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TOPIC: Question How is Celing Price calculated ?

How is Celing Price calculated ? 5 years 1 month ago #2965

  • Poorvi Bagdi
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How do I calculate Celing Price when Target Cost and Target Fee and Actual Cost are mentioned.

How is Celing Price calculated ? 5 years 1 month ago #2967

  • Kevin Reilly
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Hi Poorvi -

The Ceiling Price is a dollar figure that is agreed upon by two parties engaging in a Fixed Price Incentive Fee contract (FPIF). All costs above the agreed upon Price Ceiling are the responsibility of the seller, who is obligated to complete the work (PMBOK Guide, 4th Edition, page 322). As far as calculating the Ceiling Price, there isn't really a calculation involved in determining the Ceiling Price since it is set as a fixed amount by the two parties who engaged in the contract.

First of all, rest assured that you will most likely not encounter a question that asks to calculate the Ceiling Price, since this is something that will be given to you in the question. Having said that, below is the formula for the Point of Total Assumption (PTA), with which the Ceiling Price I usually associated.

PTA = ((Ceiling Price - Target Price)/(Buyer's Share Ratio)) + Target Cost.

In your scenario, you only have the Target Cost, Target Fee and Actual Cost, which does not give you enough information to determine the Ceiling Price.

I hope that helps.

Thanks

Kevin
The following user(s) said Thank You: Poorvi Bagdi

How is Celing Price calculated ? 1 month 2 weeks ago #12305

  • Antonio Lukovc
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Hi Kevin,
Thank you for the explanation. However, looking at Rita Mulcahy's PMP exam prep book (8th edition) on pages 480-482 we have several exercises where they describe a situation and then ask for final fee and price. However, ceiling price is not mentioned and just randomly appears in calculation table (i.e. the amount is never mentioned in the text). If we are not meant to calculate ceiling price and should assume that the question will give this information to us, does that mean that the question in Rita's book is just badly formatted?
Sorry if I sound confusing. I have been trying to figure this out for a while now... (i.e. if i missed something),
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