Question

5. In a project, a cost incentive contract has been awarded to a contractor with the following parameters: Target Cost 1,000,000 Target Profit for Seller 100,000 Target Price 1,100,000 Ceiling Price 1,300,000 Share Ratio 80% buyer-20% Evaluate the point of total assumption (PTA, breakpoint) of the project.

Answer 1

Answer:

Target Price (T.P) = Target Cost + Target Fee
T.P = 1,000,000 + 100,000 = 1,100,000

PTA = [(Ceiling Price - Target Price) / Buyer's Share Ratio] + Target Price

PTA = [(1,300,000 - 1,100,000) / 0.8] + 1,100,000

PTA = (200,000 / 0.8) + 1,100,000 = 250,000 + 1,100,000 = 1,350,000

It means the cost of development should not touch the Point of Total Assumption (PTA) (1,350,000). And, it should be the target of the seller. If it touches PTA then all further cost overrun the seller has to pay.