"Opportunity Cost" Explained

Opportunity cost is a term that many of us have struggled to understand completely. I was unsure of the definition and how it applied to the "real world" when I first heard it. It is seemed a little abstract or not concrete, more of an academic concept.

However, all these smart people believed it was real and so there was something there I should understand.

We know that opportunity cost revolves around of the idea of lost profit when you do something that is not billable. As an example, if my construction crew is doing rework on the first floor, I am losing the opportunity to install work on the second floor and bill it.  Rework is non-billable, so if my company didn't take advantage of the chance to work on the second floor, there would be an opportunity cost to us because we would have simply been performing rework.

Fair enough. However, some construction professionals see mistakes, lost productivity, and meetings as part of the business. So, they may not fully grasp the importance of this concept.

Here is another way to look at it. You have business bills due each month. Personally, each of us has costs to live. These expenses don't suspend because we can't invoice the client. Just because we have less revenue this month doesn't affect the demand payments from vendors, landlords, and the like.

Opportunity cost is real to those of us who have experienced "too much month". We know we can't be unproductive whether it is from rework, disorganized meetings or other's laziness. There is a real opportunity cost (emotional, academic and practical) when we are behind on our bills.