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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

Chapter 7
Budgeting: Estimating Costs and Risks

CHAPTER OVERVIEW

Overview – This chapter describes the process of estimating and then assembling the
project budget. The budget is an important part of the planning process as it describes
the plan for allocating project resources. Once the budget is set, it is used as part of the
project control mechanism during execution.

7.1 Estimating Project Budgets – The budgeting process involves the forecasting of the
level and type of resources needed to complete the project. Many organizations will
have well worn (and reasonably accurate) methods for creating the initial project
estimate based on past experience. It is important to remember, however, that
because every project is unique the estimating process always has some level of
uncertainty associate with it. The PM must understand the organization’s accounting
practices to the extent that they are imposed on the project budgeting and control
process.
• Top-Down Budgeting – This is the technique of developing a budget by
comparing this project to past ones using the judgment and experience of top
and middle management. Typically an overall budget is assigned to the project to
be distributed to the individual tasks. If the projects being used for comparison
are similar enough, this process can result in a fairly accurate total number. The
process of distributing the total can create a lot of conflict among the
management team.
• Bottom-Up Budgeting – This is the process of developing budgets by asking the
people who will perform the individual tasks for their estimates. These individual
numbers are then rolled up to a summary for presentation to management. It’s
important in this process to follow a good WBS to ensure that no tasks are
overlooked. Unfortunately, this process can lead to game playing when
individuals pad their estimates in anticipation of management cuts.
• Work Element Costing – Using the bottom-up estimates, costs can be applied t o
each WBS element. These are typically calculated by taking the labor hour
estimate and “dollarizing” it using appropriate labor and overhead rates. To be
accurate, the estimator needs to understand the relationship between the labor
estimate and the actual number of hours that will be charged to the project
because of personal time and inefficiencies. A similar process must be used if
machine time or other resources are charged to the project.
• An Iterative Budgeting Process – Negotiation-in-Action – Typically the budgeting
process requires some negotiation between the subordinate, who develops the
WBS plans for the tasks for which he is responsible, and the supervisor who
reviews these plans. This is a time-consuming process. At the same time the PM

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is negotiating with the several subordinates responsible for the pieces of the
PM’s WBS. It is worth emphasizing that ethics is just as important in negotiations
within an organization as in negotiations between an organization and an outside
party.
• Comments on the Budget Request Process – The bottom-up process differs from
the departmental budgeting process many organizations use. The primary
difference is that the departmental process typically comes with guidelines (either
formal or informal) on how much budget change is considerably acceptable.
• Cost Category Budgeting vs. Project/Activity Budgeting – Organizations may
budget and collect cost by functional activity. This makes it very difficult to
monitor project costs when they are distributed among a variety of different
organizational units. Project budgeting on the other hand collects project cost
using the WBS. This allows the PM to monitor cost in a manner that supports
overall project objectives.

7.2 Improving the Process of Cost Estimation – Estimates by nature are always wrong.
It’s important to build contingencies into the process or to account for uncertainty in
some other way. One way to do this is to use the PERT process of developing likely,
optimistic, and pessimistic estimates. In addition, the PM must understand whether
overhead cost is part of the estimate or not.
• Learning Curves – Studies and common sense have shown that as people
repeat a task they get better at it. This idea is formalized in the concept of the
learning curve, which states that each time the output doubles the worker hours
per unit decrease to a fixed percentage of their previous value. This effect is
important because the estimator must determine the impact learning had on past
projects (and their rates) and predict its impact on the one being estimated.
• A Special Case of Learning – Technological Shock – Projects that involve new
technologies or processes are very difficult to estimate because past
performance is not a useful guide. This is true not only because the rates are not
applicable, but because there is typically a lengthy startup process before steady
state performance is achieved.
• Other Factors – A number of other factors influence the project budget:
i) Changes in resource costs due to factors like inflation
ii) Waste and spoilage
iii) The fact that people, as resources are not freely interchangeable with each
other. The project may require five people, but if they are not the right people,
the number available is irrelevant.
iv) Projects cannot be put back on schedule by adding an infinite number of
resources. For intellectual projects like software development, the addition of
more people may actually slow the project down. Even for more mundane
tasks like painting a building there is a limit as to how many people can be
added to the project with benefit.
• On Making Better Estimates – Data can be collected on the quality of project
estimates by using statistical techniques. The estimate is compared to the actual,

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

and statistics like the Mean Absolute Ratio (MAR) and the Tracking Signal can
be calculated. These are all used to detect bias or nonrandom error in the
estimate.

