Question

A certain project operating under a FPIF contract has been negotiated and formally agreed-upon between a buyer and a seller. The following information has been included in the contract:

Price Ceiling: $531,000

Target Cost: $505,000

Target Fee: $20,000

Buyer's Share Ratio: 0.90

Seller's Share Ratio: 0.10

The project has finished and the actual cost the seller incurred was $510,954.

What incentive fee does the buyer pay the seller?

What is the total contract price (i.e., what the buyer has to pay the seller in total)?

What is the point of total assumption for the seller?

Answer 1

1. 0.90*510,954 =$ 459,858.6

2. Total contract price = $ 510,954 + $ 20,000 = $530,954

3. Point of total assumption =PTA=((Ceiling price-Target price)/0.90)+Target profit/fee

       Target price =(target cost +Target fee)=$ 505,000+$20,000 =$ 525,000.

                     PTA=(531,000-525,000)/0.90 + 20,000.

    =6,000/0.90 =6666.67+20,000

=$26,666.67.