It was looking like a pretty interesting job. After stalling out on a remodel of their historic Craftsman bungalow a few years earlier, the owners needed a house full of custom trim. The project promised to be remunerative, and the finished result some beautiful work that I could be proud of. Then we went upstairs.
The original contractor had built a series of closets in the hall and a couple of the rooms on the second floor, and they all had nonstandard door openings. The owners had ordered custom louvered bi-fold doors for the new closets, but they were the wrong size. I suggested that the owners try to recover some of their investment by selling the doors on eBay, and have some new doors fabricated. Makes good sense, right?
No sale. These people wanted me to give them a quote for demolishing the existing work and building openings to accommodate their custom doors. And that's when I knew we couldn't do business. These folks refused to acknowledge their sunk costs.
Lucky for me, I could. I ran like hell.
Change Horses Midstream Humans are alone in the animal kingdom in their unwillingness to grasp the concept of sunk costs. If a cat destroys a bird's nest and eats the hatchlings, the birds immediately set about building a new nest and laying eggs. They don't waste time trying to find someone to blame — or for that matter, someone to sue. Nor do they go on TV talk shows to weep about their misfortune, or attempt to “seek closure.” They get on with their business.
We humans, by contrast, will throw good money after bad to the point of ruin rather than acknowledge an error, take our medicine, and alter course. American popular wisdom tends to glorify persistence and condemn retreat, and we have these ideas hammered into us from early childhood.
How do you figure out if a situation is untenable, and how do you know when to walk away? I've presided over a couple of entrepreneurial ventures going down the toilet, as well as found myself waist-deep in a few projects that were doomed from the start. That experience has led me to develop some rules that I often have to remind myself to follow. Here are two:
- When approaching a new client about a project, go with your gut. If the chemistry isn't there from the beginning, things will only get worse. The chances that you will grow on each other are slim. Trust your intuition. I don't care if you're rolling up coins to make payroll and the mortgage is two months behind. You're better to spend the time building your business and getting the kinds of clients you want and need. It's tough to turn down work when your back is against the wall, but how much profit can you expect to make off of a crummy job from an irrational client? Yeah, OK, you met with them, maybe even prepared a bid. Do yourself a favor and charge it off.
- When it comes to business strategies, ask yourself if, knowing what you know now, you would have funded the venture in the beginning. If you wouldn't, change course. Throwing good money after bad doesn't bespeak persistence, just blind stubbornness. Sometimes what I've thought was a need for some fine-tuning has turned into a whole new business plan … or the end of a business.
We all know the oft-cited Chinese definition of insanity, right? That's continuing to do the same thing, but expecting different results. By ignoring the principle of sunk costs, you could be headed down that road. —Jonathan Ward is a custom remodeling and repair contractor who specializes in older houses around Durham, N.C. His home on the Internet is www.jonathanward.com.