Sunken Costs: The Second Step is Understanding and Analyzing the Problem

Okay, you’ve admitted you have a problem. You’ve taken an important first step in fixing your issues with sinking costs into failing projects or legacy systems. That must be a huge weight off your shoulders. You’ve made an important stride today, and these efforts will help to better you and your company. Now that you’ve admitted the problem, it’s time to do some analysis. What’s the point in knowing the problem if you can’t learn anything from it or figure out why you are failing.

  1. Flag the deficienciesWhere did things go wrong? What caused this project to fail, and what has led to this scenario where you are chasing bad money with good? There is no easy answer to the problem, but I have found that working with your team and compiling a list of issues with a failing project can not only be incredibly therapeutic, but can also provide different levels of understanding of where issues came up.
  2. Figure out current costThis is a necessary step for covering you bases. If your project is failing, whether it is your fault or not, you are going to have to report up the food chain on the why’s and overall costs. Knowing these numbers will provide a basic idea of what a future project could cost, and this should provide some clarity around future budgetary needs for your team.
  3. Forecast potential future costsLook at your project as if you were on day one and try and estimate how much more money you will need to invest to make this successful. Be honest and don’t try and give the optimistic numbers that you may have been geared towards recently. Knowing that the project hasn’t been going well, try and account for the unknown-unknowns at this point and provide a large amount of variance. After getting this number, also come up with potential costs for any future project that may be required if this one is scrapped.
  4. Know your labor contractsThis is important if you signed a contract for a set period of time, or for a project’s duration. If you have a good legal team, this likely isn’t much of an issue, but if a project is terminated prior to completion, it is important to know what type of continued impact this could have on your budget and bottom line. Failing projects with poor project team contracts can really be the gift that keeps on giving.

Congratulations! You’ve made it through step two. You now know you have a problem and have some of the necessary tools to CYA when your boss asks you about your sunk costs on a failing project. The last step is making a final decision. Check in later this week for the last installment in this series. If you have any comments on please hit the comment button at the top of this post, and be sure to follow me on twitter @burked585.

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