PTA above ceiling price — how big a deal, really?

Bill Baxter said:

My instinct is that this condition is not really such a big deal.  I’m curious what others thing about this.

Your instincts are sound. PTA is not a term of an FPI contract and is of no contractual significance.

The equation commonly used to determine the PTA does not produce accurate results under all conditions. The PTA is the cost that, when added to the profit remaining to the contractor, equals the ceiling price. It is the point at which every additional dollar of cost subtracts a dollar of profit. PTA is what it is. People misstate the case when they say that the PTA can exceed the ceiling price. It cannot. But under some conditions the PTA equation can yield a value that exceeds the ceiling price, in which case the equation yields an erroneous result.

Bill Baxter said:

This is exactly backwards.  Perhaps they meant flatter is 50/50 instead of 80/20?  Someone want to set them straight?

You think a 50/50 share line is flatter than an 80/20 share line?

Vern Edwards said:

Your instincts are sound. PTA is not a term of an FPI contract and is of no contractual significance.

The equation commonly used to determine the PTA does not produce accurate results under all conditions. The PTA is the cost that, when added to the profit remaining to the contractor, equals the ceiling price. It is the point at which every additional dollar of cost subtracts a dollar of profit. PTA is what it is. People misstate the case when they say that the PTA can exceed the ceiling price. It cannot. But under some conditions the PTA equation can yield a value that exceeds the ceiling price, in which case the equation yields an erroneous result.

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.

Don Mansfield said:

You think a 50/50 share line is flatter than an 80/20 share line?

Don - Thanks, but I'd like to focus on my central question first, until I get a satisfactory answer to that.

Bill Baxter said:

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.

Bill:

There is no "rule" and thus no authoritative source for it. PTA is a concept. Now look at your own definition of it.

Bill Baxter said:

"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."

Emphasis added.

I buy the first sentence (the second sentence is unnecessary), and I think everyone would agree that it describes the concept of PTA.

So, if the PTA is the seller cost at which the buyer's price has risen "to" (your word) the ceiling price, and if the buyer's price cannot exceed the ceiling price, how can the PTA ever be higher than the ceiling price? Buyer/seller sharing cannot continue beyond the ceiling price, can it? If not, then it makes no sense to say that the PTA can exceed the ceiling price, and thus the equation can produce results that are inconsistent with your own definition of PTA.

The PTA equation does not define PTA. The PTA equation produces a number, and at some values of the buyer's share it produces a number that is consistent with your definition of PTA, but at others it does not. Do you want to change your definition?

Bottom line: I agree with your general thrust, "My instinct is that this condition is not really such a big deal."

Shifting gears: In your response to Don you said that you wanted to focus on your central question. What was it? You asked only three. One was rhetorical: "This can only be a good thing for the buyer, right?" The others were: "Perhaps they meant flatter is 50/50 instead of 80/20?  Someone want to set them straight?"

Which one of those was central? I'd like to know your answer to Don's question. Do you think a 50/50 share is "flatter" than an 80/20 share? Do you still want someone to straighten out the source of the text you quoted? I know whom to call.

Maybe Bill has is axes or ratios mixed up...as the source he cited mentions, convention is to list the Government share in the numerator and the contractor share in the denominator while graphing profit along the y-axis and cost along the x-axis.  If convention holds, a 50/50 share line is not "flatter" than an 80/20 share line.

Matthew Fleharty said:

Maybe Bill has is axes or ratios mixed up...as the source he cited mentions, convention is to list the Government share in the numerator and the contractor share in the denominator while graphing profit along the y-axis and cost along the x-axis.  If convention holds, a 50/50 share line is not "flatter" than an 80/20 share line.

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.

Vern Edwards said:

Bill:

There is no "rule" and thus no authoritative source for it. PTA is a concept. Now look at your own definition of it.

Emphasis added.

I buy the first sentence (the second sentence is unnecessary), and I think everyone would agree that it describes the concept of PTA.

So, if the PTA is the seller cost at which the buyer's price has risen "to" (your word) the ceiling price, and if the buyer's price cannot exceed the ceiling price, how can the PTA ever be higher than the ceiling price? Buyer/seller sharing cannot continue beyond the ceiling price, can it? If not, then it makes no sense to say that the PTA can exceed the ceiling price, and thus the equation can produce results that are inconsistent with your own definition of PTA.

