Will you be surprised to see questions related to calculations from the Procurement Management knowledge area in PMP exams? Don’t worry; they are all simple use simple logic. To make it understandable here are some sample questions with details.
Q4: A fixed-price-plus-incentive-fee (FPI) contract has a target cost of $150,000, a target profit of $30,000, a target price of $180,000, a ceiling price of $200,000, and a share ratio of 60/40. The actual cost of the project was $210,000. Calculate the final fee and the final price.
Q5: A fixed-price-plus-incentive-fee (FPI) contract has a target cost of $9,000,000, a target profit of $850,000, a ceiling price of $12,500,000, and a share ratio of 70/30. The actual cost of the project was $8,000,000. Calculate the final fee and the final price.
Q6: A Cost-plus-incentive-fee (CPIF) contract has a estimated cost of $210,000, a fee of $25,000, and a share ratio of 80/20. The actual cost of the project was $200,000. Calculate the final fee and the final price.
Answers
Q1: Estimated Cost= $120,000
Actual Cost= $130,000
Agreed Profit=10%
Reimbursement amount= Actual cost+% profit of actual cost=$130,000+(10% of $130,000)= $143,000
Q2: Estimated Cost= $150,000
Predetermined fee=$15,000
Share Ratio=80/20( 80 is for the Buyer and 20 is for the seller)
Actual Cost= $130,000
Saving = Estimated Cost-Actual cost=$20,000
Profit to seller is Predetermined fee + (Share ratio of seller * Savings) = $15,000+(20%*$20,000)= $19,000
Q3: Target Cost=$130,000
Target Fee=$15,000
Target Price=$145,000
Ceiling Price=$160,000
Share Ratio=80/20( 80 is for the Buyer and 20 is for the seller)
Actual Cost=$150,000
Here, the actual cost is less than the ceiling price and is more than the target cost.
Final Fee=((Target cost-Actual Cost) * Seller ratio) + Target fee=(($130,000-$150,000)*20%+$15,000=(-$20,000*20%)+$15,000= –$4,000+$15,000=$11,000 Final Price=Actual cost + Final Fee=$150,000+$11,000= $161,000. But this is more than the ceiling price which is $160,000. So the final price which the seller gets is $160,000.
So the profit that seller gets is $160,000-$150,000= $10,000
Q4: Target Cost= $150,000
Target Fee=$30,000
Target Price=$180,000
Ceiling Price=$200,000
Share Ratio=60/40(60 is for the Buyer and 40 is for the seller)
Actual Cost=$210,000
Here Actual cost is more than the target price and also higher than the ceiling price. So the seller is in trouble. Let’s see how much he gets?
Final Fee=((Target cost-Actual Cost)*Seller ratio) + Target fee=(($150,000-$210,000)*40%+$30,000=(-$60,000*40%)+$30,000= –$24,000+$30,000=$6,000
Final Price=Actual cost + Final Fee=$210,000+$6,000=$216,000. But this is more than the ceiling price. So the final price is $200,000 J
Q5: Target Cost= $9,000,000
Target Fee=$850,000
Target Price=$9,850,000
Ceiling Price=$12,500,000
Share Ratio=70/30(70 is for the Buyer and 30 is for the seller)
Actual Cost=$8,000,000
Here Actual cost is less than the target price and also lesser than the ceiling price. Let’s see how much seller gets?
Final Fee=((Target cost-Actual Cost)*Seller ratio) + Target fee=(($9,000,000- $8,000,000)*30%+$850,000=($1,000,000*30%)+$850,000= $300,000+$850,000=$1,150,000
Final Price=Actual cost + Final Fee=$8,000,000+$1,150,000=$9,150,000.
Q6: Estimated Cost= $210,000
Predetermined fee=$25,000
Share Ratio=80/20(80 is for the Buyer and 20 is for the seller)
Actual Cost= $200,000
Saving = Estimated Cost-Actual cost = $10,000
Final Fee= (Saving * Seller Ratio) + Predetermined fee=($10,000*20%)+$25,000=$2,000+$25,000= $27,000
Final Price=Actual cos t+ Final Fee=$200,000+$27,000=$227,000
Point of Total Assumption (PTA): This applies to only Fixed price incentive fee contracts and refers to the amount above which the seller bears all the loss of a cost overrun. This happens due to mismanagement. Seller will sometimes monitor their actual cost against the PTA to make sure they are still receiving a profit for completing the project.
Formula is PTA=((Ceiling Price-Target Price)/Buyer’s share ratio) + Target Cost
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