What is the cost of delay? (With types and formulas)

By Indeed Editorial Team

Published 14 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses can benefit from understanding what their costs are, as it allows them to develop future strategies and create better budgets. The cost of delay is another significant cost for a growing company, which impacts profits if it has a slow product development process. Learning about delay costs can be very useful to know if you want to create effective budgets. In this article, we discuss what delay costs are, list the different types, outline how to calculate them and review tips for reducing delay costs.

What is the cost of delay?

The cost of delay, or delay costs, refer to the economic impact on a company when a product takes longer to release than expected. Companies use delay costs to forecast the impact of changes in the product's timetable. This includes delays due to slower production, marketing issues or problems related to the product's distribution. Some companies use delay costs as a retrospective tool, while others use the metric to forecast their finances for when there are supply issues.

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Types of delay costs

There are several different types of delay costs, including:

Fixed

Fixed delay costs refer to the situations when these costs are initially low before growing exponentially over time. This specifically applies to a company that uses a fixed date for a product's release, such as a film's release or another piece of media.

After a certain period, the increase in the delay costs slows, which results in the forming of an 'S' shape on a delay costs graph. In this scenario, the faster a team responds to the issue, the lower the fixed delay costs are. Due to this, companies try to resolve any issues before the product's release date to limit fixed delay costs.

Related: How to calculate fixed cost quickly and conveniently

Standard

Standard delay costs occur when these costs increase daily by a linear amount. This means that for every single day that passes, the delay costs increase by the same amount. When a delay cost is standard, the calculation process is significantly simpler than with other types of these costs. Companies use this type of delay cost when calculating the downtime of subscription applications, as each day of downtime means another day of service when refunds to customers are necessary.

Urgent

Urgent delay costs refer to these costs that increase severely as soon as the organisation passes their initial deadline, before flattening out at a high level of cost over time. Calculating this is a relatively challenging process, as understanding the severity of the initial cost increase can be difficult to determine. The rate of the cost increase depends on a range of conditions, including the specific industry and the company's role within it. This is a common form of delay cost when companies work on innovative technology, where delays mean that their product reaches the market after their competitors' products.

Intangible

Intangible delay costs refer to the costs that are insignificant and have a minimal impact on the way that the company functions after encountering them. These apply to some of an organisation's smaller projects, such as fixing minor bugs and issues with the company's existing systems and services. As these issues are minor, customers continue using the product and adding revenue to the business. The delay costs of fixing this issue are minimal as the organisation keeps a high level of customer engagement, despite the ongoing issues.

How to calculate delay costs

Learn how to calculate delay costs by following these steps:

1. Estimate revenue

To calculate delay costs, it's first necessary to determine the company's revenue estimates. Start by estimating the business's revenue if the project is successful. This is the company's normal revenue level. Then, calculate the company's revenue over the same period for when the project is yet to finish. Use existing business forecasts and up-to-date information when completing this stage, as your estimates are more likely to be accurate when you use the correct data.

2. Calculate the revenue gap

For this step, calculate the revenue gap between the two figures over time. For instance, if the company's projected revenue is £80,000 per week for when the project is successful and £65,000 per week if there's a delay, the delay cost to the company's revenue is £15,000 per week.

It's crucial to note that this difference isn't static. For example, if a company is currently experiencing delays, it can return to the revenue expected for when the project is successful over time or it can worsen. Due to this, it's key to complete specific calculations for each period to determine the most accurate delay costs.

Related: What is total revenue vs. marginal revenue? (With examples)

3. Consider additional costs

In some cases, companies receive additional costs as a result of the delay. One example of this is the increase in salary that a company pays. Typically, this occurs as the company keeps hiring consultants for the project until its completion, in addition to extending the hiring period for the equipment it uses on the project. For instance, if a company pays £20,000 per week on labour and equipment during the project, this cost continues throughout the delay period. This cost may also increase if the vendor charges more for unanticipated bookings.

Related: What are variable costs? (Explanation with examples)

4. Collate all the necessary information

When you have all the individual components and delay costs for the project, collate them into one cohesive figure. This involves adding all the costs together and doing so for a set of distinct periods. During this step, it's crucial to be as accurate as possible with the calculations, as these sums play a significant role in a company's future budgets. The final formula for calculating delay costs is as follows:

Delay costs = Revenue cost + equipment and labour costs

Example: A company has a new piece of technology and is competing with another company to introduce it to the market. The company loses an estimated £25,000 per week in revenue if the product experiences any delays, with these delay costs increasing by £5,000 for every additional week of delay. For this project, the overall delays are three weeks long. The equipment and labour costs equate to £10,000 per week, with a flat penalty of £4,000 that the consultants charge for a delay. Due to this, the delay cost calculation is as follows:

Delay costs = Revenue cost + equipment and labour costs

Revenue cost = (£25,000 x 3) + (£5,000 x 3) = £90,000

Labour cost = £4,000 + (3 x £10,000) = £34,000

Delay costs = £90,000 + £34,000

Delay costs = £124,000

Tips for reducing delay costs

Some tips for reducing delay costs include:

Assign tasks effectively

Assigning tasks effectively can be a useful way of reducing delay costs. Effective assignment means staff members are more likely to work on tasks that they have a better understanding of and complete their work without requiring support from their colleagues. For managers to assign tasks effectively, it's key that they have a good understanding of their staff members' skills and knowledge.

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Prioritise backlogs

When working on a large project, different tasks and specific jobs lead to backlogs in the production process. Some companies and teams focus on different tasks and avoid challenging components of their work to make their workdays as easy as possible. Good managers know how vital it is to address backlogs and ensure that their staff members focus on these. This involves assigning team members to target the tasks that cause delays with other pieces of work in the production process to speed up the project's overall delivery.

Related: What is a product backlog and why is it important?

Implement Gantt charts

Gantt charts are an ideal tool for companies and managers who are looking for better time management solutions. They present a series of different tasks and workflows and highlight what each task requires to advance the project. With this information, managers can gain a better understanding of the project's dependencies, which they use to progress a project. From these charts, good managers can effectively assign work that has lots of dependencies to team members to prevent project backlogs.

Related: Step-by-step: how to make a Gantt chart in Word and why

Consider taking a hands-off approach

To reduce delay costs, managers can consider taking a hands-off approach to projects. Effective managers hire the right professionals for their projects so that these individuals quickly finish their work without the need for micromanagement. By taking this approach and broadly guiding the team, managers facilitate more effective work throughout the organisation and ensure that projects finish as soon as possible.

Disclaimer: The model shown is for illustration purposes only, and may require additional formatting to meet accepted standards.

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