The PTA equation does not define PTA. The PTA equation produces a number, and at some values of the buyer's share it produces a number that is consistent with your definition of PTA, but at others it does not. Do you want to change your definition?

Bottom line: I agree with your general thrust, "My instinct is that this condition is not really such a big deal."

Shifting gears: In your response to Don you said that you wanted to focus on your central question. What was it? You asked only three. One was rhetorical: "This can only be a good thing for the buyer, right?" The others were: "Perhaps they meant flatter is 50/50 instead of 80/20?  Someone want to set them straight?"

Which one of those was central? I'd like to know your answer to Don's question. Do you think a 50/50 share is "flatter" than an 80/20 share? Do you still want someone to straighten out the source of the text you quoted? I know whom to call.

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?

In regards to the following:

Bill Baxter said:

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.

Now I think we have different conceptions of the PTA - since when does the PTA define the point where the seller is in a "loss position?"  The PTA is merely the point where the share ratio converts from X/Y to 0/100 - a seller could still be in a profitable position at a PTA.  For example, let's refer back to the authoritative source you cited.  In that example (Figure 3), at the PTA the contractor would still receive 5 profit...how is that a "loss position?"

Overall, I'm not sure how to answer your central question any better than Vern did.  A PTA is not a term of the contract and it's importance is only as significant as the parties choose to make it when negotiating the geometry of the FPI contract.

Bill Baxter said:

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.

Bill,

Surely you know that the above response does not address my point, which was:

Quote

So, if the PTA is the seller cost at which the buyer's price has risen "to" (your word) the ceiling price, and if the buyer's price cannot exceed the ceiling price, how can the PTA ever be higher than the ceiling price? Buyer/seller sharing cannot continue beyond the ceiling price, can it? If not, then it makes no sense to say that the PTA can exceed the ceiling price, and thus the equation can produce results that are inconsistent with your own definition of PTA.

The PTA equation does not define PTA. The PTA equation produces a number, and at some values of the buyer's share it produces a number that is consistent with your definition of PTA, but at others it does not. Do you want to change your definition?

The Point of Total Assumption (PTA) in a fixed-price-incentive arrangement is the dollar amount at which the contractor assumes total cost responsibility. It is the dollar amount at which cost sharing stops--the effective share ratio becomes 0/100. That dollar amount cannot be greater than the ceiling price, because there is no cost sharing beyond the ceiling price. You know that as well as I do. That assertion is affirmed by your own definition of PTA, which is a good definition, and which I accept, as would most persons familiar with the concept. The PTA can equal the ceiling price, but it cannot be greater than the ceiling price.

I think that you have become used to saying that the PTA can exceed the ceiling price, and that's understandable since a variety of source materials make similar statements. However, that statement is misleading. Given your own definition of PTA, it cannot be true that the PTA can exceed the ceiling price. What is true is that the equation commonly used to determine the PTA in an FPI(F) arrangement can yield a value that is greater than the ceiling price, but any such number does not fit the definition of PTA. The ceiling price sets the limit.

With respect to your "central question_":_

Quote

My central question is in the subject line (bottom line up front):

FPI-Firm Target :  PTA above ceiling price — how big a deal, really?

I say again, agreeing with you, for the third time, that this matter is contractually inconsequential. (Although, for planning purposes, you probably have a poorly structured FPI(F) incentive arrangement if the equation yields a value greater than ceiling price.) Unless someone else thinks differently, your central question has been answered. What more do you want?

Bill, I welcome you to the Wifcon site and hope you'll continue to participate. You undoubtedly know by now that when any of us makes a statement, others will challenge it if they disagree.

On 4/17/2017 at 6:59 AM, Bill Baxter said:

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?

On 4/17/2017 at 10:15 AM, Don Mansfield said:

You think a 50/50 share line is flatter than an 80/20 share line?

Bill Baxter said:

“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 see Bill's point now. An understandable miscommunication. Happens easily in this web format. I increasingly doubt the utility of these online Q&As/discussions. Issues that can easily be sorted out face-to-face becomes a tedious and sometimes never-ending search for clarity and source of frustration. The more I see of it, the less I like the idea of online education and training. I think that organizations that rely heavily on it are cheating their people and undermining  themselves in the long run.

Vern Edwards said:

The more I see of it, the less I like the idea of online education and training. I think that organizations that rely heavily on it are cheating their people and undermining  themselves in the long run.

Amen, Couldn't agree more.

On 4/18/2017 at 7:33 AM, Bill Baxter said:

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.

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.

