· Target cost – this is what the estimated cost of the work
· Target profit – the negotiated profit for the seller
· Target price – cost + profit
· Ceiling price – maximum the buyer will pay
· Share ratio – the ration that determines how cost overruns and underruns will increase or decrease the profit of the seller
The formula is straight forward. The PTA = ((Ceiling price-target price)/buyers share ratio) + target cost. At the PTA, the seller assumes all further cost over runs. They can still make a profit on the contract, but each additional dollar comes out of their profits.
Lets do a problem!
For simplicity, I pulled a generic calculation off Wikipedia. Assume:
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
To solve, all we do is plug the values into formula above.
PTA = ((2,450,000 - 2,200,000)/ 0.80) + 2,000,000 = 2,312,500. This is the price where all additional costs are paid by the seller.
The formula is easily mastered, but it is important to understand the concept behind the incentive. Because the PMP exam is multiple choice, you can often get to the right answer without doing formulas as long as you understand the concept of the topic. Because this is an incentive fee, any question where the contractor comes in below the target price will have an answer where the target profit is greater than planned! In that instance, you don’t even need to do the PTA calculation. Likewise, if the contractor exceeded the target cost, the actual cost will always be between the target price and the ceiling.
Understand the concept and use that to eliminate any obviously wrong answers.
Will you have a PTA question on the exam? Who knows! But you will have the underlying knowledge either way.
Coda
I am amazed at large organizations penchant of micromanagement. Our state just issued guidelines to re-open certain businesses, and the guidelines are both common sense and are probably aligned with CDC guidelines. So just have me (as a business owner) sign an attestation that I will follow them! But no… Instead I must submit complicated documents, seating plans and approvals from at least three different government entities. While many people have poor judgement, why can’t the rules ever help those of us who have good judgement?