7.3 Risk Estimation – Project aspects such as duration of activities, amount of resources
to utilize, value estimation etc., are very uncertain in a typical project. It is important
to manage this ambiguity to allow the project manager to make better decisions
when the situation arises. This is done through risk estimation and analysis, a
technique that describes uncertainty in a way, that it becomes possible, although
with a few reasonable assumptions, to make project activity decisions in an insightful
manner.
• General Simulation Analysis – A very useful tool to evaluate projects in
conceptual stage is simulation combined with sensitivity analysis. A through
estimation of the various tasks is made and the uncertainty associated with each
task is included. Simulation runs then show the likelihood of realizing various
levels of costs and benefits. Investigation of the model may also expose the
major sources of uncertainty.

TEACHING TIPS

Estimating and budgeting are dry subjects. Students who actually have to perform this
process on real projects, however, will be very interested in practical guidance beyond
the scope of this chapter. Here are some tips based on my experience.

The estimating process has to be defined in writing in advance of preparing the estimate.
The definition needs to include:
• Key project parameters and assumptions.
• Rules for how to allocate cost among different categories to ensure everything is
covered and nothing is duplicated. This is necessary even if there is a WBS, as
different people will interpret it differently.
• A sound method for identifying each “official” version of the estimate. It will
change and it’s easy to get confused as to what the current issued version is
versus the current working version.
• An airtight method of documenting the data and assumptions that serves as a
backup for each element of the estimate. The sound logic used during
development will quickly be forgotten. A year later someone will ask about a
number and nobody will know.

The estimating process for the next project must be considered in the collection of actual
data from the current project. This is particularly true if any kind of rate-based estimate is
used. As silly as it sounds, people discover that during a project they did not collect the
data necessary to develop or update rates. This discovery is usually made during the
estimating process for the next project when it is too late.

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

An excellent source of very practical advice on the estimating process is the NASA Cost
Estimating Handbook, available on the web at: http://ceh.nasa.gov/

PROJECT MANAGEMENT IN PRACTICE

Pathfinder Mission to Mars—on a Shoestring

Question 1: How did a change in philosophy make such a drastic difference in
project cost?
In 1976, cost was not a constraint, performance was. In the subsequent project,
performance was subordinated to the project’s cost goals.
Question 2: Why was the mission scope so limited? Why even spend the money
to go to Mars with such limited objectives?
Due to economic considerations and political realities, the mission was expected to hold
costs down to a minimum level while still achieving a level of performance that would be
a public relations success with at least some science accomplished. This project serves
as an example of why projects sometimes are selected for nonfinancial reasons. A low-
cost project was viewed as having the potential to demonstrate to the political
stakeholders that NASA could launch cost-effective space missions.
Question 3: Describe their “de-scope,” “lien list,” and “cash reserve” approaches.
1) De-scope: Performance objectives were ranked and could be cut from the
bottom, if necessary, to meet the cost objectives set for the project.
2) Lien list: This was a list of potential changes to the project that were anticipated
or discovered along the way. By recognizing these as potentially costly changes,
and managing the list, cost growth could be controlled.
3) Cash reserve: Costs would be squeezed at the start of the project. The intention
was to release funds, only if they could not be squeezed out of the project.
Question 4: Recent design-to-cost interplanetary projects have also had some
spectacular failures. Is this the natural result of this new philosophy?
NASA has done considerable soul searching on this subject after the loss of the Mars
Climate Orbiter. The excellent white paper (available at
ftp://ftp.hq.nasa.gov/pub/pao/reports/1999/MCO_report.pdf) concluded that the drive to
reduce cost was definitely a contributing factor in the incident. The danger is (and was)
that scope vital to the success of the mission could be ignored in the name of cost
cutting. This is not the result of underhanded scheming, but a natural consequence of
overworked people believing that, what they can’t get to will probably come out okay just
the same.

