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What is Opportunity Cost? | Video

What is Opportunity Cost? | Video

There’s an old saying: ‘Time is money’. It’s all about Opportunity Cost.

It means, if you try to save money by doing something yourself, you may be omitting to think about the value of your time. When you are working on that thing, you lose the opportunity to use your time more productively.

That time is the Opportunity Cost.

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Definition of Opportunity Cost

Opportunity costs represent the benefits an individual or organization misses out on when it chooses one alternative over another.

Application: Business Case and Project Proposal

And they are not restricted to money or financial costs. The real cost of any gain you forgo is an opportunity cost.

Examples include:

  • lost time
  • pleasure
  • competitive advantage, or
  • any other benefit

Explicit and Implicit Opportunity Costs

Explicit Opportunity Costs refer to money applied to one objective, which could have an alternative use.

Implicit Opportunity Costs refer to other resources or assets applied to one objective, which could have an alternative use.

Anything (resources, assets, or time) that you could put to alternative use gives rise to an opportunity cost. It’s easy to neglect other forms than money.

Evaluating Your Project Options

Project Sponsors, clients, and Project Boards can use opportunity cost to help them make informed decisions, when they have multiple options before them. Because understanding the potential missed opportunities they would forgo, by choosing one investment over another, allows for better decision-making.

So, this is fundamentally a matter of strategic decision-making, business acumen, and good governance.

Opportunity Cost Formula and Calculation

Opportunity Cost = FO − CO

where:

  • FO = Return on best foregone option
  • CO = Return on chosen option

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. This allows us to compare:

  • Different options in a business case, or
  • One project proposal with alternative proposals, or
  • A proposed project with doing nothing.

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About the Author Mike Clayton

Dr Mike Clayton is one of the most successful and in-demand project management trainers in the UK. He is author of 14 best-selling books, including four about project management. He is also a prolific blogger and contributor to ProjectManager.com and Project, the journal of the Association for Project Management. Between 1990 and 2002, Mike was a successful project manager, leading large project teams and delivering complex projects. In 2016, Mike launched OnlinePMCourses.

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