How to Calculate Cost of Delay in Projects

In the course of their daily activities, Agile project managers very often need to decide whether a project feature should be implemented earlier than others or even which project should be given preference among many distinct ones required by a business. In these challenge moments, it is important to have appropriate tools available that allow project managers to prioritize their decisions. Among many different options available, prioritizing costs through the concept of Cost of Delay may help in achieving an assertive decision.

In this article, you will learn what Cost of Delay is, why it is so important in the field of Agile project management, how to calculate it, and some important tips on how to reduce costs of delays by using Kanban.

What is Cost of Delay?

In the field of Agile project management, the concept Cost of Delay can be understood as the economic effect of postponing project features or even the entire project to market.

In other words, the Cost of Delay refers to the amount of profit a business loses when delaying the delivery of a feature or the final version of a project. This can be placed in many different contexts, as for example, manufacturing, product development, software development, IT operations and so on. Put simply, Cost of Delay is a way of communicating value and urgency.

Therefore, Cost of Delay generally shows the impact of time on the development of a certain project. In general, the longer this delay is, the greater is the economic loss for the business.

Importance of Cost of Delay

The economic characteristic of Cost of Delay can be used in practice to help project managers and businesses in many different ways:

• Facilitated prioritization. Cost of Delay helps project managers to prioritize projects and features by weighting delivery options based on their value and urgency.
• Appropriate focus. By changing the focus from the point of view of date and costs to value and urgency, Cost of Delay can help achieve an appropriate focus for the business to take relevant decisions.
• Enhanced decision-making. Better decisions can be achieved by making the economic trade-off visible and by facilitating the understanding of both value and efficiency.

How to calculate Cost of Delay?

Now that you have a better understanding of Cost of Delay and its importance, let’s take a look at how to calculate Cost of Delay in the context of Agile project management.

Cost of Delay can be quantified through different metrics, depending on the type of project being carried out. In a broad view, Cost of Delay is represented by an amount of money per unit of time (either weeks or months), which is derived from an initial estimation of the amount of profit that is expected from a project or even from a specific project feature after it is delivered.

To illustrate this, let’s say that a company has an expected profit of $50,000 a month from a finished project. Therefore, for this specific project, the Cost of Delay is $50,000/month. Put simply, each month the project is delayed, the company will not earn $50,000 which represents a financial loss opportunity.

Another possible metric commonly used to quantify the Cost of Delay is the so-called CD3 (Cost of Delay divided by duration). In order to calculate CD3, the following procedure should be followed:

• Estimate the profit of the project (or project feature) on a weekly or monthly basis;
• Estimate the duration to implement the project (or project feature);
• Divide the estimated profit by the estimated duration.

Since the return on investment (ROI) will be faster for higher values of CD3, the CD3 metric can be used to prioritize the development of project features or projects from an economical perspective.

Reducing Costs of Delays with Kanban Method

One of the main causes associated with costs of delay in projects is attributed to improper project management which can lead to significant wastes in the form, for example, of waiting time during the life cycle of a project.

The Kanban method is a great alternative to help your business aim at reducing costs of delays concerning important projects or even particular projects´ features. This can be achieved through a correct management of the project workflow, where the important steps concerning a project are visualized and monitored. This allows team members to realize in real time critical bottlenecks where tasks get stuck and therefore where there is room for continuous improvements.

By correctly managing the project workflow through the Kanban method, it is possible to cut down waiting time and other types of wastes that may be present in the process as a whole.

Among the most important properties of the Kanban method, one in particular can work wonders in helping your team to reduce costs of delays, the so-called: work in-progress (WIP) limits. This means establishing a specific maximum number of tasks that are allowed to be executed simultaneously by the team, in each step of the process, based on the team capacity. By implementing WIP limits, process throughput and efficiency are increased as the team focuses on finishing tasks rather than initiating new tasks randomly.