Calculate final price of the contract
Submitted by cplusplus on Thu, 04/29/2010 - 10:29
103. The following is the data for a CPIF project you are managing:
Target cost is $ 100,000;
Actual cost is $ 80,000
Target fee is $ 20,000;
Maximum fee is $ 25,000;
Sharing ratio is 60:40.
What should be the final price of the contract?
Choice 1 $ 100,000
Choice 2 $ 108,000
Choice 3 $ 105,000
Choice 4 $ 92,000
Thank you all.
Forums:
ChandraR
Thu, 04/29/2010 - 12:20
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Answer is Choice 2 As a buyer
Answer is Choice 2
As a buyer you split the cost savings per agreed ratio.
Cost savings = Target cost- Actual cost = $100,000-$80,000 = $20,000
Seller's share/Incentive Fee in the cost savings = 40% = 0.4 * $20,000 = $8,000.00
Cost of the contract = Actual Cost + Seller's minimum fee + seller's share(IF) in cost savings
= $80,000+$20,000+$8,000 = $108,000.00
Chandra
mgurunath
Sun, 05/02/2010 - 08:49
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Small Clarification
I am still preparing for PMP exam.
IMHO In this case the final fee that the buyer is going to offer is
$20,000 + $8,000 = $28,000
Which is greater than the maximum fee of $25,000
So shouldnt the cost of the contract be
$80,000 + $25,000 = $105,000
Please let me know if my understanding is incorrect.
ChandraR
Sun, 05/02/2010 - 19:38
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This is a CPIF contract. The
This is a CPIF contract. The incentive fee of $8000 comes on top of the minimum agreed fee of $20,000.00. If the project over runs the targetted maxiumum of $100,000.00, there is no incentive fee. The maximum fee of $25,000.00 comes into picture when Point of Total Assumption (PTA) is involved. At that time the seller has to absorb the excess cost based on the PTA calculation.
Chandra
mgurunath
Wed, 05/05/2010 - 05:13
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Reclarification
@chandra,
I have checked with some reliable sources regarding this confusion.
They have replied back to me mentioning that max fee still holds good and the answer should be $105,000.
I will check back on the suggestion on FAR site, could you please check from ur side as well.
ChandraR
Fri, 05/07/2010 - 02:58
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MGurunath,Generally incentive
MGurunath,
Generally incentive fee is a percentage of cost savings to encourage the seller to do the best to create a win-win situation. Even If the seller does a lousy job he is guaranteed to get $20,000 fee. If you restrict the fee to $25,000 you are offering a mere $5000.00 as incentive on a 100k project. Where is the incentive for the seller to do a very very very good job and save huge costs to the buyer? I could not get a satisfactory explanation when I read some more articles explaining this CPIF contracts. The Buyer's ratio is a 2 sided incentive to the seller. The buyer is absorbing a lion's share in case of cost overruns as well as providing good incentive in case of huge cost savings. Either max. fee or buyer's ratio is extraneous information. How do we know which one? Can you pl. ask your reliable sources to explain with some reasoning instead of giving a number as answer so majority of the PMP aspirants following this now and in future get benefited?
Chandra
maj1981
Mon, 05/03/2010 - 18:08
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Your answer
Could you explain how you determined the seller's share/incentive fee in the cost savings? The question has a ratio amount of 60:40, how did you know to use 40?
Thanks
ChandraR
Mon, 05/03/2010 - 20:02
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In general, as a buyer you
In general, as a buyer you offer a share of cost savings as an incentive to the seller and naturally you are the one who deserves to keep a bigger pie. Normally in the wording buyer's ratio, the first portion is buyer's share and the second part of the ratio is seller's.
Chandra
anoop_modi
Thu, 05/06/2010 - 02:53
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Chandra, pls see below
Chandra,
pls see below question that consider ceiling price. It seems that actual fee calculations also consider ceiling price and min and max fee values.
Question:- A fixed-price- plus-incentive- fee (FPI. contract has a target cost of $130,000, a target profit of $15,000, a target
price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000.
How much profit does the seller make?
1. $10,000
2. $15,000
3. $0
4. $5,000
Ans: 1 i.e 10,000
Regards
Anoop
dinduboy
Thu, 05/06/2010 - 03:44
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Are this PTA type question
Are this PTA type question relavan for the current PMP exam as i have not seen any PTA examples here.
