How to Calculate Cost of Delay So You Know Where You’re Losing Money
Deciding which project should be given top priority is a dilemma that business owners and managers face regularly. For instance, would it serve the company better if it focuses on a $1 million, a three-month-long project first or push through with the smaller project that would cost $20,000 but with a two-week deadline? Sadly, making a concrete decision isn’t easy and often entails blurry visualisations using project management tools that don’t really tell you anything.
This is why more companies are actively using Cost of Delay (CoD) projection when it comes to determining its future projects. Why? Because it’s the most straightforward data-backed decision-making approach that you can bet your company’s future on. Well, using CoD is just one tool that you can learn now after reading this blog post. If you want to see it in action and other forecasting techniques, check out this blog post on how I save a company from spending another 20 Million Euro on a failing project where they already spent 15 Million Euro.
In this blog post, you will learn how you can use CoD to make reliable decisions in a very limited time.
What is Cost of Delay?
Cost of Delay is the monetary impact of a project’s delay. It pertains to how much a company will lose, or how massive the fallout will be if the project does not meet its deadline.
Let’s say one manager got caught in traffic and was subsequently late to a crucial meeting with an investor. Obviously, this delay will cost the company in terms of time and resources. The example is simple, and it goes without saying that there’s more on the line when it comes to delays in vital company projects. Missed deadlines and delays can lead to high labour costs, the loss of a client or the launch of a poorly-designed product.
How is Cost of Delay Calculated?
When it comes to calculating Cost of Delay, critical elements like additional labour cost, the market value of the product or feature or missed business opportunities should be taken into account. There are several ways of computing CoD (or its metrics). Here are some of them:
- You can compute the cost of delay by estimating the revenue or sales the project is expected to generate once it’s launched and how much a delay will cost. For example, your product’s new feature is estimated to generate weekly revenue of $15,000. This means your company will lose $60,000 if the project is delayed for four weeks. You also have to consider the salaries you’ll continue to pay the team, the changes in marketing and any damage the delay will have to your company’s reputation.
- Another way to compute Cost of Delay is to follow Cost of Delay Divided by Duration (CD3). To compute using this method, you have to:
- Compute the project’s estimated weekly profit.
- Assess the amount of time required to launch the project.
- Divide the estimated project duration against the expected revenue.
Once the computations are done, you can compare which projects have higher CD3 value. A higher CD3 means the return of investment is quicker. Therefore these are the projects that should be given top priority.
- CoD can also be computed using the formula –
Total Cost of Delay = Lost Month Cost + Peak Reduction Cost
Lost Month Cost indicates the peak month of sales – the period wherein sales of the product are high or stable and before it begins its downward turn. You can calculate Lost Month Cost by multiplying the product margin and the sales volume of the peak month. Most consider Lost Month Cost as part of the CoD.
Meanwhile, peak reduction cost deals with the product cycle. This refers to the sales volume, which can be determined by how fast the product is developed and launched, how quickly the sales and marketing team can advertise it to clients and secure sales. Unfortunately, delays in the product launch have a significant impact on sales and leads to a lower sales peak. Assigning a number to the reduced peak in revenue is not simple, which is why most companies disregard it.
What are the Different Types of Cost of Delay?
Companies should also familiarise themselves with the various types of Cost of Delay since these can affect CoD calculations.
- Fixed Date Curve: This type of CoD refers to projects that have a fixed and rigid time frame. It’s therefore vital that a company follow a strict schedule in order to meet the deadline, as missing it will be costly. For instance, the product has to be launched before a new regulation that will greatly affect the product is passed. Or the company has a TV advertisement that’s set to be released internationally.
In this situation, calculating the Cost of Delay is a little complicated. The company should expect the CoD to grow at an average pace initially. But there will be a large sales increase following a particular time frame before settling to a minimal growth rate.
- Intangible Curve: Projects with a low Cost of Delay typically have an intangible curve. This is because they have little effect on the company due to it being low on the project food chain. The company faces no risks even if these projects are delayed since CoD in virtually nonexistent.
- Standard Curve: Projects with a standard curve shows a Cost of Delay that moves in a linear manner. It’s also easy to compute this type of CoD since there’s no difference regardless of how long the project lasts.
- Urgent Curve: As the name implies, projects with a compelling curve CoD have to be wrapped up and launched as soon as possible to create value for the business. Any delay to the project will end with the company losing revenue. For example, your company has to come up with a product in order to compete with a competitor that’s already preparing for a huge product launch. Projects with this type of curve will see high Cost of Delay when the deadline hits, and this will continue to increase over time.
Cost of Delay is very fluid, and the CoD curve is subject to change. Let’s say a company as successfully launched a unique product feature. Since it has no competitors, the company will follow a standard CoD curve. But if after a year a rival company launches a similar feature on one of its products, the standard CoD curve can change and become a fixed date one.
Companies should understand how vital Cost of Delay is when it comes to choosing and managing projects. It’s also vital they know how to calculate CoD since it has a significant impact on the business. It also assists the management in deciding which projects should be moved up or down the pipeline.
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