Your management team has burned away soooo much money in preparing and scoring the project to sell it to the customer for too lowsy money. Now it is in a stage that it is impossible to implement it: Engineers often recognize this. The budget is way too small to succesfully implement the project. Then, at this stage, it is better to cancel it. I have seen this too often....
The opportunity cost is simply the missed opportunity of the best non-staffed project. I think it is fairly static. Once it is identified, that is the cost. It would only change if an even better project is identified. If anything, you could argue that the opportunity cost diminishes with time, since the effort to finish the staffed project should be diminishing with time, leading to fewer resources to invest as an alternative. Example: If you only need one more day to wrap up a project, the opportunity cost is minimal, since it is hard to imagine you could refocus that remaining day of effort to get any appreciable return from an alternative.
Sunk costs are merely costs that have already occured. The point of mentioning them is that you should be comparing future returns and investments. That is, ignore the costs that have already occurred, e.g. sunk costs.
These two dynamics are why so many projects are completed, even if in retrospect some should not have been started. If you are half done with a project, the return on remaining investment has doubled. Most likely, the opportunity cost has halved as well, since the available investment has halved. A project looks increasingly attractive as it marches towards completion- except for the cases I outlined in my column, where new information has caused a reevaluation.
Ok, thanks for the explanation. So would the opportunity cost really be the value of the alternative subtracting the sunk costs? I'm thinking the value of the alternative is not static, may also be growing.
Think of opportunity cost as the income from your best availabe alternative. That is the income you are forgoing by choosing the original project. Strictly speaking it is not a cost, as there isn't an actual cash flow. I brought up this concept to illustrate that project selection is a choice between alternatives, and would not mix it up with other concepts, such as sunk cost. As a project progresses, the opportunity cost decreases, only in so much as the smaller remaining resources to complete the project mean less resources to execute an alternative as well.
Another way to think of this is to always compare future investments and future returns.
On one hand, "sunk costs don't matter". On the other hand, opportunity cost keeps increasing as time goes by. It's a bit conflicting. Opportunity cost is a sunk cost. It has to matter. But it's difficult to know when to stop from this alone. The situation with competition or competing technologies seems a faster or clearer way to judge. Yet when the competition scores, not keeping up by cancelling the project is also a big risk. But it would mean the project goal(s) would be changed. The majority of projects are stopped just for the first reason: successful completion.
A project in development must go through periodic checks to ensure that the project is of value as of that date. Also, analysts come up with the idea for the project, and the clock starts ticking. Opportunity costs start decreasing from that point on, and if the project (talking about electronics) takes a long time then the company has to ensure other companies don't have enough market buzz on that same product.
As we unveil EE Times’ 2015 Silicon 60 list, journalist & Silicon 60 researcher Peter Clarke hosts a conversation on startups in the electronics industry. Panelists Dan Armbrust (investment firm Silicon Catalyst), Andrew Kau (venture capital firm Walden International), and Stan Boland (successful serial entrepreneur, former CEO of Neul, Icera) join in the live debate.