FYI
http://pmp.groupsite.com/discussion/topic/show/178422
admin
Thu, 05/06/2010 - 04:39
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Yes its very much relevant
Yes its very much relevant and you can get a question on PTA in the real exam too.
dinduboy
Thu, 05/06/2010 - 07:02
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aicks, thanks admin
aicks, thanks admin
ChandraR
Thu, 05/06/2010 - 13:06
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Anup, Yes. Your example is
Anup,
Yes. Your example is different from what we are discussing. We are not given ceiling price, target price. We are simply given target cost, actual cost, buyer's ration, seller's minimim fee and max. fee and we are asked to compute the project cost (for buyer) for the CPIF contract. Based on this info how fo you compute? Do you put the minimum fee/maximum fee while splitting the profit from cost savings. In my opinion for this question that does not involve PTA calculation, use actual cost, minimum fee + profit splitting as incentive fee and the ignore the maximum fee as extraneous information trying to deliberately mislead you to see whether you fall into the trap.
Regards,
Chandra
maj1981
Fri, 05/07/2010 - 00:02
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Please explain
I'm not getting that answer, could you explain how you got the answer? Thanks!
ChandraR
Fri, 05/07/2010 - 00:57
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I too couldn't get it
Maj1981,
Are u explanation on Anup's Question?I did not pay attention to compute until I saw your posting. I too did not get it. According to me, the seller did not make any profit. Infact, he lost money. Here is my calculation:
PTA = [Ceiling Price - Target Price]/BR + Target Cost
= [160,000-145,000]/0.8 + 130,000
= $148,750.00
This means if the project costs beyond $148,750.00, the seller has to absorb the excess cost = Actual cost - PTA = 150,000 - 148,750 = $1250.00
None of the choices given match with my calculation. The seller has to pay $1250.00 out of his pocket unless there are some typos/some of the numbers are jumbled up.
Chandra
dinduboy
Fri, 05/07/2010 - 02:55
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as previously mentioned you
as previously mentioned you find the answer for this question here:
http://pmp.groupsite.com/discussion/topic/show/178422
pta = (160,000 – 145,000)/.8 + 130,000 = 148,750
So, since the total cost @pta = 148,750
over run @pta = 18,750
buyer share = 15,000
seller share = 3,750
Note, the cost up to that point was agreed to split between parties.
If the total cost would be equal pta, then seller would have a profit = target profit – sellers overrun share = 15,000 – 3,750 = 11,250
Now, with the total cost 150,000—every dollar above cost 148,750 will be taken directly from the sellers profit. So, the final profit will be = 11,250 – (150,000-148,750) = 10,000
ChandraR
Fri, 05/07/2010 - 03:15
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Dinduboy,I am not convinced.
Dinduboy,
I am not convinced. PTA means the max. price the buyer is going to pay and any thing beyond is seller's responsibility.
Cost overrun for the seller =PTA $148,750.00 - Actual cost $150,000 = - $1,250.00
Where is the profit? It is $1,250 loss for the seller.
Whoever has done the calculation, he/she made 2 blunders:
1) Assumed/Interpreted Cost Over run as Target Cost - PTA
where as in reality
cost overrun= target cost-actual cost
but the buyer is agreeing to loose all profit + absorb part of the cost overrun
2) is using the buyer's ratio again to split the cost over run between seller and buyer where as it has already been factored into while calculating PTA.
Chandra
dinduboy
Fri, 05/07/2010 - 10:49
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Sorry Chandra, i just pasted
Sorry Chandra, i just pasted the link and not sure of its credibility. PTA is also a new concept for me..i just discovered it yesterday and trying to make sence of it ever since :)
Anyway based on my understanding of this concept, from the buyer's point of view:
The upper bound limit = $Ceiling Price and the Lower bound limit = $Target Price
If the $Actual Price is lower than PTA, then its all good
However if the $Actual Price is higher than PTA, then the buyer and seller share the difference based on the ratios provided when the contract was negociated.
If the $Actual Price > $Ceiling Price ----> then the Seller pays for the difference.
Thanks and please advice.
