Mohammad KhanDeputy Vice President, Program Management| MetLife BangladeshDhaka, Bangladesh
A sunk cost is a cost that has incurred, and which cannot be recovered. Actual cost is also the cost incurred at the same point. Can the actual cost be recovered? To my understanding, No, we cannot recover. So what is the difference between them? Saving Changes...
Luis BrancoCEO| Business Insight, Consultores de Gestão, LdªCarcavelos, Lisboa, Portugal
Dear Mohammad Interesting your question Thanks for sharing
In my opinion it can only be considered sunk costs when, for whatever reason, a decision is made to close the project before it creates a product, service or outcome. Cannot therefore be recovered
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1 reply by Mohammad Khan
Dec 08, 2019 11:55 AM
Mohammad Khan
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Thank you for you answer.
So, as per your explanation the Actual Cost is Sunk Cost when the project is terminated for whatsoever reason. Am I right? If that's true, Sunk costs and Actual cost are always the same in terms of amount. Please correct me if I am wrong.
Saving Changes...
Sergio Luis ConteHelping to create solutions for everyone| Worldwide based OrganizationsBuenos Aires, Argentina
If not about to recover it or not. Is about if cost has to be considered to calculate something which have cost as a component or not. In the case of sunk cost it must not taken into account.
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1 reply by Mohammad Khan
Dec 08, 2019 11:57 AM
Mohammad Khan
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Thank you for your answer. But, apologies. I did not understand. Can you please give an example?
The one difference is your sunk costs might also include future expenditures for which you are committed (e.g. a contractual obligation which you cannot break) whereas actual costs reflect the spend to date.
Kiron
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1 reply by Mohammad Khan
Dec 08, 2019 12:07 PM
Mohammad Khan
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Thank you for your answer.
If I interpret what you said as follows, will I be correct? That is - for example, today at this point of project Actual cost is $1M. If the sponsor wants to terminate/cancel the project as per contractual agreement I will have to another $100K. Then the Sunk cost will be $1M + $100K (if the project is terminated), but the Actual cost will be $1M before termination of the project (if it continues as normal). But if the project is terminated and after project closure total cost incurred will be $1M + $100K
Please correct me, if I am wrong.
Saving Changes...
Thomas WalentaGlobal Project Economy ExpertHackenheim, Germany
These terms have different purposes and are used in different scenarios.
Actual cost is used to control the project going forward. Sunk cost is used to counter a human bias (denial of a loss) by labeling past commitments as such and focusing on the future.
Agree with Kiron, they might not even have the same amount of cost. Either there are future commitments that are sunk, or they may be some value created, not all is lost.
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1 reply by Mohammad Khan
Dec 08, 2019 12:11 PM
Mohammad Khan
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Thank you for your answer.
What may the human biases? I would request you to look at my reply to Kiron's answer and let me know if I am right or not.
Saving Changes...
Mohammad KhanDeputy Vice President, Program Management| MetLife BangladeshDhaka, Bangladesh
Dec 08, 2019 6:51 AM
Replying to Luis Branco
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Dear Mohammad Interesting your question Thanks for sharing
In my opinion it can only be considered sunk costs when, for whatever reason, a decision is made to close the project before it creates a product, service or outcome. Cannot therefore be recovered
Thank you for you answer.
So, as per your explanation the Actual Cost is Sunk Cost when the project is terminated for whatsoever reason. Am I right? If that's true, Sunk costs and Actual cost are always the same in terms of amount. Please correct me if I am wrong. Saving Changes...
Mohammad KhanDeputy Vice President, Program Management| MetLife BangladeshDhaka, Bangladesh
Dec 08, 2019 7:00 AM
Replying to Sergio Luis Conte
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If not about to recover it or not. Is about if cost has to be considered to calculate something which have cost as a component or not. In the case of sunk cost it must not taken into account.
Thank you for your answer. But, apologies. I did not understand. Can you please give an example? Saving Changes...
Mohammad KhanDeputy Vice President, Program Management| MetLife BangladeshDhaka, Bangladesh
Dec 08, 2019 9:15 AM
Replying to Kiron Bondale
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Mohammad -
The one difference is your sunk costs might also include future expenditures for which you are committed (e.g. a contractual obligation which you cannot break) whereas actual costs reflect the spend to date.
Kiron
Thank you for your answer.
If I interpret what you said as follows, will I be correct? That is - for example, today at this point of project Actual cost is $1M. If the sponsor wants to terminate/cancel the project as per contractual agreement I will have to another $100K. Then the Sunk cost will be $1M + $100K (if the project is terminated), but the Actual cost will be $1M before termination of the project (if it continues as normal). But if the project is terminated and after project closure total cost incurred will be $1M + $100K
Please correct me, if I am wrong.
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1 reply by Kiron Bondale
Dec 08, 2019 12:45 PM
Kiron Bondale
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Mohammad -
Good example - it illustrates the point I was trying to make!
Kiron
Saving Changes...
Mohammad KhanDeputy Vice President, Program Management| MetLife BangladeshDhaka, Bangladesh
Dec 08, 2019 10:04 AM
Replying to Thomas Walenta
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These terms have different purposes and are used in different scenarios.
Actual cost is used to control the project going forward. Sunk cost is used to counter a human bias (denial of a loss) by labeling past commitments as such and focusing on the future.
Agree with Kiron, they might not even have the same amount of cost. Either there are future commitments that are sunk, or they may be some value created, not all is lost.
Thank you for your answer.
What may the human biases? I would request you to look at my reply to Kiron's answer and let me know if I am right or not.
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1 reply by Thomas Walenta
Dec 08, 2019 12:23 PM
Thomas Walenta
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Mohammad,
Agree to your example in the reply to Kiron.
Sunk cost are used in situations when you have to make decision whether to continue with a project. So this is not what the original plan said. Often people then think, we already spent so much, so we should continue. Rationally, financially this makes no sense though. The decision should be based on the future projection starting from the actual status and knowledge. It should include a review of the original business case updated.
All rational decision making needs to identify and remove human emotions.
Saving Changes...
Thomas WalentaGlobal Project Economy ExpertHackenheim, Germany
Dec 08, 2019 12:11 PM
Replying to Mohammad Khan
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Thank you for your answer.
What may the human biases? I would request you to look at my reply to Kiron's answer and let me know if I am right or not.
Mohammad,
Agree to your example in the reply to Kiron.
Sunk cost are used in situations when you have to make decision whether to continue with a project. So this is not what the original plan said. Often people then think, we already spent so much, so we should continue. Rationally, financially this makes no sense though. The decision should be based on the future projection starting from the actual status and knowledge. It should include a review of the original business case updated.
All rational decision making needs to identify and remove human emotions. Saving Changes...
If I interpret what you said as follows, will I be correct? That is - for example, today at this point of project Actual cost is $1M. If the sponsor wants to terminate/cancel the project as per contractual agreement I will have to another $100K. Then the Sunk cost will be $1M + $100K (if the project is terminated), but the Actual cost will be $1M before termination of the project (if it continues as normal). But if the project is terminated and after project closure total cost incurred will be $1M + $100K
Please correct me, if I am wrong.
Mohammad -
Good example - it illustrates the point I was trying to make!
