Sunk Cost Fallacy in Software Projects

The sunk cost fallacy is the tendency to continue investing in a project or decision based on the time, money, or resources already spent, rather than current and future value. This can lead to irrational decision-making, especially in software development where past investments may no longer justify continued work.

Example:

A company has spent 12 months developing a custom project management tool. During testing, it becomes clear that the tool is buggy, expensive to maintain, and doesn’t meet user needs. However, leadership insists on continuing because “we’ve already spent a year on this.” Meanwhile, a commercial alternative is available that meets requirements and costs less.

Continuing development just because of the past investment is a sunk cost fallacy. Those past resources cannot be recovered, and the decision should instead focus on future costs and benefits.

Here are three steps a Program Manager can take to address it.

#1 – Focus on Future Value, Not Past Costs. Emphasize data-driven decisions based on potential ROI, not past effort. Use metrics like estimated completion time, projected maintenance costs, and value delivered to end users. Reframe conversations from “we’ve already built X” to “what’s the best use of resources going forward?”

#2 – Encourage a Culture of Honest Evaluation. Create regular checkpoints (e.g., retrospectives, milestone reviews) where teams can critically assess the project’s viability. Foster a no-blame environment where it’s acceptable to pivot or shut down underperforming initiatives, even after significant investment.

#3 – Have Clear Exit Criteria and Go/No-Go Gates. Define decision points with objective criteria (e.g., adoption targets, performance metrics). If the project fails to meet those, have a pre-agreed process to reevaluate or terminate it. This reduces emotional attachment and supports rational choices.

TL;DR:
The sunk cost fallacy can trap software teams into continuing bad projects. Program managers can counter it by focusing on future value, promoting honest assessment, and establishing clear exit strategies.