Reginald SmithFire Support Trainer| Capstone CorporationClarksville, Tn, United States
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Reginald SmithFire Support Trainer| Capstone CorporationClarksville, Tn, United States
As my studies continue, I ran into a contracting question. FPIF, (TC 20,000, TP 20,000, TPrice 220,000, CP 250,000, BSR 70/30). The project was completed for an actual cost of 218,576. What is the PTA?
My question is on the BSR. Although I got the right answer I hesitated on this question because I was unsure of using the buyers 70% or using the sellers 30%.
I used the Buyer's percentage because the TC less than the AC. Is my thought process wrong?
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1 reply by Sachin Aggarwal
Jul 06, 2020 9:36 AM
Sachin Aggarwal
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Hi Smith
If you are clear with the FPIF concepts, there is not need to worry about using Buyer’s Share of Risk or Seller’s Share of Risk.
We can easily derive formulas for PTA that use either Buyer’s Share of Risk or Seller’s Share of Risk but would give the same result.
Let me explain using your example. Target Cost = TC = $200,000 Target Profit = TPRO = $20,000 Target Price = TPRI = $220,000 Ceiling Price = CP = $250,000 Share Ratio = SR = BSR/SSR= 70/30
PTA is the Actual Cost beyond which SR equals 0/100. Buyer bears no risk associated with cost escalations beyond this point.
Actual Cost + Actual Profit = Actual Price = AC + TPRO + (TC - AC) x SSR = APRI
When AC = PTA, APRI = CP, therefore PTA + TP + (TC - PTA) x SSR = CP = PTA + $20,000 + ($200,000 - PTA) x 0.3 = $250,000 = PTA = $242,857.153
As Buyer’s Share of Risk and Seller’s Share of Risk are not independent to each other, we can use either of them in different formulas to get the same result. I used SSR in the above calculations. Rami used BSR. Both are equivalent formulas. Concepts are important to reach the correct conclusion.
I hope this helps!
It was hard typing all that maths here :) If you want to explore further, you can have a look at these lessons.
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
Hi Reginald,
I believe there is a typo in one of your figures (TC should be $200,000 Not $20,000 as the Target Price = TC+TP = $220,000).
As for your question, I believe the AC is irrelevant here and usually PTA is calculated as follows: PTA = ((Ceiling Price – Target Price) / Buyer’s Share Ratio) + Target Cost
You always take the buyers ratio because you need to know the point at which the buyer will stop paying the seller for overruns. In this type of contract you normally have two types of ratios: One for sharing profit, which is used when the project cost less than the target cost and another is cost sharing ratio which is used when the project cost more than the target cost so in this case the BSR given to you is for under runs as the AC is less than the TPrice.
Beyond the Point of Total Assumption, the seller’s profitability decreases, and their initiative and interest to complete the project may diminish too.
I hope this helps. Saving Changes...
Reginald SmithFire Support Trainer| Capstone CorporationClarksville, Tn, United States
Rami,
Awesome explanation. I can only assume that the share value once it hits PTA is 0/100%. Thank you Sir for your time and the sharing of your knowledge.
r/
Reggie
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1 reply by Rami Kaibni
Feb 20, 2017 2:43 AM
Rami Kaibni
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You're Welcome Reginald.
Yes, the ratio is 0/100 for anything above the Ceiling Price or PTA but the buyer still pays his share for anything in between the TPrice and Ceiling Price.
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
Feb 20, 2017 2:41 AM
Replying to Reginald Smith
...
Rami,
Awesome explanation. I can only assume that the share value once it hits PTA is 0/100%. Thank you Sir for your time and the sharing of your knowledge.
r/
Reggie
You're Welcome Reginald.
Yes, the ratio is 0/100 for anything above the Ceiling Price or PTA but the buyer still pays his share for anything in between the TPrice and Ceiling Price.
Reginald SmithFire Support Trainer| Capstone CorporationClarksville, Tn, United States
Thanks Saket. Saving Changes...
Sachin AggarwalCountry Sales Manager (IOT, Japan)| BlackBerry Tokyo, Japan
Feb 20, 2017 12:52 AM
Replying to Reginald Smith
...
As my studies continue, I ran into a contracting question. FPIF, (TC 20,000, TP 20,000, TPrice 220,000, CP 250,000, BSR 70/30). The project was completed for an actual cost of 218,576. What is the PTA?
My question is on the BSR. Although I got the right answer I hesitated on this question because I was unsure of using the buyers 70% or using the sellers 30%.
I used the Buyer's percentage because the TC less than the AC. Is my thought process wrong?
Hi Smith
If you are clear with the FPIF concepts, there is not need to worry about using Buyer’s Share of Risk or Seller’s Share of Risk.
We can easily derive formulas for PTA that use either Buyer’s Share of Risk or Seller’s Share of Risk but would give the same result.
Let me explain using your example. Target Cost = TC = $200,000 Target Profit = TPRO = $20,000 Target Price = TPRI = $220,000 Ceiling Price = CP = $250,000 Share Ratio = SR = BSR/SSR= 70/30
PTA is the Actual Cost beyond which SR equals 0/100. Buyer bears no risk associated with cost escalations beyond this point.
Actual Cost + Actual Profit = Actual Price = AC + TPRO + (TC - AC) x SSR = APRI
When AC = PTA, APRI = CP, therefore PTA + TP + (TC - PTA) x SSR = CP = PTA + $20,000 + ($200,000 - PTA) x 0.3 = $250,000 = PTA = $242,857.153
As Buyer’s Share of Risk and Seller’s Share of Risk are not independent to each other, we can use either of them in different formulas to get the same result. I used SSR in the above calculations. Rami used BSR. Both are equivalent formulas. Concepts are important to reach the correct conclusion.
I hope this helps!
It was hard typing all that maths here :) If you want to explore further, you can have a look at these lessons.
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