Convention Security: Project Success through Budget Recovery

Question 1: How is a project for an event like a multi-day convention different
from a project like building a house?
Managing a convention is different from managing the construction of a house, since
there are fewer chances of changes in the architecture of a house than in the

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

requirements of a convention. Managing a convention usually requires ad-hoc changes

in the plans, since there is no primary decision maker and there had to be compromises
and disagreements. This is unlike building a house which is much simpler to manage in
comparison to a multi-day convention.
Question 2: Does 72 different risk factors seem like a lot to plan for? How
important was CSP’s contingency planning for this project?
Planning for 72 different risk factors is indeed a humungous task. It usually happens that
managing one risk factor changes the risk level of some other factor. Managing so many
factors to an acceptable level at the same time requires a lot of careful attention,
exercise, and experience. CSP’s contingency planning was very important in this case
since it was not the primary decision maker. The team knew in advance that they will
have to work with other agencies and they planned accordingly to take care of any
changes. If they wouldn’t have planned for this, the convention was surely at risk.
Question 3: How does not being in control of decisions and plans affect the
project manager?
It is very difficult for a manager to not be in control of decisions and plans, since that is
what the task of manager is. He is used to taking actions and decisions based on his
experience, but certain situations demand more control of oneself than that of the
situation. When there are multiple parties and stakeholders, one person is not
responsible for everything and the manager is aware of this. He carefully makes his
plans and modifies his activities to be able to meld his decisions with others, if the need
arrives. A project manager not only manages a project but also manages a team and
knows what decisions are to be taken in different circumstances.
Question 4: Does being off by 150% in the estimate for human resources required
for a project surprise you? What do you think happened? How do you think they
managed to accommodate this change without exceeding the budget?
It is definitely surprising to being off by 150% in the estimate. I believe that CSP under-
estimated the number of troopers that were required or was not aware of the level of
security required. However, they did think of multiple plans with alternate contingencies
to account for different types of changes in their plan of action. When the need arrived,
they were able to make these changes by careful use of project management tools and
practices to avoid any budget increases. Indeed, one of the major reasons for not
exceeding the project budget was the development of multiple plans with alternate
arrangements for different situations.

Managing Costs at Massachusetts’ Neighborhood Health Plan

Question 1: Wouldn’t higher eligibility requirements for subscribers cut NHP’s
health care costs? Why did this exacerbate NHP’s situation?
Reducing the patient load did not reduce the providers’ fixed cost for insurance and
facilities. Therefore, fewer patients had to absorb the same costs, but the revenues were
reduced. Profit therefore is dependent on changes in volume of demand. This made it
difficult for them as volume decreased.
Question 2: Explain the trade-off between hospital utilization and contract rates.

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

This scenario can be a complex one to evaluate financially. Visualize a scenario where a
patient’s stay generates sufficient revenue to cover the variable costs associated with
the stay. Once variable costs have been met, the remaining revenue can be used to
offset fixed costs. Once the level of utilization has covered the fixed costs, the hospital
begins to make a profit. However, suppose that the patient does not pay enough
revenue to cover the variable costs associated with the treatment received, any level of
hospital utilization will create a loss of profit.
Question 3: How did changing from a line item pay plan to an episode plan allow
comparisons and save costs?
The pay-per-episode plan establishes a standard cost that can be easily audited. In a
pay-by-line-item plan, it is much more difficult to detect and disallow inappropriate
additions to the bill being issued by the hospital. The hospital has an incentive to add
line items to help offset its fixed expenditures, so that it can recognize an operating
profit.

Habitat for Humanity Wins a Big One

Question 1: Did LHH seem to have a “de-scope” plan?
LHH did not seem to have a plan to de-scope, or reduce the scope of the plan. They
seemed to only consider that they would get all of the money from the LCHTC that was
proposed or nothing at all.
Question 2: Did LHH seem to understand the County Committee’s budget
allocation process?
It seems apparent that LHH did not understand the time issue with the County
Committee’s budget allocation process. LHH appeared to do everything else correctly,
but as shown by their strategy to contact the committee members individually when they
didn’t hear a response soon, they may not have understood how long budget allocations
take.
Question 3: How did the concept of partnering (Chapter 4) apply in this example?
Why do you think the Committee was insensitive to this opportunity?
LHH should have considered partnering with the County, which would have provided the
County with more incentive to approve the request.

