Also called: Opportunity Cost, Time Cost, Delay Cost, Cost of Delay, Cost of Waiting, Cost of Delay Penalty, Cost of Delay Penalty Fee, Cost of Delay Penalty Charge, Cost of Delay Penalty Interest, Cost of Delay Penalty Tax, and Cost of Delay Penalty Surcharge
See also: Cycle Time
Relevant metrics: Cost of Delay, Time to Market, Customer Satisfaction, Product Quality, and Return on Investment
How to calculate Cost of Delay:
Cost of Delay = Cost of Delay per Unit Time x Time Delayed
What is the Cost of Delay?
Cost of Delay is a concept used to quantify the impact of a delay in the delivery of a product or service. It is a measure of the financial, operational, and customer-related costs associated with a delay in the delivery of a product or service.
It is used to compare the cost of delaying a project to the cost of completing the project on time.
Cost of Delay is calculated by taking into account the cost of the delay, the cost of the resources used to complete the project, and the cost of the lost opportunity. The cost of the delay is the amount of money that would be lost if the project was delayed. The cost of the resources used to complete the project is the amount of money that would be spent on the resources needed to complete the project. The cost of the lost opportunity is the amount of money that would be lost if the project was not completed on time.
The cost of delay is the cost associated with not taking action on a project or task. It can include lost revenue, missed opportunities, and increased costs due to delays in completing the project. It can also include the cost of additional resources needed to complete the project, such as additional staff or materials.
Where did Cost of Delay come from?
The term “Cost of Delay” was first coined by Don Reinertsen in his book “The Principles of Product Development Flow”. The concept of Cost of Delay is based on the idea that the cost of delaying a project or product is often greater than the cost of completing it. This concept is based on the idea that the longer a project or product is delayed, the more likely it is to become obsolete or irrelevant. The cost of delay is the sum of the costs associated with the delay, such as lost revenue, lost opportunities, and lost time.
It is also the cost of not taking advantage of the opportunities that could have been taken advantage of had the project or product been completed on time. The concept of Cost of Delay is an important one for product development teams to consider when making decisions about when to launch a product or project.
Understanding the Cost of Delay
The cost of delay takes into account the economic impact of the time it takes to deliver a product or feature to the market. It includes factors such as lost opportunity revenue, potential market share loss, reduced customer satisfaction, increased development costs, and decreased team morale. Essentially, the cost of delay is a way to measure the impact of delaying the delivery of a software project, and is used to inform decisions about prioritization, resource allocation, and project management.
There are two main types of Cost of Delay: direct and indirect. Direct costs are those that are directly associated with the delay, such as the cost of resources, lost opportunities, and other factors. Indirect costs are those that are not directly associated with the delay, such as the cost of customer dissatisfaction, lost market share, and other factors.
Some examples of direct costs associated with a delay include the cost of resources, lost opportunities, and other factors. For example, if a project is delayed, the cost of resources such as labor, materials, and equipment may increase. Additionally, the project may miss out on potential opportunities, such as new customers or markets, that could have been gained had the project been completed on time.
Indirect costs associated with a delay may include the cost of customer dissatisfaction, lost market share, and other factors. For example, if a project is delayed, customers may become dissatisfied with the product or service, leading to a decrease in customer loyalty and a decrease in market share.
The value of a project is not always guaranteed
Companies undertake projects with the expectation that they will provide a certain benefit, but there is always a risk that these hypotheses may be incorrect. In such cases, having more time to adjust and pivot towards the overall goal is preferable to having less time. Late feedback can be incredibly costly, with many executives lamenting that they wish they had known critical information sooner. Therefore, taking the time to fully consider the value and potential risks of each project is crucial for successful project management.
Cost of delay as a prioritization framework
Cost of delay (CoD) is a prioritization framework that enables businesses to measure the economic impact of delaying the completion of a product or feature. By calculating the ongoing monetary costs of each item on a team’s backlog, product managers can make more informed decisions about prioritization and resource allocation.
Quantifying the economic impact of delays
Calculating the cost of delay requires three key inputs: the estimated revenue per unit of time that the project will generate, the estimated time to complete the project, and the monthly profit divided by the project’s estimated time. This number represents the monthly cost of delay that would be incurred by the organization if the project were to be delayed.
“If you only quantify one thing, quantify the cost of delay.” – Don Reinertsen
Don Reinertsen, a renowned CoD expert and author, has famously said, “If you only quantify one thing, quantify the cost of delay.” By using this framework, product teams can arrive at a data-backed estimate for the cost of delay and make more accurate estimates of the value and costs of each initiative.
Reinertsen argues that most people have a poor ability to estimate cost of delay, as they often underestimate the negative impact that a delay could cause and the amount of time required to complete a project. The cost of delay approach forces organizations to do the necessary calculations to arrive at a more accurate estimate of the cost of delay. This, in turn, allows product teams to make better-informed decisions about prioritization.