ChandraR
Fri, 05/07/2010 - 11:35
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Hi Dinduboy:Your
Hi Dinduboy:
Your understanding of PTA is incorrect. From the buyer's point of view, PTA is the upper bound NOT the ceiling price. @PTA, the FPIF/CPIF contract effectively becomes a FIRM FIXED CONTRACT The buyer is not obligated to pay a penny more than PTA. Ceiling Price is normally a liitle bit more than Target price and the difference between these two is split per buyer's ratio and added to the Target cost to compute PTA. In our example this difference is 160-145 = 15,000. Out of this buyer will take the burden of absorbing 15,000/0.8 = $18,750.00 ( More generous on the part of buyer! He is losing all the profit, though he targetted a cost of $130,000 during the planning stages, he is prepared to shell additional $18,750.00 to get the project done- altogether is spending upto $148,750.00 Not the Ceiling price of $160,000.00. The person who posted the solution is misleading by computing Ceiling Price - Actual Cost and giving the seller a profit- which is WRONG!
Chandra
dinduboy
Fri, 05/07/2010 - 12:39
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Much thanks Chandra for the
Much thanks Chandra for the clarification and taking time to explain.
Noted below is a good link for understanding PTA concept:
http://www.canadianprojectmanager.ca/articles/pta.pdf
I have changed my mindset on PTA now and its more biased to yours :)
cplusplus
Sat, 05/08/2010 - 10:02
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Answer is choice 3 which is 105K, i am not at all convinced with
Answer is choice 3 which is 105K, i am not at all convinced with their explanation.
Question No : 103
The following is the data for a CPIF project you are managing:
Target cost is $ 100,000;
Actual cost is $ 80,000
Target fee is $ 20,000;
Maximum fee is $ 25,000;
Sharing ratio is 60:40.
What should be the final price of the contract?
Choice 1 $ 100,000
Choice 2 $ 108,000
Choice 3 $ 105,000
Choice 4 $ 92,000
Correct Choice : 3
Justification :
Target cost (TC) = $ 100,000
Target fee (TF) = $ 20,000
Maximum fee = $ 25,000
Sharing ratio=60:40
Actual fee (AF) = {(TC - AC) * SSR} + TF = {($ 100,000 - $ 80,000) * 40%} + $
20,000 = $ 20,000 * 40% + $ 20,000 = $ 28,000,
Although the actual fee is more than the maximum fee, the maximum fee ($ 25,000) only is payable.
So, final price = AC + AF = $ 80,000 + $ 25,000 = $ 105,000
i found this question on pmstudy.
ChandraR
Sat, 05/08/2010 - 11:45
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C++,I am also not convinced
C++,
I am also not convinced as I never came across such formula. What if AC = 125,000.00. Is the buyer entitled to deduct 40% of the excess costs incurred and pay just 20,000-10,000 = $10,000 as fee? If the minimum fee is $20,000.00 that is guarnateed and in that scenario, the project cost = 80+20 = $100,000.00 not $105 k not $108k
Chandra
ChandraR
Sat, 05/08/2010 - 14:09
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Further, when your contract
Further, when your contract says minimum fee: $20k;max. fee $25k, I consider the difference as award fee and is subject to the discretion of the buyer and when you state Buyer's ratio, I consider that for computing PTA and provide the cushion to the seller in cas of cost overruns and incentive to share the cost savings - motivating the seller to do an effective job. Since the question clearly states that this is a CPIF contract, I ignore the max. fee as extraneous info - not applicable in this scenario- and just use Buyer's ratio and PTA to determine the maximum the buyer is going to spend on the project - including the minimum fee he is contractually obligated to pay.
Chandra
Shamik@76
Sat, 10/23/2010 - 06:52
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Resolution: PTA & Final Price of an CPIF contract
Hi Chandra and others,
Please, find the resolution of this query as given below.
Target Cost = $130,000; Target Fee (profit) = $15,000 ==> Target Price = $130,000 + $15,000 = $145,000
Ceiling Price = $160,000; Share Ratio: 80% buyer – 20% seller for overruns; Actual Cost = $150,000
In this case, the Actual Cost is higher than the Target Cost, so the seller is penalized and receives less fee, or profit. Therefore, Final Fee = {(130,000 - 150,000) * 20%} + 15,000 = -4,000 + 15,000 = $11,000.
