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Bill Baxter

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About Bill Baxter

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    Male
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    Chicago
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    Project Management
    PMP Exam Prep Training
  1. PTA above ceiling price — how big a deal, really?

    Attached is an image of my cost model for the case where Buyer's Share is 0.4 and the PTA is above the ceiling price. PTA_Model_20170420.pdf
  2. PTA above ceiling price — how big a deal, really?

    Correction to my definition of PTA: "The Point of Total Assumption is that TOTAL COST reached at that point in time where the buyer's price has risen to the ceiling price and any additional cost over-runs will not be shared with the buyer but will instead be totally assumed by the seller - hence, the term Point of Total Assumption. There is a discontinuity in the seller's marginal cost at this point, as any additional cost over-runs are born entirely by the seller." I need to teach the equation for PTA to my students because it appears on the PMP exam from time to time, and I feel a duty to understand it clearly if I'm going to be teaching it.
  3. PTA above ceiling price — how big a deal, really?

    Vern: re: how can the PTA ever be higher than the ceiling price? In a money-losing scenario, the seller's cost will have risen above the buyer's price. By adjusting the buyer's share ratio, we can dial-in a PTA value on the cost curve which is just equal to the ceiling price, or below the ceiling price, or above the ceiling price. My central question is in the subject line (bottom line up front): FPI-Firm Target : PTA above ceiling price — how big a deal, really?
  4. PTA above ceiling price — how big a deal, really?

    Matthew - thanks... but no, I understand the convention for buyer's share/seller's share of cost over-runs... Here is the quote again: “A flatter over run share line (80/20 instead of 50/50) places more risk on the Government for over runs up to the PTA. Equally important: a flatter over run share line means the contractor will reach PTA at a higher cost. This means the contractor will assume all additional over run burden later than with a steeper over run share line.” The first sentence is fine. My issue is with the last two sentences. with an 80/20 share instead of a 50/50 share, the quote says that the contractor will reach the PTA at a higher cost. This is incorrect. PTA = Target Cost + (Ceiling Price - Target Price) / Buyer's Share. If Buyer's share is 0.8 instead of 0.5 the denominator is larger and the PTA is smaller. This is what I meant when I said the quote had it backwards. I wish I'd not included the aside... I'd really like us to focus on the central question: In which a PTA is numerically larger than the ceiling price, causing the seller to be in a loss position for a period of time -- while costs continue to rise -- before the ceiling price is reached and the sharing of cost over-runs stops.
  5. PTA above ceiling price — how big a deal, really?

    Don - Thanks, but I'd like to focus on my central question first, until I get a satisfactory answer to that.
  6. PTA above ceiling price — how big a deal, really?

    Vern - Your definition for PTA does not sing to me. Here is how I would define it: "The Point of Total Assumption is that seller cost where the buyer's price has risen to the ceiling price and any additional cost over-runs will not be shared with the buyer but will instead be totally assumed by the seller - hence, the term Point of Total Assumption. There is a discontinuity in the seller's marginal cost at this point, as any additional cost over-runs are born entirely by the seller." The equation for PTA is solid. I have posted a step by step derivation of it here. If the equation gives erroneous results above the ceiling price it would because there is a rule somewhere that says the PTA must never be above the ceiling price. If this is the case, I would like to know the authoritative source of this rule. Thanks, Bill B.
  7. FPI-Firm Target : PTA above ceiling price — how big a deal, really? I was speaking with a government procurement officer a few months ago, who ‘freaked-out’ at the idea of a PTA above the ceiling price. I’m wondering how big a deal this really is. Granted, the incentive structure is a little concerning, that the seller is in a loss position while still sharing cost over-runs with the buyer… but it does not seem like a completely unacceptable situation to me. For example: imagine you start negotiations with a target cost of $2.5 million and target price of $2.875 million (a modest 15% profit). Ceiling price is 3.25 million. Buyer’s share of overrun is 65%. So PTA = Target Cost + [(Ceiling Price - Target Price)/Buyer’s Share] PTA = 2.5M + [(3.25 - 2.875)M / 0.65 = $3.077 million, which is below the ceiling price of $3.25 million. Now imaging we change just one thing: we reduce the buyer’s share of cost overruns from 65% to 40%. This can only be a good thing for the buyer, right? But look what happens to the PTA. It is now 2.5M + [3.25 - 2.875)M / 0.40 = $3.438 million, which is above the ceiling price of $3.25 million. So, we made a change that should favor the buyer, but causes this situation where the PTA is above the ceiling price. My instinct is that this condition is not really such a big deal. I’m curious what others thing about this. Background context: I teach PMP exam prep, and the PTA is one of the topic areas. I was teaching a class, and the government procurement officer was one of my students. Aside: I came across an error in what should be an authoritative source for this topic. Within, it states: “A flatter over run share line (80/20 instead of 50/50) places more risk on the Government for over runs up to the PTA. Equally important: a flatter over run share line means the contractor will reach PTA at a higher cost. This means the contractor will assume all additional over run burden later than with a steeper over run share line.” This is exactly backwards. Perhaps they meant flatter is 50/50 instead of 80/20? Someone want to set them straight?
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