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Product management, Leadership, Engineering

Cost of Delay

The cost associated with the time taken to complete a project or task.

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: Return on Time Invested, Cycle Time

Relevant metrics: Cost of Delay, Time to Market, Customer Satisfaction, Product Quality, and Return on Investment

In this article

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)

How to calculate the cost of delay

Ask the Zeroth question: Is the work still valuable?

Before diving into any calculations, it’s important to ask the foundational question: Is this work still valuable? Work that was valuable when first planned might lose its relevance over time, especially if it gets delayed. The longer something remains in your work-in-progress (WIP) pipeline, the higher the risk that it becomes outdated or irrelevant. Worse, delays tend to diminish the overall value a project can deliver.

If the work is no longer valuable, stop working on it and redirect your resources to more valuable initiatives. For the remaining work, you can now calculate the costs associated with delay to make informed decisions on prioritization.

Clarify the various types of delay costs

The cost of delay can be categorized into several types of expenses that directly or indirectly affect the outcome of your project:

  1. Ongoing operational costs (salary and overhead) The most immediate cost of a delay is the expense of continuing to pay team members and operational overhead while the project remains unfinished. This cost includes salaries, benefits, and overhead for everyone working on the project. Each week a project is delayed adds to this operational burden without bringing any corresponding revenue.

  2. Lost sales at launch Delays in delivering a product or feature can reduce the initial impact of your launch. The market window might narrow, and competitors may gain an advantage. Delayed launches typically result in lower sales upon introduction, as the delay erodes customer anticipation and market relevance. For commercial products, you can estimate this loss by calculating the sales that would have been made had the product launched on time.

  3. Erosion of market share and long-term revenue A delay not only reduces the number of initial sales but can also affect the entire product lifecycle. As competitors release similar or superior products, your delayed offering may capture a smaller portion of the market. The longer the delay, the more potential market share is lost, reducing long-term revenue and making it harder to recoup your initial investment.

  4. Shortened product lifespan (earlier end-of-life) Delays can lead to a product becoming obsolete sooner. If your product is released late, it may reach its end-of-life stage more quickly than originally planned. This means reduced sales as the product is replaced or surpassed by newer offerings, further reducing the overall return on investment.

Estimate your organizational costs

To calculate these, add up the weekly cost of everyone involved in the project, including their salaries and any operational overhead, and multiply that by the number of weeks the project is delayed. For example, if a team of 6 people earns $100,000 annually, this equates to about $2,000 per week per person. For a four-week delay, the total cost is $2,000 * 6 people * 4 weeks = $48,000.

  1. Lost sales at Llaunch Some products rely on a strong initial market introduction. A delay in this phase can lead to reduced market excitement, fewer sales, or missed opportunities for early adoption. To calculate this, estimate the weekly sales you expect at launch and multiply by the number of weeks delayed. For instance, if you anticipate selling 300 units per week at $1000 per unit, and the project is delayed by four weeks, the lost revenue equals 300 units * $1000/unit * 4 weeks = $1.2 million.

  2. Long-term revenue loss A delay can have a lasting impact on your revenue over the entire product lifespan. As competitors enter the market, your delayed product may never achieve the peak sales you originally projected. Estimate how much lower the maximum sales will be over the product’s lifecycle due to the delay, and calculate the potential lost revenue over that period.

  3. Shortened product lifespan Delays can shorten a product’s useful life in the market. To calculate this, estimate how much earlier the product might reach its end of life and lose relevance in the market due to late entry. This can be challenging to predict, but understanding the broader market context will help.

In addition to the core financial costs, there are other indirect costs that can result from delaying a project:

  1. Customer dissatisfaction and brand erosion Delays can negatively impact your relationship with existing and potential customers. If a project or product is delayed, it might result in customers turning to competitors. This can damage your brand reputation and diminish customer loyalty.

  2. Opportunity costs Opportunity costs represent the value of what you are not doing because of the delay. By focusing resources on a delayed project, you are forgoing other potential revenue-generating opportunities. It’s important to calculate the value of the projects that could have been completed instead, which might bring faster returns or create more value for the business.

  3. Increased development costs The longer a project takes, the more complex and costly it becomes. Delays often result in the need for additional resources, whether it’s more developers, additional testing, or further revisions to keep the product competitive. This increased scope can add to the overall cost of development.

  4. Decreased team morale and productivity When projects are delayed, team morale can suffer, especially if the team feels they are working on something that is no longer valuable. This can lead to decreased productivity, further compounding the delay.

Ask questions that the team can answer anonymously

To gain better insights into potential delays and costs, ask your team the following questions anonymously:

  • How many projects are you currently working on?
    This helps identify if multitasking is causing delays and adding to the ongoing operational costs.
  • How many more weeks do you estimate before the project can deliver value?
    This question gauges the time required for the first release or product delivery.
  • If you need other teams or resources, how long do you think you will need them to complete your work?
    Dependencies can further extend project timelines. Identifying them early allows for better coordination and reduction of delays.

Determine the most valuable work

By understanding the costs of delay, you can prioritize projects based on which will deliver the most value in the shortest time. Rank work according to potential revenue, reduced costs, and strategic value to the business. Focus on completing high-value projects that have a significant financial impact or provide immediate customer value.

Key takeaway: for every project under consideration:

  1. Ask the zeroth question: Is this work still valuable? If not, stop and move on to more valuable projects.
  2. Estimate ongoing operational costs: Calculate the cost of continuing to pay the team and overhead while the project remains unfinished.
  3. Assess the impact of a delayed launch: Estimate the loss of initial sales due to delayed market entry.
  4. Evaluate the long-term revenue impact: Understand how delays affect the product’s overall revenue potential.
  5. Consider a shortened product lifespan: Calculate how delays might lead to an earlier end-of-life and reduce total revenue.
Relevant questions to ask
  • 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:

People who talk about the topic of Cost of Delay on Twitter
Relevant books on the topic of Cost of Delay
  • 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)
Sources

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