Answers the Question
At what point on a fixed-price plus incentive fee contract will the vendor be responsible for all overruns?
Calculator for Point of Total Assumption
What Is the Point of Total Assumption?
Many companies use a type of contract that is fixed price with incentives for efficient delivery. Should the vendor incur small overruns, they will bear at least part of the cost. At some point (the point of total assumption), however, the vendor will be deemed responsible to bear the entire cost of any additional overruns.
Why Is it Important?
- A reasonable person may see small overruns as the cost of doing business, but large overruns a sign of unnecessary inefficiency or goldbricking.
- Buyers must think carefully to set this point low enough to provide ample protection for their budgets but high enough so as not to scare off potential vendors.
- Vendors, on the other hand, must be careful to understand the point of total assumption prior to selecting the price for their offerings.
Formula(s) to Calculate Point of Total Assumption
- POINT OF TOTAL ASSUMPTION = ((CEILING PRICE - TARGET PRICE) / BUYER'S SHARE RATIO) + TARGET COST
- Incorrectly estimating project costs and risks