Bill Baxter said:

Correction to my definition of PTA:

"The Point of Total Assumption is the 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.

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

If you want to see what it looks like graphically, you can use this: 

FPIF-CPIF Calculator-Grapher 20120817.xlsx

Bill Baxter said:

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.

Your new definition is not as good as your old one. For one thing, "point in time" does not make sense. Revise the first sentence, which is too complicated. Drop the second sentence. It does not help anyone understand PTA, and it sounds like something a phony academic would say. Your students will be scratching their heads over "discontinuity in the seller's marginal cost."

Here is what the DOD/NASA Incentive Contracting Guide says about PTA, at pages 69 - 70:

Quote

Those who are involved in structuring FPI contracts also consider the “cost ceiling” or “Point of Total Assumption” as a critical element because it is the point where the FPI contract converts to a firm-fixed price contract (0/100 sharing ratio).  Beyond this cost point each cost dollar reduces the contractor's profit by a dollar or increases his loss by that amount...

Many of the features of the cost-only FPI contract are similar to the features of the CPIF contract.  These include the range of incentive effectiveness, target cost, target profit, and sharing formulas that were also contained in the CPIF contract structure.  However, the FPI contract introduces the ceiling price and the location of a cost ceiling or point where total assumption of cost responsibility is reached.  This point has generally been called the “point of total assumption” (PTA) and represents, in this example, the point where the share ratio changes from 65/35 to 0/100.  Thus, all costs incurred beyond the PTA are in a firm-fixed-price area and have the effect of reducing profit by one dollar for each dollar of cost incurrence...

The simple mechanical method to find the PTA point by counting back a certain dollar amount from the ceiling price and counting up an equal dollar amount on the profit scale is an acceptable short cut in graphics.

The DOD/NASA guide is the ultimate authority on formula incentives. It has never been surpassed. Don't try to reinvent the wheel. Use the graphic on page 70 as an aid to understanding. Toss the "PTA model."

The PTA is an effect of the ceiling price. If it weren't for the ceiling price there wouldn't be a PTA. If you want to teach the PTA equation, explain that it correctly calculates the PTA only up to the ceiling price, because that is the point at which, by contractual agreement, all cost sharing ends and the contractor assumes total cost responsibility-- thus "point of total assumption." The share ratio becomes 0/100 at that point, and the contract becomes firm-fixed price. Depending on the structure of the incentive, the PTA might be less than the ceiling price, but the ceiling price is the highest possible value for the PTA.

That's probably all you need to teach, unless you want to teach the truth, which is that the FPI(F) contract is the most studied contract type and has never been proven to be effective and should not be used unless forced upon you by ignorant higher-ups. Of course, you don't need to know the truth in order to pass the PMP exam. You only need to know the answers.

If we define the PTA as the cost that, when added to the contractor's profit, equals the ceiling price,  then the PTA can exceed the ceiling price if profit would be negative when total cost is equal to the ceiling price. The OP's parameters:

Target cost = $2.5 million

Target profit = $375,000

Overrun share ratio = 40/60 (G/C)

Ceiling price = $3,250,000

The PTA formula he used yielded a PTA of $3,437,500:

On 4/17/2017 at 6:59 AM, Bill Baxter said:

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.

If actual cost turned out to be $3,250,000, the contract price would be $3,175,000:

Final Price = Final cost + (Target profit - Contractor share of overrun (Amount of overrun))

= $3,250,000 + (375,000 - (.6*750,000))

= $3,250,000 - $75,000

= $3,175,000

For costs in excess of $3,250,000 up to $3,437,500, the contractor does not assume 100% of the costs--they only assume 60%. So, let's say actual costs were $100K higher than the ceiling price. In that case, the final contract price would be $3,215,000 ($40K higher):

Final Price = Final cost + (Target profit - Contractor share of overrun (Amount of overrun))

= $3,350,000 + (375,000 - (.6*850,000))

= $3,350,000 - $135,000

= $3,215,000

So, PTA can exceed ceiling price.

Don:

In your analysis, is the ceiling price the most that the Government will have to pay to the contractor? Are the parties still cost-sharing above that amount?

Vern Edwards said:

Don:

In your analysis, is the ceiling price the most that the Government will have to pay to the contractor? Are the parties still cost-sharing above that amount?

Yes, the ceiling price of $3,250,000 is the most that the Government will have to pay the contractor. The parties are cost sharing up to $3,437,500.

Thank you, Don.