The cost of delay prioritization framework also helps teams better allocate resources. Spreading development resources across multiple features may seem like a good idea, but it can lead to delayed revenue and lost opportunity. By using CoD techniques for backlog prioritization, product teams can gain clarity about how to best allocate their limited resources.
A data point to stakeholders
The cost of delay can provide useful data points to stakeholders requesting changes in priority. Urgent requests for new functionality can upend the strategic plan captured in the product roadmap. Without sound reasoning for sticking to the existing product development process, on what basis will the product team be able to turn down these demands and protect their developers from having to shift gears abruptly? By using the cost of delay framework, product managers can demonstrate the actual economic impact of delayed work on the agreed-upon product functionality, thus providing a more compelling argument to stakeholders for sticking to the product development plan.
When speaking with senior leadership, the cost of delay can be particularly useful. Executives, board members, and investors are typically motivated by the bottom line. By demonstrating that a cost-of-delay estimate has been developed for all primary initiatives, product teams can show that they are mindful of the economic impact of their work on the organization. This can help to build trust and support for the product development process.
The cost of delay is a critical component of another popular agile prioritization framework, Weighted Shortest Job First (WSJF). By prioritizing work based on the cost of delay, organizations can ensure that they are delivering the highest value features to the market as quickly as possible. To learn more about prioritization and the cost of delay, check out our upcoming webinar.
Kanban and managing the Cost of Delay
One way to reduce waiting time is by managing workflow with Kanban. The Kanban method is a powerful tool for optimizing your workflow in order to increase throughput and efficiency. With its help, you can visualize every step of your process, even on a global portfolio level, monitor how projects are progressing, and identify where work gets stuck. Among the strongest sides of Kanban for reducing CoD are the so-called WIP limits that prohibit your team from working on more than a certain number of tasks or projects simultaneously.
Another lean principle that can be applied to reduce CoD is taking Gemba walks. Gemba walks are a legacy of the Toyota Production System, and they encourage managers to spend more time on the production floor (even if it is a digital one)
What is the potential impact of delaying this decision?
Hint Delaying this decision could lead to missed opportunities, a lack of progress, and a decrease in efficiency.
What are the potential risks associated with delaying this decision?
Hint Delaying this decision could lead to increased risks of making the wrong decision, missing out on potential benefits, and a lack of preparedness for future events.
What are the potential benefits of making this decision now?
Hint Making this decision now could lead to increased efficiency, better preparedness for future events, and potential cost savings.
What are the potential costs of making this decision now?
Hint Making this decision now could lead to increased costs in the short-term, such as additional resources and time needed to implement the decision.
What are the potential longterm costs of delaying this decision?
Hint Delaying this decision could lead to increased costs in the long-term, such as missed opportunities, a lack of progress, and a decrease in efficiency.
What are the potential shortterm costs of delaying this decision?
Hint Delaying this decision could lead to increased costs in the short-term, such as additional resources and time needed to implement the decision.
What are the potential costs of not making this decision at all?
Hint Not making this decision at all could lead to missed opportunities, a lack of progress, and a decrease in efficiency.
What are the potential costs of making the wrong decision?
Hint Making the wrong decision could lead to increased costs, missed opportunities, and a lack of progress.
What are the potential costs of making the right decision?
Hint Making the right decision could lead to increased efficiency, better preparedness for future events, and potential cost savings.
What are the potential costs of making a decision too quickly?
Hint Making a decision too quickly could lead to increased risks of making the wrong decision, missing out on potential benefits, and a lack of preparedness for future events.
You might also be interested in reading up on:
- David J. Anderson @djplan
- Don Reinertsen @DonReinertsen
- Johanna Rothman @johannarothman
- Tom Cagley @tcagley
- Johanna Rothman @johannarothman
- The Scientific Secrets of Perfect Timing by Daniel H. Pink (2018)
- Agile Estimating and Planning by Mike Cohn (2005)
- The Principles of Product Development Flow: Second Generation Lean Product Development by Don Reinertsen (2009)
- Accelerate: Building and Scaling High-Performing Technology Organizations by Nicole Forsgren, Jez Humble, and Gene Kim (2018)
Want to learn more?
Receive a hand picked list of the best reads on building products that matter every week. Curated by Anders Toxboe. Published every Tuesday.
No spam! Unsubscribe with a single click at any time.
Product Loop provides an opportunity for Product professionals and their peers to exchange ideas and experiences about Product Design, Development and Management, Business Modelling, Metrics, User Experience and all the other things that get us excited.Join our community
Made with in Copenhagen, Denmark
Want to learn more about about good product development, then browse our product playbooks.