Project Management

What to do about sunk costs [Video]

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A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts. Written by Elizabeth Harrin from RebelsGuideToPM.com.

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Sunk costs… what a headache when it comes to decision making. In this video, I talk about what they are and why they are a problem. If you don’t feel they are a problem for you as a project manager, then all credit to you!

In summary, sunk costs are those that have already been paid out. They are budgeted expenditure that has already been committed – the company can’t get those funds back. I agree they absolutely that this expense shouldn’t cloud your judgement, but unfortunately not everyone in the project sphere feels the same way and often decisions are made with sunk costs playing a large part in what next steps are taken.

In my view, project sponsors who feel that saving face is more important than business value are most at risk from making choices that perhaps wouldn’t stand up to too much audit scrutiny when the project is reviewed for benefits in a couple of years’ time post-delivery. Having said that, everyone is at risk of feeling invested when they have poured effort into working on something.

We have to work really hard to make sure that sunk costs, and the emotion attached to a project, don’t play a part in tough decisions about the project’s future.

Watch the video and then share your thoughts in the comments below: am I right, or is there more to it? Can’t wait to hear your views!

Posted on: March 08, 2022 04:00 AM | Permalink

Comments (10)

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Stéphane Parent Self Employed / Semi-retired| Leader Maker Prince Edward Island, Canada
I've been luck: I've never had to participate in a decision where sunk costs was considered a factor.

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Maria Hrabikova Engagement Manager | Plex, by Rockwell Automation Ricany U Prahy, Prague, Czechia
Thank you, Elizabeth.
Here is the link to an article discussing sunk cost fallacy with the real-world examples of such behavior or endeavor - to illustrate, robust investment by the British and French governments in the Concorde project. In parallel, the article references a scale of eight questions to measure susceptibility to the effect.

https://hbr.org/2021/07/how-susceptible-are-you-to-the-sunk-cost-fallacy

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Olivier Skora Entrepreneur Consultant| Cd'aC Consutling Chalonvillars, France
Hello Elizabeth. Thanks for your video. I am a little be confused and lost about the concept of Sunk costs. Why do you not use the term Actual Costs, Earn Value, Planed value, Estimate to Complete ? Thanks in advance for clarifying sunk costs versus the above designations.
Olivier

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Elizabeth Harrin Director| RebelsGuideToPM.com London, England, United Kingdom
@Olivier because sunk costs is just a different way of talking about money. Think of it is as actual cost. It's the amount invested in the project so far. However, actual cost normally has the connotation that you'll carry on and spend the rest of the budget as planned. Sunk cost has the connotation that the project will be stopped. It's not an EV term, as it is not to do with monitoring and controlling and forecasting spend, it's a reflection of what the business will "lose" if the project is stopped now.

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Elizabeth Harrin Director| RebelsGuideToPM.com London, England, United Kingdom
@Maria, thanks for sharing that HBR article, interesting!

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Olivier Skora Entrepreneur Consultant| Cd'aC Consutling Chalonvillars, France
Ok understood, thanks for this clarification.Now I understand the topic, thanks again for your reply.

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Justin Fu Senior Systems Engineer| Parsons Bristow, Va, USA
Thanks

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Binay Samanta Director| Project & Environment Consultants Dhanbad, India
Often decisions are made with sunk costs playing a large part in what next steps are taken.

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Kwiyuh Michael Wepngong Financial Management Specialist | US Peace Corps / Cameroon Yaounde, Centre, Cameroon
I think this is vital...."We have to work really hard to make sure that sunk costs, and the emotion attached to a project, don’t play a part in tough decisions about the project’s future."

I must confess I haven't gotten to the video yet

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Kwiyuh Michael Wepngong Financial Management Specialist | US Peace Corps / Cameroon Yaounde, Centre, Cameroon
I think this is vital...."We have to work really hard to make sure that sunk costs, and the emotion attached to a project, don’t play a part in tough decisions about the project’s future."

I must confess I haven't gotten to the video yet

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