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TOPIC: FPIF Contract - Target Price Calculation

FPIF Contract - Target Price Calculation 7 years 3 months ago #524

  • Harwinder Bhatia
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Hello Cornelius,

In couple of questions (Q 31 & 104) in your Formula Study Guide, I saw that the equation:

Target Price = Target Cost + Target Profit

does NOT hold good.

Can you give some examples of situations where the above equation would NOT be true on an FPIF Contract?

Thanks !
Harwinder, PMP
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Re:FPIF Contract - Target Price Calculation 7 years 3 months ago #525

  • Cornelius Fichtner
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Harwinder,

I'd need a bit more background to understand where you are coming from in this question: Can you tell me where you saw that this equation doesn't hold up and what other formula do you see for an FPIF Contract?

But in any case let's remind ourselves that your question may be outside of the realm of the PMP exam (even though I'm not yet 100% certain of its exact reasoning.) From the feedback that I receive, procurement focuses mostly on the published standards and not on specific exceptions.
Until Next Time,
Cornelius Fichtner, PMP, CSM
President, OSP International LLC

Re:FPIF Contract - Target Price Calculation 7 years 3 months ago #526

  • Harwinder Bhatia
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Hello Cornelius,

Thanks for your response. Yes, I understand that such questions may be out of scope for the PMP Exam. I was trying to learn more on PTA for my own interest and happened to catch these points in the formula study guide.

Q 31: the Target Cost is given as 1,000,000, Target Profit as 100,000 and Target Price as 1,200,000. Since the PTA formula doesn't use the Target Profit, the answer to the question is not an issue. But I thought, for the sake of correctness, the Target Profit should have been mentioned as 200,000, so that the formula (Target Price = Target Cost + Target Profit) held good.

Q 104: It asks for Target Cost and provides the values of Target Price and Target Profit. I would have calculated Target Cost by simply subtracting Target Profit from Target Price. That would have given me a different answer than what is derived in the guide:

Target Price = Target Cost + Target Profit

=> Target Cost = Target Price - Target Profit
=> Target Cost = 1,700,000 - 150,000
=> Target Cost = 1,550,000

The answer in the guide goes through the PTA formula and comes out with a Target Cost of 1,600,000.

In this question, the approach and the answer in the guide would make perfect sense to me had the value of Target Profit been omitted from the question.

So, I thought may be there are "special cases" where the Target Cost and Target Profit don't add up to Target Price. I want to clarify whether I'm thinking on the wrong lines or it's a minor typo in the guide.

Thanks !
Harwinder, PMP
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