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Cost overruns: The worse threat to your business!

April 2, 2012

You start a business. You budget for renting space, buying raw materials, manufacturing the product you believe in, providing services, marketing, and hiring personnel to run your business. Within a year or two you run out of money or credit because you accepted other people underestimating the costs of everything (they did it to get your business knowing well that they will be paid the  extra): rent, materials, unattractiveness of the product, lack of consumer interest, marketing difficulties, laziness of personnel, salaries pool, timing, everything. The only way you can stay in business is to borrow more money at higher interest rate and hope for the market to improve. You work your ass off. Are you an idiot? No, you are human!

When I remarried in 1982, I asked my girlfriend to call my ex-wife and get an “outside view’ of how stubborn and selfish of a husband I was. She married me anyway and we are happily married for 30 years. The feedback helped her avoid overestimating the marital bliss (I cite this example, one out of many in my incredible life, to wet your appetite for a more predictable success in whatever you do). Cost overruns mean that you spend more and get less. You end paying the unexpected extra to get what was expected when you started! A much better way to be successful in business or in whatever you start doing is to put the burden of correct estimating costs and benefits to you on the other person, not yourself! Got it?

Cost overruns will be prevented 100% if you type a detailed contract with a wife (prenuptial), a business partner or supplier  (notaries contract), even your gardener. The only contract that cannot be contested in court is a C-MOR contract (see past postings). The contract specifies in detail what the other person is obligated to do, build or perform for you, when, and how much it will cost you. You never pay the full amount until the product (check for cheaper materials) is delivered exactly as described in the contract – no matter what!. You never pay more than has been done at any given time during the process! You are awesome because you go against human nature! You do not commit the fallacy of optimism that all your friends commit! Remember, your supplier will estimate correctly what his work will cost you only if he knows that you mean business! Don’t underestimate their attempt to get you to pay more (their margin of profit) when they know that you have reserved funds for starting your business! Suppliers know that their invoices are unrealistic, cost overruns are rarely surprising although people may apologize and pretend to be surprised. Don’t be fooled by your nice upbringing. Great relationships isn’t about that, they are about respect for correct estimating of things and your power to enforce agreements. If anybody is never afraid of you about anything – you are a pushover. Remember, humans evolved in a tougher environment than Canada, Somalia is more like it.

So, now you know the most important psychological rule within the system called C-MOR: Most human beings (the lower class, middle class, even upper class, educated) build castles in the air when they plan things, some human beings move in (the mentally ill) and people like me correctly estimate how much rent to collect!

Hay, dude, I really care about you guys, it’s time to stop the charade. Make your decisions on the basis of correct estimates of results and hold others accountable. Be awesome!!

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