The Emanon Aircraft Corporation

Question 1: How did inflating the material costs solve purchasing’s “lateness”
problem?
By inflating the estimated cost of the materials, the purchasing official may be ordering
extra material in the inventory to avoid any scarcity. This didn’t actually solve the
purchasing lateness problem, but increased the working capital requirements and the
financing costs associated with sustaining the extra capital as raw materials inventory.
The working capital appears to be chargeable to the project as an indirect cost (bulk
purchase allocated over the period’s units of output). In reality, the project is only seeing
a portion of the net impact to net free cashflow.
Question 2: What alternatives were available to Emanon besides demoting the
purchasing manager?

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

Rather than demoting the manager, Emanon could have issued warnings to the
purchasing official to avoid such issues in the future. Also, they could have penalized the
official monetarily in proportion to the penalty paid by the corporation. Another option
could have been to affect his yearly appraisal.
Question 3: What should Emanon do now?
Emanon now knows that the reason behind losing the competition was the increased
expected material costs. It should now work with its purchasing department to bring the
cost down to what is required and ensure that multiple checks are performed at different
levels of the purchasing department, so that the costs estimated are as close to actual
costs as possible with a minimal overhead for unexpected circumstances.

Simulating the Failure of California’s Levees

Question 1: What would be involved in changing the simulation threat from
hurricanes to earthquakes?
In order to change the simulation threat from hurricanes to earthquakes, the simulation
model would have to be modified by the scientists to account for the movement of the
ground in addition to the influx of water. The base model from New Orleans would be a
good start for the simulation, but additional parameters would need to be included.
Question 2: What process do you think would be used to analyze the simulation
results?
Hopefully the engineers could take historical data to run through the simulation to see
how accurately the simulation output matched historical results. Students may come up
with a variety of answers.

MATERIAL REVIEW QUESTIONS

Question 1: What are the advantages of top-down budgeting? Of bottom-up

budgeting? What is the most important task for top management to do in bottom-
up budgeting?
Refer to Section 7.1 in the text.
1) Advantages of top-down budgeting include:
a) Management can develop aggregated budgets that are reasonably accurate if
they are based on comparable projects.
b) It is not necessary to know about each task in order to develop a top-down
estimate.
2) Advantages of bottom-up budgeting include:
a) Individuals closer to the work are apt to have a more accurate idea of resource
requirements than their superiors or others not personally involved.
b) The resource requirements needed to complete tasks within work packages will
be more accurate than when other budgeting techniques are used.
c) Active participation of the stakeholders will tend to increase the acceptance and
support for the budget. The act of participating in bottom-up budget preparation

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

can help increase the emotional investment of stakeholders for adhering to the
cost baseline.
d) Bottom-up budgeting can help train managers to understand important
dimensions of project success. For example, junior managers will learn more
about how resource consumption will affect profitability and future cash flows.
3) Senior management should check to ensure that all major cost elements have been
included in the bottom-up budget.

Question 2: In preparing a budget, what indirect costs should be considered?

Refer to Section 7.2 in the text. An indirect cost is a cost that cannot be directly traced
back to the production of an output. For accounting purposes, two rules of thumb are
often used when classifying a cost as direct or indirect. In order to fall into the direct cost
category, the cost must be physically observable (it can be seen and measured when an
output is made) and it must be economically feasible to track the cost during production
of each output. If this is not true, then the cost will usually be captured in bulk as an
indirect cost and allocated back to the units of output that were created during a fixed
period of time (accounting period, for example). Examples of indirect costs that a project
manager should consider include:
1) Sales, general, and administrative expenses (SG&A)
2) Contract penalties
3) Contingency allowances
4) Waste and reduction to fair market value (defects, spoilage, and obsolescence)
5) Turnover costs (replacement and training of personnel)

Question 3: Describe the purpose and use of a tracking signal.

Refer to Section 7.2 in the text. The tracking signal is used to measure an estimator’s
relative (to the MAD or MAR) bias. Bias is detected as patterns of variation that are not
random. The textbook provides two examples of a tracking signal (TS).

Question 4: Describe the top-down budgeting process.

