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Found 1 result

  1. 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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