On 4/17/2017 at 9:59 AM, Bill Baxter said:

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.

  Both of your scenarios are perfectly valid in addressing different risk profiles.  As the buyer's assumption of overrun costs increase, the PTA drops, which makes perfect sense. 

Maybe the best way to state the question is whether a particular share scenario is appropriate for a particular situation, rather than whether a particular share scenario is a good thing in a purely objective sense.

My only issue in this thread is whether the PTA of an FPI(F) contract can exceed the ceiling price. It cannot. It can equal the PTA, but it cannot exceed it.

The PTA is the cost at which cost sharing stops and the contract becomes FFP. To the best of my knowledge the concept of a PTA was first discussed in either the 1965 or 1969 Incentive Contracting Guide. The 1969 Guide explains that "[A]ll costs incurred beyond the PTA are in a firm-fixed-price area and have the effect of reducing profit by one dollar for each dollar of cost incurrence." Based on that description, the PTA can be equal to but never higher than the ceiling price.

The 1969 Guide included an equation for calculating the PTA, which is still in use, but the equation stops working when incurred cost equals ceiling price, It does so for no other reason than that the clause at FAR 52.216-16, Incentive Price Revision--Firm Target (OCT 1997), paragraph (a) states: "in no event shall the total final price of this contract exceed the ceiling price." However, the PTA equation can produce a result higher than the ceiling price, because it does not reflect the contractual limitation. Some people are conflating PTA with the mathematical outcome of the equation, but that equation produces a valid result only at or below the ceiling price. This should be very easy to understand.

By definition, the PTA can never exceed the ceiling price.

If you accept incentive theory, then it goes without saying, or should, that a particular share ratio is appropriate for a particular situation.

Vern Edwards said:

My only issue in this thread is whether the PTA of an FPI(F) contract can exceed the ceiling price. It cannot. It can equal the PTA, but it cannot exceed it.

I'm sorry, Vern. My example above disproves that assertion. In my example, the ceiling price is $3,250,000, but the PTA is $3,437,500. Your assertion is only true if profit will be >= $0 at the ceiling price.

Don:

You say your example shows the PTA can exceed the ceiling price of $3,250,000, up to $3,437,500. I asked you:

On 7/31/2017 at 4:51 AM, Vern Edwards said:

In your analysis, is the ceiling price the most that the Government will have to pay to the contractor? Are the parties still cost-sharing above that amount?

You answered:

On 7/31/2017 at 3:17 PM, Don Mansfield said:

Yes, the ceiling price of $3,250,000 is the most that the Government will have to pay the contractor. The parties are cost sharing up to $3,437,500.

The definition I use for PTA is based on the description in the DOD Contract Pricing Reference Guides, Vol. 4, Ch. 1: "the cost at which the contractor assumes total responsibility for each additional dollar of contract cost." 

If in your example $3,250,000 is the most that the Government will have to pay the contractor, an amount at which the Government will not pay the contractor $1.00 more, I do not understand how the Government will share some of the costs in excess of $3,250,000 up to $3,437,500.

It seems to me that if $3,250,000 is the most that the Government will have to pay the contractor, then if the contractor incurs a cost greater than that amount the contractor will be totally responsible for it. Am I wrong about that? Although I know that equations can produce at PTA value in excess of the ceiling price, I do not think that such numbers match the definition of PTA in the CRPGs or in the Incentive Contracting Guide and thus do not constitute Points of Total Assumption.

I think that you believe that the PTA equation defines PTA. I don't. I think the equation is a way to determine the amount of the PTA, but that it yields an accurate PTA value only up to the ceiling price, at which point it works no longer.

I think our disagreement is about definitions, not math. But I'll wait for your explanation.

Vern Edwards said:

It seems to me that if $3,250,000 is the most that the Government will have to pay the contractor, then if the contractor incurs a cost greater than that amount the contractor will be totally responsible for it. Am I wrong about that?

Yes, that's wrong. If the contractor incurred $3,250,000 in cost, the Government would only pay $3,175,000. See my first calculation above. Cost sharing would continue up to $3,437,500. At that point and above, the Government would pay $3,250,000 (the ceiling price).

Don:

You keep sending me back to your equation. Can you explain with words? Suppose that the contractor's cost has reached the ceiling price of $3,250,000 and it then incurs another dollar. What happens as a result? What is the contractual effect on each of the parties?

