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Comparison · Pricing & Margin

Sunk vs. Relevant Costs: Decide From Today

Separate past spending from future differences when choosing whether to complete, change, or abandon a business project.

By PriceAndProfit Editorial Updated

A sunk cost has already been incurred and cannot be changed by the current choice. A relevant cost differs between the alternatives still available. Keeping these categories separate helps evaluate the next decision without pretending that past losses disappear. The business should report the full project result while comparing future choices using the receipts and costs those choices can still change.

Worked calculation

Incremental value of continuing = future receipts from continuing − future costs caused by continuing − contribution displaced from alternatives

Suppose a studio has already spent $8,000 developing a custom tool. Completing it now requires another $3,000 and is expected to produce $5,000 of customer receipts. Abandoning it produces no receipts but avoids the $3,000 completion cost. With no other differences, completion adds $2,000 of future contribution compared with abandonment. The full project would still show a $6,000 loss: $5,000 revenue minus $11,000 total spending.

The $8,000 past expenditure is relevant to evaluating how the project performed, but it does not become a new cost of choosing completion today. Requiring the final $5,000 receipt to recover the full $11,000 before continuing could cause the studio to reject a future contribution that reduces the existing loss. Conversely, continuing merely because $8,000 has already been spent does not justify any additional amount of spending.

Hypothetical worked example
Decision viewCalculationResult
Complete, no displaced work $5,000 − $3,000 $2,000 future contribution
Full project result $5,000 − $8,000 − $3,000 −$6,000
Complete, displacing $2,500 contribution $2,000 − $2,500 −$500 relative to alternative

Decision checks and limits

Now introduce an alternative use for the team's time. If completing the tool would prevent a confirmed job that contributes $2,500 over the same period, the opportunity cost changes the comparison. Completion offers $2,000 incremental contribution from the tool but sacrifices $2,500 elsewhere, making it $500 worse than taking the alternative job. The original development spending remains unchanged; the new information concerns a future consequence of the decision.

Some future costs are also irrelevant because they are identical under both options. A noncancelable software payment due next month may continue whether the project proceeds or stops. It is a real cash requirement but not a differential cost for this choice. Document cancellation terms and the time horizon before calling a cost avoidable. Maintain two views: a full historical project result for accountability and a forward comparison for action. That avoids both hiding past losses and allowing them to control a decision they can no longer change.

Sunk cost

  • Timing: Already incurred and unchanged by the options now available.
  • Reporting use: Part of the historical project result and learning review.

Relevant cost

  • Timing: A future cost or opportunity that differs between the current alternatives.
  • Reporting use: Part of the incremental comparison used to choose the next action.
Bottom line

Choose the measure or structure that matches the stated decision, then reconcile the dollars using the same period and cost scope.

Apply the calculation

  1. List choices available today

    Define completion, modification, abandonment, and feasible alternative work rather than comparing with a past option that is no longer possible.

  2. Tag each cash flow

    Mark already incurred amounts, unchanged commitments, avoidable future costs, and alternative receipts separately.

  3. Preserve accountability

    Report the total project outcome alongside the forward decision so choosing the least costly remaining option is not described as overall success.

Method references: OpenStax: Relevant information for decisions. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.

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