Refer to Section 7.1 in the text. Initially, few details may exist regarding how the work
should be accomplished. In such cases, senior management sets a top-down budget by
comparing the new project with similar ones done in the past. Then the budgets can be
cascaded to and validated by the lower levels of management. During this process of
cascading, the decomposition of required outputs into families of related work packages
should help to confirm the feasibility of the initial estimate.

Question 5: What is a variance?

Refer to Section 7.2 in the text, Table 7-1, and the glossary. There are many potential
perspectives that can be used to explain the concept of variance. At the most basic
level, a variance is the difference between a planned value and an actual value.
Because variances measure the uncertainties that are present in a management system
such as a project plan, variances may be random or nonrandom. If the project manager
observes random variation, the variance may be acceptable. If the project manager

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

observes nonrandom variation, it should be treated as an exception and investigated to

see if corrective action is required to restore stability to the performance levels observed
while executing the project plan.

Question 6: Describe the learning curve phenomenon.

Refer to Section 7.2 in the text. There is a cliché that “practice makes perfect.” In the
basic learning curve, each time the number of repetitions for a task is doubled, a
predictable percentage of improvement in productivity will be observed. If 100 hours
were required to complete task “A” on the first cycle, a 90% learning curve would mean
that only 90 hours would be necessary on the second cycle. On the fourth cycle, only 81
hours would be needed to complete that repetition of task “A.”

Question 7: How might you determine if cost estimates are biased?

Refer to Section 7.2 in the text. With respect to a cost estimate, it is not desirable to
either over or underestimate costs. When a distribution of estimates is unbiased, the
over estimates and the underestimates will tend to cancel each other out, resulting in
little bias. The text provides a very good explanation of mean absolute ratio (MAR) and
mean absolute deviation (MAD). A tracking signal (TS) is used to detect if estimates are
biased, and how much relative are the estimates to the natural variation (or error), that
is, the MAD.

Question 8: What is “program budgeting”?

Refer to Section 7.1 in the text. Program budgeting describes the process of developing
and maintaining budgets that are broken down by actual task in a specific project. A
variant is to show budgets for a series of projects that are related to a specific program.

Question 9: What is the difference between project and category oriented

budgets?
This question is meant to make the students understand the distinction between
“categories” and “activities.” Categories are generic groups of activities such as
“transporting materials,” while activities are specific tasks in a project/program such as
“move steel rods from location A to location B on Sept. 3.”
Refer to Section 7.1 in the text. In category-oriented budgets, expenses are categorized
into cost sub-accounts such as supplies, labor, electricity, gas, and telephone, and
grouped for the organizational level being reported, even sometimes a specific project.
In project-oriented budgets, expenses are categorized into the project tasks that
consume various types of resources.

Question 10: How does a risk analysis operate? How does a manager interpret the
results?
To perform risk analysis, a manager makes certain assumptions about the parameters
and variables associated with a project decision. This is then checked with the risk
profile or the uncertainty that is present with these variables. This helps in the estimation
of risk profiles or probability distributions of the outcomes of the decisions. Generally a

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

project involves multiple parameters and variables and thus simulation is preferred over
tedious analytical methods. This simulation/analytical process reveals the distribution of
various outcomes and this risk profile is used to assess the value of the decision along
with various other factors.

CLASS DISCUSSION QUESTIONS

Question 11: Discuss ways in which to keep budget planning from becoming a
game.
Refer to Section 7.1 in the text. This is a tough issue which should be able to generate
an interesting class discussion. The process is a “game” when the participants perceive
it as a zero sum game with management decisions made in an arbitrary and capricious
manner. Management can try a few things to defuse the situation such as:
1) Use open and honest discussions about resource allocation decisions that are
based upon principles of shared interest and collegial management.
2) Refrain from mandating across-the-board budget cuts when faced with cost
containment problems.
3) Use the four dimensions of project success to foster rational and consistent
resource allocation decisions in a manner that links project management
strategies to overall business success.

