Issues & Analyses: Throwing Good Money After Bad: Why Every Expensive Project Needs An Exit Strategy

How does a project manager know when to pull the plug on a failing project in which they have already invested substantial resources? All too often they wait too long with dire fiscal consequences for those putting up the money. The instinct — to continue to invest more money with the rationale that “we have already invested too much to back out now”— is known in the world of economic decision-making as the sunken cost fallacy. The decision of the Jones Library trustees to push forward with their expansion and demolition project in the face of incredibly escalating costs is a quintessential example. 

In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken. In other words, a sunk cost is a sum paid in the past that is no longer relevant to decisions about the future.

At their meeting on August 22, the Jones Library trustees voted (5-1) to ask the town to move forward expeditiously with their expansion and demolition project, arguing that too much time and money has been invested to back out now. Trustee Alex Lefebvre even asserted that “it would be fiscally irresponsible to not continue”. According to the trustees’ own figures, they have only spent $400,000 on the project to date and expect to incur another $1.4 million in design costs before the project goes out to bid in June 2023.

This is indeed a lot of money, though a fairly small percentage of the total cost if the project comes in at the current estimate of between $46M and $50M (or even higher, as happens frequently with bids — see e.g., here ) and with a currently projected deficit of $7M to $14M. The assertion that the fiscally responsible thing to do is to continue with the project is offered with little consideration of additional budget overage between now and the start of construction in the fall of 2023, and with a pretty vague treatment of who will pay the bills, on the one hand, and the possible risks to the town — and its other budgetary needs if it has to take on more debt to complete the work — on the other hand.

For those justifying moving forward because of sunken costs, future or prospective costs are irrelevant. For them, it is imperative to spend whatever is necessary in order to not waste what has already been spent and hence there is little will to discuss, with any precision, costs yet to be incurred. The sunken cost fallacy is iconic in business studies precisely because, in spite of knowing that throwing more money at a failing or unaffordable project rarely proves to pay off, decision makers are, nonetheless, seduced into doing just that.

Spectacular examples of sunken cost debacles — instances where decision makers failed to change course in spite of ominous warnings that course correction was necessary — include the “Concorde fallacy”, the Lockheed L 1011 fiasco, the Washington Public Supply System debacle (commonly referred to as WHOOPS), and the Chicago Deep Tunnel Project. In each of these cases, no one would have advocated for the project if the true costs had been known at the outset. Yet, once begun, few argued to stop the folly.

How To Know When To Pull The Plug
How can decision makers know when it’s time to pull the plug? Business and economic textbooks offer some advice.

1. Decisions ought to be based on the current circumstances and long term considerations, not on past investments. In the case of the Jones, we need to know (or at least have a better idea of) what is the project really likely to cost (complete numbers and detailed economic forecasts have yet to be shared with the public), what is the worst case scenario concerning possible costs, who will pay for  budget overruns, and what are the risks to the town? Unfortunately, the trustees are not discussing these issues.
   
2. One warning sign that the sunken cost fallacy is operative is when decision makers are unwilling to ask whether the project might be failing, and to consider an exit strategy. Jones Library Building Committee member Zander Lopez has asked on multiple occasions that the committee discuss how they will determine whether the project is no longer viable and what an exit strategy might look like. But the rest of the committee has refused to take up the issue.
   
3. One of the most important — and often overlooked — aspects of business and project planning is the setting of start, stop, and continue criteria. When these are set in advance, the data themselves will answer the question of whether the project has earned the right to continue or whether it’s time to sunset it, and instead to provide resources to something more successful. Again — these criteria are absent from the Jones process.

The majority of the Jones Trustees assert that the benefits of continuing outweigh the costs. But how can we know? Bob Pam, the trustees’ treasurer, voted against continuing, arguing that the costs are no longer justifiable given the ballooning estimates and the potential need to spend the endowment. This should give us pause. Have the trustees provided us with enough credible information to assess the situation?  

What are the realistic chances that the costs will be significantly lower (or higher) by June 2023? What are the realistic chances that $10-17 million will be raised by the Friends of the Jones before the start of construction? Why are the fundraisers apparently setting the timing of their activites rather than the Town setting deadlines for specific amounts with documented proof of the certainty of the money?

We need to have an open discussion of the considerations mentioned above. Amherst taxpayers are entitled to know what kinds of risks are being taken in their name, how much more they will have to pay in taxes, and what they will get for that expenditure. The trustees have declined to engage in those discussions with the public, and residents should insist that we not move forward without them.

Editor’s note: The Brewster, MA Select Board voted unanimously on August 22, 2022 to pull the plug on their planned $16.4M library renovation, forfeiting a $4.6M state grant in the process. The original project was estimated to cost $10.2M and cost estimates have risen $6.2M since planning began in 2017.

“I know how hard you’ve worked on this project,” board member Cynthia  Bingham said. “But we had to balance the impact of this project with the fact that we desperately need a community center. I wonder if we could take a look at this project in pieces. I would have a difficult time voting on the large project.”

“I was fully in support of the $10 million project,” board member Dave Whitney said. “Now it’s $16 million and $6 to $7 million in public debt. I cannot support the project going forward.”