Contract question!

Submitted by Latunde on Sat, 04/26/2014 - 09:26
A fixed price plus incentive fee contract has a target cost of $130,000, target profit of $150,000, 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? 
 
A) $10,000
 
B) $15,000
 
c) $0
 
d) $5,000
 
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admin

Sat, 04/26/2014 - 10:41

See Similar Question here. http://pmzilla.com/fixedpriceincentivefee-contract-question

philstinnet

Sat, 04/26/2014 - 15:28

Buyer talks to Seller - "Man, my experts told me that this work should cost $ 130,000. Based on our mutual understanding, your profit is going to $ 15,000. Please take this $ 130,000 in right hand and $ 15,000 in your left hand. I am giving you both (target cost and target fee) at this time."

Seller to Buyer - "Cool ! I will go ahead and complete the work."

Seller does the work, but the work costs $ 150,000 which is $ 20,000 higher than the estimate from buyer.

Seller to Buyer - "I have finished the work. But the work was worth $ 150,000 and not $ 130,000 as your experts told you."

Buyer to Seller - "Interesting. So, my experts misjudged the worth of the work by $ 20,000. Anyway, as per our agreement, we are going to split in 80:20 ratio."

Seller to Buyer - " Cool bro ! If we split $ 20,000 in 80:20 ratio, your portion will be $ 16,000 and mine will be $ 4,000."

Buyer to Seller - "Sounds good. Let me give you additional $ 16,000."

Buyer reaches to his pockets to fetch $ 16,000. Suddenly a thought comes to his mind that he has already paid $ 145,000 to the seller. If he pays this additional $ 16,000, his total-out-of-the-pocket is going to be $ 161,000. 

Buyer to Seller - "Hey man ! If i pay you this $ 16,000, my total-out-of-the-pocket is going to be $ 161,000. I can not go above $ 160,000 as this is my ceiling price. Therefore, i can not give you additional $ 16,000. However, i can pay you $ 15,000 so that my total-out-of-the-pocket does not go above $ 160,000. "

Seller to Buyer - " Sure, i understand. This is just as per the agreement between us."

Buyer to Seller - " Here you go man ! Here are your additional $ 15,000."

Seller gets the money and leaves the Buyer's facility.

On driving back to his work place, Seller thinks - "I got $ 145,000 from the Buyer in the beginning. Today, he gave me additional $ 15,000. So the total money i received from Buyer is $ 160,000. I had to pay $ 150,000 to do the work. Therefore, my profit is just $ 10,000."

 

 

Jigga

Mon, 04/28/2014 - 19:02

Am confused here if the sharing ratio is 80:20 which I believe is 80 to the buyer and 20% for the seller. How come in this case the buyer is payin the seller $16,000 instead of $4'000?? Pls clarify.

philstinnet

Wed, 04/30/2014 - 14:27

Buyer is responsible for 80%. The 80% of $ 20,000 comes out to be $ 16,000. Therefore, buyer is responsible for $ 16,000.

It is very clear.

Could you please explain the cause of your doubt ? I am not sure what is making you think that Buyer should pay $ 4,000 ?

Thanks

sunku65

Thu, 05/01/2014 - 07:30

Hi Jigga,

 

Philstinnet is 100% correct. Try this.

If  Actual Cost > Traget Cost

(Reimbursment = Target Cost  + Target Fees + Buyers Share of Extra Cost ) Vs Ceiling Price (which one comes Less that one answer).

(Reimbursment = 130,000 + 15,000 + 80% of 20,000) VS 160,000 (which one comes Less that one answer)

161,000 VS 160,000 (which one comes Less that one answer)

Here 160,000 the contractor getting out of spending 150,000.

Therefore profit is 10,000.

 

Assume if atual Cost < Target Cost

If  Actual Cost < Target Cost

(Reimbursment = Actual Cost + Target Fees - Sellers Share of Extra Cost ) Vs Ceiling Price (which one comes Less that one answer).

sunku65

Thu, 05/01/2014 - 10:46

Please ignore above my confused formula.

The following formulas yeilds Final Price either using (Taget Cost or Actual Cost) or (Buyers  or Sellers Share) for CPIF and FPIF.  (Vs : Versus,  CP :Ceiling Price)

 

I.Formula 

Final Price  = Target Cost + Fees/Profit  - ( Buyers % share of (Target Cost - Actual Cost)) Vs CP (Which is lower)

II. Formula

  Final Price = Actual Cost + Fees/Profit + (Sellers % Share of (Target Cost - Actual Cost)) Vs CP (Which is lower)

 

sunku65

Thu, 05/01/2014 - 14:37

Try this too (it looks hard)

http://pmp.groupsite.com/beta/discussion/topics/178422/messages

 

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

So, the correct answer is a.

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PMP Fighter

Fri, 05/02/2014 - 10:07

I have few confuse,

target cost of $130,000 = the buyer expect.

target profit of $150,000 = the seller finally buy "the thing" of this price.

a target price of $145,000 = the fee finally paid by buyer.

a ceiling price of $160,000 = the upper limit of buyer would pay.

a actual cost of $150,000 = what???

 

sunku65

Fri, 05/02/2014 - 15:36

The target cost  $130,000 is signed contract to complete xyz work.

The Actual cost $150,000 after completing the xyz work.(came excess of $20,000).