Every decision you make as a contractor has a cost. Whether it’s selecting one subcontractor over another, accepting a particular project when others are available, or giving your workers a necessary pay increase when funds are tight, there will always be the flip-side of your decision to consider. Typically, these costs are considered in the form of what-if scenarios:
- What if the other subcontractor could’ve helped me cut costs?
- What if the project I selected to take on is less profitable than I originally thought?
- What if the funds I used to give my workers a pay increase could’ve been better spent elsewhere for the long-term success of my business?
The cost of the things you didn’t do and the decisions you didn’t make is what’s known as opportunity cost. Confused? Don’t worry. In this article, an attorney who practices Nashville construction law will explain this important principle to help you make better decisions when presented with several options. Making the right decisions could have a significant effect on the success of your business — choose wisely.
Defining “Opportunity Cost”
According to Investopedia, the term opportunity cost refers to “the benefits an individual, investor or business misses out on when choosing one alternative over another.” For example, when purchasing breakfast you’re presented with several options (i.e., an egg sandwich, donut, or coffee), which invariably means that you’ll have to make concessions:
- Egg Sandwich: Healthy and wholesome, provides sustained energy throughout the day, but lacks in flavor. Opportunity Cost: Personal enjoyment.
- Donut: Lots of flavor, but provides little energy and isn’t diet-friendly. Opportunity Cost: Health and energy.
- Coffee: Helpful energy boost, but doesn’t fill you up and extra ingredients to enhance flavor (i.e., sugar, cream, etc.) aren’t necessarily diet-friendly. Opportunity Cost: Appetite and sustained energy.
As you can see, each breakfast option comes with benefits and lost opportunities, which makes the decision more complex than you might initially think. On the project site, these types of decisions are significantly more important because there’s a lot of money backing each and every decision you make. When the opportunity cost is millions of dollars, a valuable vendor partnership, or a relationship with an owner who could help your business rise above your competitors, no decision can be taken lightly.
How to Avoid Negative Opportunity Cost
As a contractor, the best way to avoid a negative opportunity cost is to approach each decision deliberately and work with experts to make the best decision for your business. For example, what is the opportunity cost of signing a contract without having it reviewed by an attorney from a Nashville construction law firm? Potentially, your right to payment, legal costs, and more. That’s a lot of risk and a potentially business-crippling opportunity cost. Is that a risk you can afford to take?
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.