Risk and project sunk cost

Posted on: February 28th, 2013 by admin 1 Comment

I have been having a running discussion with one of my colleagues regarding project and cost, specifically the cost of a project that is under consideration for termination.  A project is going through a gate review. During this review we find that the objectives are not met by this phase and further action has little likelihood of subsequent success.

That seems like the end of the discussion, doesn’t it?  Not necessarily.  What happens when we decide to try to meet this same objective of the organization with another project?  Smart organizations base their project selection criteria on items that have connections to the business case. At least that is true of “for profit” organizations and we are sure the same applies to non-profits (if not more so).  What happens to our business case when we make a number of attempts to accomplish the objective?

Surely we have learned something in the previously described failed project.  This expenditure has shown us what does not work. What do we include in the business case if we start another project up, with the same objective as its scope?  Is this loss truly sunk cost? Or are we rationalizing away the expenditure to make the new business case seem palpable?

Remember, it was the business case that largely set the Six Sigma quality approach apart from the older, more all-embracing total quality management (TQM). If we override the business case, what are we really doing? Somehow, justification by faith alone does not seem to be a prudent business approach.

Tags: , , , ,

One Response

  1. admin says:

    Thank you for taking the time to reply to the blog posting on Risk and project sunk cost. We appreciate all feedback and opportunities to exchange ideas.

    Your example is great. If we think the sunk costs put us in a position to take a future project (with the same objective) on with a much improved probability of success and we can make a profit we would likely (or should) take the project. For me that is where theory and practice should be the same.

    However, what if we are really not in a better position to success due to this failure? What if we take another project to meet the objective and fail in that one also? What if it is the third or fourth attempt to make the project work before we have the product available to generate the would be “profit”? What is now the hurdle for the project to pay for itself in terms of revenues generated for the company? This is more the perspective we were approaching the discussion.

    I meant palpable – in this context means substantial, definite or unambiguous.

Leave a Reply

Subscribe to our Newsletter

Subscribe to our Newsletter
Name
Email *
Single Sign On provided by vBSSO