What are sunk costs?

Sunk costs are expended costs. For example, an organization has a project with an initial budget of $1,000,000. The project is half complete, and it has spent $2,000,000. Should the organization consider the fact that it is already $1,000,000 over budget when determining whether to continue with the project? The answer is no. The money spent is gone. As executives, directors, or managers evaluate whether they should continue “pouring” money into a troubled project, any money spent so far should not influence their decision to stop, suspend, or continue on with the project, because they cannot recover those costs. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to “lose the investment” by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments.