Managing the Opportunity Costs - PMP Certification

A career in project management is pretty rewarding. You can get a job in just about any industry and a really good paycheck. To be a project manager, you must pass a few exams and achieve certifications to prove your skills in this field. PMP, or Project Management Professional, is one such certification that helps you learn the ins and outs of project management, what it’s about, and how to advance a career in this industry. One of the many topics covered in the exam is opportunity cost. Let’s see what opportunity cost is and how it’s related to PMP certification.

What is Opportunity Cost?

You may have learned the opportunity cost concept in economics in high school. It explores the relationship between the scarcity of resources and their demand. Scarcity, as the name suggests, is when there’s a lack of resources or their availability is much less than the demand. Now, the producer has to choose what they’d like to use these scarce resources for, especially if it has multiple uses, and they have to pick the most valuable one.

For instance, paper is produced from the pulp of the tree, but that would require cutting down several trees. That’s called opportunity cost. The producer has to choose one product, avoiding the next best alternative. In a business context, opportunity cost refers to the net value of the chosen as well as the next best alternative product. Basically, it’s the product or the opportunity you miss out on because of the scarcity of resources and choose the most beneficial alternative instead.

It means you can spend money on only one product at a time. Ideally, you should work on projects with smaller opportunity costs to spend fewer resources and ensure maximum returns.

How to Manage Opportunity Cost?

The biggest benefit of considering opportunity cost is that it allows you to reduce your cost of operation. Note that opportunity cost doesn’t help you deduct the cost of any product automatically, but considering it can help you decide how much you will save or lose on choosing one project over another. It allows you to be more transparent in decision−making. Calculating the amount for each project will give you a better idea of which project costs more and which offers a better and higher return.

You must calculate benefit returns, the amount you’d earn in the future from the project, and compare it with the alternatives to make an effective decision. For example, suppose you get two opportunities that involve the same capital. Now, to figure out which is better for your organization, you have to calculate the benefit returns after adjusting the risk. You need to incorporate the first opportunity and the next best alternative of the same kind and with the same capital requirement.

A project manager is responsible for providing risk management to maximize the project's returns and minimize expenditures so that you can save more while enjoying better future benefits. People implement the opportunity cost concept in decision−making because it enables them to utilize scarce resources efficiently. However, that doesn’t mean you have to limit the use of these resources to one project. Nowadays, managers are focusing on creativity. They find new ways to use the same resources for both projects by dividing them equally or combining two projects into a single opportunity.

Why do Project Managers need to Understand Opportunity Cost?

As a project manager, you will face many situations where you have to choose between several competing projects. Of course, the concept is an essential part of the PMP exam, and passing it requires a sound knowledge of this subject. But there’s more to opportunity cost than that. When you work as a project manager, you need to factor in your organization’s goals and core vision when taking on new opportunities.

At times, you have to make tough choices−choose one project over another. It gets pretty challenging when both projects seem crucial for your company’s success and involve the same capital, but due to the scarcity of resources, you can pursue one at a time. That’s where the opportunity cost concept comes in handy.

While comparing these projects, you can decide which project is perfect for investing your skills, human resources, time, and money. Once you have invested your resources in the best opportunity, the second−best alternative can’t be executed. Therefore, it’s important to put the available resources to great use to minimize opportunity costs and maximize your returns.

About PMP

Project Management Professional (PMP) is for aspiring project managers that want to complete their training in project management and earn a certificate that’s valid worldwide. Once you have passed this test, you can secure a job as a project manager in nearly any industry in any part of the world. The certification shows your ability to handle different elements of a project, including human resources, time, money, and other resources. You need to learn the popular project management methodologies, such as Agile, Waterfall, Scrum, Kanban, Scrumban, and Six Sigma, to get a better understanding of project management.

Is Opportunity Cost Necessary for PMP Certification?

The PMP test covers other factors additionally that can make you a better project manager and improve your ability to make an informed decision, choose the right personnel for various projects, allocate resources to these projects, maximize your returns, minimize expenditure, and ensure the organizational goals are met.

Opportunity cost is one of the crucial project management concepts. If you are attempting PMP certification, you may have finished the PMBOK guide (the book for aspiring project managers). While it covers most topics, it doesn’t have anything on opportunity costs. Even if the exam doesn’t ask you any questions related to opportunity cost, this approach is quite famous in the project management industry. You might face real−world problems in which choosing an opportunity based on factors like capital, budget, returns, and resources can get challenging. Take some time to learn this concept before appearing for the PMP certification.