Opportunity Costing

There are a couple of other accounting terms worth looking at in considering how risk affects budgeting:

• Sunk cost - this is money already expended that can't be recovered
• Opportunity cost - this is forecast earnings from the project. This figure may change as we go through the project.

A risk occurring at some point in the project may alter your opportunity cost but it can't affect the money that is already sunk e.g. You have invested in developing new courses, buying equipment and appointing new staff expecting to win an NHS contract worth £10 million. The total project cost was expected to be £4 million (making your opportunity cost £6 million) and you have already invested £3 million when the NHS pulls the plug on the deal. You are however offered a contract worth £3 million by a pharmaceutical company. What do you do?

Managing an institutional budget is a bit like being a fighter pilot - you can't afford to dwell on past mistakes. You may have made a massive mistake in getting to where you are but you need to decide how to move forward. At this point in time your choice is either to stop now and lose £3 million or accept the new contract and invest a further £1 million thus reducing your overall loss at the end of the project to £1 million.