Vern Edwards said:

You keep sending me back to your equation. Can you explain with words? Suppose that the contractor's cost has reached the ceiling price of $3,250,000 and it then incurs another dollar. What happens as a result? What is the contractual effect on each of the parties?

If the contractor incurs another dollar above $3,250,000, the Government pays $0.40 and the contractor's profit goes down $0.60. The total amount the Government pays is $3,175,000.40.

Don:

I think I understand.

FAR 52.216-16(d)(2)(ii) addresses a situation in which the total final negotiated cost exceeds the target cost. It says:

Quote

If the total final negotiated cost is greater than the total target cost, the adjustment is the total target profit, less ______ [Contracting Officer insert percent] percent of the amount by which the total final negotiated cost exceeds the total target cost.

So you are saying that if the total final negotiated cost is equal to or greater than the ceiling price, and if the total target profit minus the contractor's share of the overrun yields a negative number, then the total final negotiated cost is still reduced by the contractor's share of any overrun. An adjustment is made even though the target profit minus the contractor's share is less than zero.

The effect is to produce a final price that is less than the ceiling price, even though the contractor has incurred costs equal to or greater than the ceiling price. In other words, sharing continues even after there is no profit left to reduce. Thus, PTA can exceed ceiling price.

Do I understand correctly?

Yes, I think you understand.

Can someone provide a current, working link to the DOD Contract Pricing Reference Guides, Vol. 4, Ch. 1.  ? 

I keep getting circular links to a page at " https://acc.dau.mil/AccessDenied.aspx?returnurl=https%3a%2f%2facc.dau.mil%2fCommunityBrowser.aspx%3fid%3d406579%26lang%3den-US

"ACC has migrated to a new platform
and can be found on the DAU.mil site at  www.dau.mil/community-hub."

Now that is interesting.

The effect of your example is to make both profit and cost entitlement subject to adjustment based on the profit sharing formula. In all my years in contracting I have never entertained such an idea. I have considered zero profit, but not negative profit. I was so started (and intrigued) by the sudden realization of what you were saying that I called two experts, both of whom you know, both of whom have extensive knowledge of and experience with FPI(F) contracts, to ask if they had ever heard of such a thing. Neither had, and one was livid at the thought. They think that target profit is reduced by the overrun until it reaches zero,  at which point the incentive is no longer effective. They do not think that cost entitlement is affected by anything other than the principles of cost allowability and the ceiling price.

I pointed out that the plain language of FAR 52.216-16 does not expressly preclude the use of a negative number in calculations of total final price. They were not impressed. They said that the clause clearly provides for the adjustment of "target profit," not cost entitlement. When target profit minus the contractor's share of an overrun reaches zero, no further adjustment is to be made. The incentive stops working. You don't start subtracting from incurred cost.

I looked at FAR 16.401-1(b) and found:

Quote

Incentive contracts include a target cost, a target profit or fee, and a profit or fee adjustment formula that (within the constraints of a price ceiling or minimum and maximum fee) provides that—

(1) Actual cost that meets the target will result in the target profit or fee;

(2) Actual cost that exceeds the target will result in downward adjustment of target profit or fee; and

(3) Actual cost that is below the target will result in upward adjustment of target profit or fee_._

According to that description, adjustments are to target profit or fee, not to cost entitlement.

At this point I do not agree that FAR 52.216-16 stands for the proposition that cost entitlement is to be reduced by the contractor's share of a cost overrun. I believe that cost entitlement under an FPI(F) contract is limited only by the cost principles and the ceiling price. But see FAR 16.403-1(a). I could find no case law or other discussion of the idea that cost entitlement is to be reduced by the the contractor's share of an overrun.

Since you're with DAU I wonder if you could put this issue to DPAP, ask for their interpretation, and let us know their response.

One of my experts said that before the guidance in Better Buying Power this issue was not likely to come up.

If any reader can shed the light of experience on this issue, please chime in.

joel hoffman said:

Can someone provide a current, working link to the DOD Contract Pricing Reference Guides, Vol. 4, Ch. 1.  ? 

I keep getting circular links to a page at " https://acc.dau.mil/AccessDenied.aspx?returnurl=https%3a%2f%2facc.dau.mil%2fCommunityBrowser.aspx%3fid%3d406579%26lang%3den-US

"ACC has migrated to a new platform
and can be found on the DAU.mil site at  www.dau.mil/community-hub."

https://www.dau.mil/tools/p/CPRG

Vern Edwards said:

At this point I do not agree that FAR 52.216-16 stands for the proposition that cost entitlement is to be reduced by the contractor's share of a cost overrun. I believe that cost entitlement under an FPI(F) contract is limited only by the cost principles and the ceiling price. But see FAR 16.403-1(a). I could find no case law or other discussion of the idea that cost entitlement is to be reduced by the the contractor's share of an overrun.