Question 12: List some of the pitfalls in cost estimating. What steps can a
manager take to correct cost overruns?
Refer to Sections 7.1 and 7.2 in the text.
1) Uncertainty: By nature projects are unique; therefore, any estimate made beforehand
about project outcomes is uncertain. Estimates are just that; they are always wrong.
2) Assumptions: An assumption is the answer to a question that is otherwise unknown
or too expensive to get a timely answer. There is nothing wrong with assumptions;
they are a part of the game in creating estimates in the face of uncertainty. One
danger with assumptions is that they present an opportunity for biases to be
embedded in the project. One particularly dangerous assumption is that the data
from past projects can be blindly applied to the estimates for new projects. If the new
project is different enough in process or product, old data can only be used with a
grain of salt. It’s important to keep in mind that using old data uncritically can make
the estimate too high as well as too low.
3) Learning Curves: Experience can influence productivity. The estimator may need to
consider the effects of experience using techniques such as the learning curve.
4) Bad Data: Data about past performance may have been captured incorrectly and/or
reported inaccurately. The estimator should validate the accuracy of historical data
with respect to representing what the data should represent.
5) Missing Scope: The most accurate estimate will be fatally flawed, if it does not
account for all the work the project has to do. This could be due to a poor estimating
process or uncertainty about the actual work scope.

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Project Management: A Managerial Approach, 9 th edition Instructor’s Resource Guide

Before managers can correct cost overruns, they must detect them. This means that
there has to be a detailed plan that is measured on a regular basis. When overruns are
detected, the manager needs to evaluate the root cause with the help of the team.
Corrective action may include reducing staff, reducing scope, or increasing the budget.

Question 13: Why do consulting firms frequently subsidize some projects? Is this
ethical?
Refer to Section 7.2 in the text. It’s ethical for companies to take a deliberate loss on a
project for several reasons:
• The company is investing in a new business area.
• The company is sharing costs with a partner in support of a future big win-win
situation. For example this might be undercharging on a project supporting
another company’s proposal preparation.
• The project represents a charitable donation.
• The company would otherwise have no work at all, but wishes to retain its staff.
It is unethical for a company to knowingly underbid a contract with the intent of making
the money back through later changes. The U.S Government has named this practice as
“defective pricing” and goes to great length to prevent it and punish the perpetrators.

Question 14: What steps can be taken to make controlling costs easier? Can these
steps also be used to control other project parameters, such as scope?
In order to control costs, it is essential to have a project plan that is organized according
to the way the project actually will be managed. To develop such a plan, use the WBS to
decompose project deliverables from the scope statement into sets of deliverable-
oriented work packages linked to cost centers in the project’s budget. By linking the
control mechanisms to the work packages, the manager will have a much better chance
of detecting overruns when something can still be done about them. This is also true for
other parameters such as schedule and progress (performance). As painful as it sounds,
it is better to measure cost, schedule, and progress more frequently than less. The
longer it takes to detect a variance, the bigger it will be and the harder to correct.

Question 15: Which budgeting method is likely to be used with which type of
organizational structure?
Refer to Section 7.1 in the text. Functional organizations will tend to prefer activity-
oriented budgets. Project based organizations would prefer to have program-oriented
budgets. In these two forms, the vertical hierarchy is the driving factor behind budgeting
tendencies. However, the matrix form may exhibit tendencies toward using both types of
budgets. The weak matrix form would be expected to exhibit functional preferences,
while the strong matrix (project matrix) would tend to exhibit project preferences more
predominately.

Question 16: What are some potential problems with the top-down and bottom-up
budgeting processes? What are some ways of dealing with these potential
problems?

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Refer to Section 7.1 in the text.

1) Top-Down Budget Problems: Top-down budgets are often developed from
analogies, parametric models, and/or business intuition. Budgets based on
analogies are only useful, if the new project is similar enough to the old ones. If
parametric models are used, the estimator may neglect to include important cost
elements and/or the parameters in the model may not reflect the current process.
If the model is derived from business intuition, the estimates will tend to be overly
optimistic. In all cases, the use of bottom-up estimating techniques to confirm the
top-down estimate is recommended.
2) Bottom-up Budget Problems: Bottom-up budgets should be developed using the
WBS to organize estimates by cost center. However, the WBS format may make
it difficult to capture indirect costs in a manner that will be credible to members of
the various functions actually doing the work. Moreover, the bottom-up estimate
is even more likely than a top-down estimate to leave out some important cost
elements. This could be because the estimating process is poorly organized or
because the project is different enough that the scope is “unknown” to the
estimators. Bottom-up budgets should be compared with top-down budgets as a
sanity check.

