This paper presents a performance metric and design criterion for model-based real-time optimization (RTO) systems, named extended design cost. Extended design cost is a systematic, comprehensive approach for evaluating the performance of RTO design alternatives based on fundamental principles from optimization, control and statistics theory. This metric is defined as the total toss in performance of the RTO system during some pre-specified evaluation period due to design imperfections, and is shown to consist of contributions from both the transient and steady-state behavior of the closed-loop RTO system. The proposed method is demonstrated using several examples. This paper concludes by presenting a systematic approach for selecting which model parameters to adjust on-line using extended design cost and the method is illustrated in the William-Otto reactor case study.