Final Price = Actual Cost + Final Fee = 150,000 + 11,000 = $161,000. However, this is above the Ceiling Price = $160,000.
PTA = {(Ceiling Price - Target Price)/Buyer's Share Ratio} + Target Cost = {(160,000 - 145,000)/0.80} + 130,000 = $148,750. This means that the Actual Cost = $150,000 is GREATER than the PTA. The subtle point, it seems you have missed, is: "Once the costs on an FPI contract reach PTA, the maximum amount the buyer will pay is the CEILING price."
This implies that the Final Price the Seller would receive is = $160,000 (Ceiling Price). The seller's Actual Cost = $150,000. Thus, the seller makes a profit of = 160,000 - 150,000 = $10,000.
Hopefully, this query gets resolved now! You may also brush up the finer points regarding PTA at http://en.wikipedia.org/wiki/Point_of_total_assumption.
Cheers,
Shamik Banerjee
savian
Sat, 10/23/2010 - 08:24
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I thought PTA only applies to
I thought PTA only applies to FPIF type contracts?
Also, I've got a question about PTA for you gurus:
If the overrun is above PTA value but below ceiling price, does the overrun share ratio still remain the same? How is this calculated?
biyat
Wed, 12/23/2015 - 03:46
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Explanation
Question:- A fixed-price- plus-incentive- fee (FPI. contract has a target cost of $130,000, a target profit of $15,000, a target price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000.
How much profit does the seller make?
1. $10,000
2. $15,000
3. $0
4. $5,000
Ans: 1 i.e 10,000
Solution:
Target Cost = 130,000
Target Profit = 15,000
Target price = 145,000
Ceiling price = 160,000
Share ratio = 80:20 (i.e. buyer : seller)
Actual cost = 150,000
Find the incentive
Incentive = (Target cost – Actual cost) * Seller/Vendor’s share ratio percentage
= (130,000 – 150,00) * 20/100
= -(20,000) * 20/100
Incentive = -(4,000)
Find overhead fee
Overhead fee = Target Fee or Vendor’s target profit + Incentive
= 15,000 + -(4,000) = 15,000 – 4000
Overhead fee = 11,000
Find contract cost
Contract cost = Actual Cost + Overhead fee
= 150,000 + 11,000
Contract cost = 161,000
Compare the constract cost with ceiling price
161,000 > 160,000
So buyer will only give 160,000 (Ceiling price)
So, Seller/Vendor’s profit = 160,000 – 150,000 = 10,000
Another way to look at it is using Point of Total Assumption (PTA)
Calculate Point of Total Assumption
PTA = Actual cost + (Ceiling price – Target price) / Buyer’s share percentage
= 130,000 + (160,000-145,000)/0.8
PTA = 148,750
As per definition, Once the costs on an FPI contract reach PTA, the maximum amount the buyer will pay is the CEILING price.
So, buyer will only pay $160,000
Hence profit = 160,000 – 150,000 = 10,000 (Answer)
Question
The following is the data for a CPIF project you are managing:
Target cost is $ 100,000;
Actual cost is $ 80,000
Target fee is $ 20,000;
Maximum fee is $ 25,000;
Sharing ratio is 60:40.
What should be the final price of the contract?
Choice 1 $ 100,000
Choice 2 $ 108,000
Choice 3 $ 105,000
Choice 4 $ 92,000
Solution:
Target cost = 100,000
Actual cost = 80,000
Target fee = 20,000
Maximum fee = 25,000
Sharing ratio = 60:40 (i.e. buyer : seller)
Find the incentive
Incentive = (Target cost – Actual cost) * Seller/Vendor’s share ratio percentage
= (100,000-80,000) * 0.4
Incentive = 8,000
Find overhead fee
Overhead fee = Target Fee or Vendor’s target profit + Incentive
= 20,000 + 8,000
Overhead fee = 28,000
Compare overhead fee with ceiling fee (maximum fee)
28,000 > 25,000, hence customer will only give $25,000
Find contract cost
Contract cost = Actual Cost + Overhead fee
= 80,000 + 25,000
Contract cost = 105,000 (Answer)
Hope it helps...