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Eric Graves

Aerospace and mechanical engineer turned NPD systems engineer, Eric spends his time engineering better product develop systems, using PLAYBOOK as his tool of choice!

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Introduction to Cost of Delay (Part 1)

Eric Graves- 01/9/17 04:12 PM

This is Part 1 in a series of posts discussing Cost of Delay and making objective new product development project decisions based on economic analysis.

In this part, we learn many applications for Cost of Delay analysis and why it can help improve product development velocity and increase profits.

Introduction to Cost of Delay

Understanding the cost of delay to market, how to calculate it, and how to compare the cost to the benefits we may gain from a delay can create a strategic advantage for new product development companies.

Interestingly, Cost of Delay is a key metric most product development companies do not fully understand or know how to calculate. In this article, we will explore what is cost of delay, why it's critical to calculate it and how it enables team to make product development decisions based on economics.

You can also view our complete Guide to Cost of Delay.

View My Guide to Cost of Delay

What is Cost of Delay?

The Cost of Delay is the amount of money it will cost the company if a product launch is delayed.It’s a metric you need to know as the cost of delay is often worth millions of dollars in profit.

Why is the Cost of Delay important?

Creating fast flow in your new product development project is critical to your bottom line! 

Cost of Delay provides a sound economic foundation for making decisions regarding which projects should get priority across an organization. It's also a good way to prioritize the implementation (or not) of new product features, tempering scope creep.

Making fast and effective project decisions increases project velocity, profitability, and customer satisfaction. Calculating the cost of delay enables fast and effective product decisions.

Cost of Delay - Making decisions based on economic loss or gain

For example, have you ever wondered if it is worth delaying your product launch to add a new feature to a product, or questioned whether a cost reduction effort in a project was worth the delay it would cause, or whether moving resources from one project to another was the 'best' thing to do?

Have you ever wondered if mitigating a particular project risk was worth the time it would take, or what would be the absolute best thing to spend your time and money on today?

Questions like these are pervasive throughout product development. Often the answers differ a lot depending on whom you ask.

After hours or weeks of meetings and arguments, typically a decision is made based on intuition or other factors not related to project economics. However, intuition-based decisions (or other) are subject to change often as new information arrives or opinions change, and achieving buy-in across the organization is more difficult.

What if there were simple, quantitative, and objective answers to these types of questions? What if you could more easily see the impact of changes on the Return on Investment of a project? Less time would be spent arguing, changing minds, and reworking our designs. Projects would be completed faster, and be more profitable, and the work environment would be much more pleasant. At PLAYBOOK, we believe in a better workplace, built around objective decisions which are even fun to analyze and make. We believe this provides such a strategic advantage that someday all workplaces will be like this, or they won't survive. Their best people will find better places to work.

Cost of Delay is a metric you must know to make decisions based on economic loss or gain. The Cost of Delay is what Don Reinertsen refers to as The Golden Key. I like to use another analogy, too. Do you remember Captain Jack Sparrow’s compass from Pirates of the Caribbean?

"True enough, this compass does not point north.""...Where does it point?"

"It points to the thing you want most in this world."
Jack Sparrow and Elizabeth Swann

Like Jack Sparrow without his compass, a project team without a model for calculating Cost of Delay and making analytical decisions too often goes around in circles or chooses the wrong direction entirely. In this recent post by Don Reinertsen, Don points out yet another example of 'the advantage of using math.' With a common model based on economics, we can more easily gain project team consensus and make the 'right' decision quickly when faced with questions like the ones above, and a great many others. 

Want to learn more about how to calculate cost of delay? Download the eBook, "Profit Driven Development and Cost of Delay: A Guide for Decision Makers."

Download my eBook

    • Part 1: How can the Cost of Delay improve product development velocity and increase profits?

    • In Part 2: What is the definition of Cost of Delay?

    • Part 3: How to quickly estimate the Cost of Delay.

    • Part 4: How to quickly estimate the other terms generally required to create a project economic model.

    • Part 5: Examples of how to calculate the cost of delay and the subsequent ROI of making some common project trade-offs.

    • Part 6: Important factors to consider when implementing a project economic model and how to manage uncertainty of model inputs. 

    • Part 7: How to calculate the economic value of a decision quantitatively.

    • Part 8: How to communicate and account for uncertainty in each decision's impact on launch date, sales volume, and the other Economic Variables.

    • Part 9: How to increase certainty in our economic decisions, in part by increasing the accuracy of our impact estimates.

    • Part 10: Critical success factors for Implementing Project Economic Modeling and Economic Decision Making.

    Related Posts: 

    WSJF and How to Calculate It

    WSJF and Architectural Runway

    Don Reinertsen on cost of delay

    Wikipedia on cost of delay

    Editor's note: This post was originally published in 2015 and has been updated for accuracy and comprehensiveness.