I assume your reference to FAR 16.403-1(a) was to "when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss."

As far as cost allowability, one of the standards at FAR 31.201-2( a ) is "Terms of the contract". Why couldn't the parties enter into an advance agreement that would disallow a portion of costs by the amount of any negative profit? 

So the answer to the original poster's question--"PTA above ceiling price — how big a deal, really?"--seems to be a big deal.

Don Mansfield said:

https://www.dau.mil/tools/p/CPRG

Thanks, Don. Finally figured out how to find it.  Under "Tools"

Don Mansfield said:

I assume your reference to FAR 16.403-1(a) was to "when final cost is more than target cost, application of the formula results in a final profit less than the target profit, or even a net loss.

Yes. But that could refer to a situation in which the contractor exceeds the ceiling with a zero profit.

Don Mansfield said:

As far as cost allowability, one of the standards at FAR 31.201-2( a ) is "Terms of the contract". Why couldn't the parties enter into an advance agreement that would disallow a portion of costs by the amount of any negative profit?

They could. The question is whether they did when they agreed to FAR 52.216-16.

Don Mansfield said:

So the answer to the original poster's question--"PTA above ceiling price — how big a deal, really?"--seems to be a big deal.

No. For one thing, PTA is not a contract term, just an idea. PTA is not mentioned anywhere in FAR and is not a term of an FPI(F) contract. The big deal is the question whether under an FPI(F) contract the parties have agreed to apply a formula for a profit incentive to costs.

Don:

See Southwest Marine, Inc., ASBCA 54550, 09-1 BCA ¶ 34116. I have sent it to you by email.

Vern

On 8/1/2017 at 8:23 PM, Don Mansfield said:

I'm sorry, Vern. My example above disproves that assertion. In my example, the ceiling price is $3,250,000, but the PTA is $3,437,500. Your assertion is only true if profit will be >= $0 at the ceiling price.

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base. 

Is the way to look at it that "the PTA ceases to be an operative concept when it is greater than the ceiling?"

 If your total contract price is  above the ceiling, the PTA is the least of your problems.   To me, that is the teaching point in the OP's scenario.

REA'n Maker said:

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base. 

Is the way to look at it that "the PTA ceases to be an operative concept when it is greater than the ceiling?"

 If your total contract price is  above the ceiling, the PTA is the least of your problems.   To me, that is the teaching point in the OP's scenario.

Did you read that case Vern posted?

REA'n Maker said:

I have a hard time believing that you can  penalize a contractor by zeroing out his profit, and then continue to use that same profit calculation to eat into his legitimate cost base

You're not the only one, REA. Some pretty knowledgeable and experienced people feel the same way. It doesn't seem right. But I found one ASBCA decision that says the Government can do it, based on the board's interpretation of the language of the incentive price revision clause and FAR 16.403-1(a). It appears to be a case of first impression and there has been no other like it since. One knowledgeable person thinks the contractor's case was poorly argued. Don and I are looking further into the matter to find out if there is an official position on the interpretaiton of the clause.

Don Mansfield said:

Did you read that case Vern posted?

Yes; it was a tough read though considering that it brought in several obtuse concepts such as "debt concessions".

Ignoring the extraneous offset calculations, it looks like the key data points supporting your position are in (g) and (h)?

Specifically:  $ 1,517,031 (30% of overrun) - $550,724 (Target Profit) = $966,307 (Total decrease to final cost)

As a thought experiment, doesn't this approach allow the scenario whereby the profit offset is so high that allowable costs = 0?  (not likely, but logically possible)

Vern Edwards said:

One knowledgeable person thinks the contractor's case was poorly argued.

That case looks incredibly complicated (a government claim; Chapter 11) , with the FPI calculation forming but a small part.  One wonders if the vagaries of the calculation got lost in the noise.

REA'n Maker said:

As a thought experiment, doesn't this approach allow the scenario whereby the profit offset is so high that allowable costs = 0?  (not likely, but logically possible)

No. In my scenario, once costs get up to $3,437,500 the contract becomes a FFP contract for $3,250,000.