Cost, Opportunity

Opportunity cost is a way of measuring the cost of an activity in terms of the value of the best alternative that was not selected. For example, an existing supplier offers to maintain the current contracted price if the buyer agrees not to seek competitive offers at the conclusion of the current contractual period. In making the offer, the supplier also advises the buyer that market rates have increased by 5%, which the suppler is willing to forgo in return for the security of an extension to the period of the contract. However, the buyer decides that the transparency of inviting competitive bids for the renewal of the contract is preferable to making a potential saving of 5% by remaining with the current supplier. Tenders are invited and the original supplier wins the contract, but the buyer is required to pay 5% more than was previously being paid, as a result of the tendering process. The opportunity cost of going to tender has been an increase of 5% to the value of the contract, being the value the buyer chose to forgo in order to undertake the option of the competitive tendering process. The buyer decides that this a price worth paying, rather than facing accusations of a lack of transparency as a consequence of not going to tender.