What is Sunk Cost?
A sunk cost is a cost that has already been incurred and cannot be reversed or recovered, regardless of any future decision. Because it does not change between alternatives, accounting theory says it should be ignored when choosing between options. Treating sunk costs as relevant is known as the sunk cost fallacy.
How It Works
- Identify costs already paid in the past or contractually unavoidable.
- Exclude them from comparisons between future alternatives.
- Focus the decision on future cash flows that actually differ between options.
- Document the rationale to avoid emotional or political pressure to recover past spending.
Saudi Context
Saudi project sponsors evaluating mega-projects under Vision 2030 are encouraged to ignore sunk feasibility study costs when re-evaluating projects. SOCPA training material and audit guidelines highlight the sunk cost fallacy as a common pitfall in capital budgeting.
Example
A Riyadh company spent SAR 500,000 on market research for a product that is now expected to lose money. The SAR 500,000 is sunk and should not influence the decision to cancel or launch the product; only future cash flows matter.