Question 17: How is the budget planning process like a game?

There are natural differences between management and workers. Managers are often
measured by cost performance, which may be tied to bonuses. Workers on the other
hand do not like their performance to be monitored, particularly in a direct and frequent
manner. When asked how long it will take to do something, they will typically give a
“comfortable” answer, especially if they are experienced. Workers who have been
around the track a few times become firm believers in Murphy’s Law and give estimates
based on the worst case. One other factor that I have observed is technical folk’s
reluctance to accept the realities of the capitalist system. They will insist till the cows
come home that a project will take so many hours, regardless of whether anybody can
afford the deliverable at the resulting price. The game part comes in when the two
parties begin to anticipate each other’s actions. The workers inflate their estimates in
anticipation of management cutting them. Managers cut the estimates because they
know that (surprise!) they have been inflated, and the vicious circle starts.

Question 18: Would any of the conflict resolution methods described in the
previous chapter be useful in the budget planning process? Which?
Refer to the answer of Question 16 in this book and to Chapter 6 in the textbook. The
technique used during conflict resolution (budget planning process) will be contingent
upon the situation. Confrontation (interdisciplinary problem-solving) would be the
preferred approach for this author. However, compromises may be appropriate in
scenarios where both parties have equal power and an acceptable outcome can be
attained. The other conflict resolution strategies should see infrequent use during
budgeting processes. For example:

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1) Avoidance: The project is an operating necessity and the process being fixed
produces benefits that far exceed the execution costs of the project. Failure is not
an option. Consider the project initiated when the Apollo 13 astronauts had to
abort the planned lunar landing and return to Earth.
2) Withdrawal: The budget issue is unimportant to one of the stakeholders. For
example, a contractor, as a conscious strategy to invest in maintaining a client
relationship, may absorb a minor scope change. Such decisions would be based
on the total lifecycle value of the relationship rather than the costs associated
with a single scope change transaction.
3) Forcing: In cases where cost constraints (market pressures) could jeopardize
business survival, unless preferred approaches of the performing organization
are modified, forcing budgets on a single project may be an appropriate albeit
risky response necessary to get the job done.

Question 19: How does the fact that capital costs vary with different factors
complicate the budgeting process?
Refer to Section 7.1 in the text. Cash flows for capital costs are managed differently than
the cash flows for operating costs. Each industry may use different assumptions and
procedures as to how capital costs should be treated in budgets. Moreover, since capital
costs are associated with future business capacity, they have a greater degree of
uncertainty than the operating expenses consumed in a single business period. To end
this discussion, since capital costs are accumulated in bulk, the allocation of their usage
to activities in a budget may be significantly influenced by external variables such as
changes in market supply and demand.

Question 20: Why is learning curve analysis important to project management?

Refer to Section 7.2 in the text. For projects of a similar nature, repetition should improve
productivity. It’s important for the estimators to understand and carefully apply
assumptions about the learning curve. For example, if the learning factor embedded in
historic data is ignored, a project could be underestimated, because it will start out with
no learning at all.

Question 21: Why is it “ethically necessary to be honest” in negotiations between

a superior and subordinate?
Depending on the situation, bosses may not even need to negotiate. There are times
when it is appropriate for a boss to direct (think of the captain of a warship during battle),
but they aren’t that frequent in most project management situations. In most cases, there
is some level of negotiation that takes place. If the boss wants the enlightened support of
his/her subordinates, then she needs to be honest in her dealings with them. If not,
upset subordinates can “sandbag” the project making it look like they are doing the work
when in fact, they are not. In all but the smallest project, it will be impossible for the boss
to make up personally the lost work when it is discovered. Bosses do have power, but
they need to use it ethically for the long-term good of the organization.

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It is also ethically necessary for subordinates to be honest as well. They should be

truthful in their communication with the supervisor. For instance, they should let the
supervisors know when they may need time away from work, what type of work they
prefer, etc. By communicating these types of things, it is more likely the subordinate will
be happy and the project completed is closer to on time.

Question 22: The chapter describes the problems of budgeting for S-shaped and
J-shaped life-cycle projects. What might be the budgeting characteristics of a
project with a straight line life cycle?
The chapter emphasizes the danger of simple across the board budget cuts for projects
with exponential or right half of a U-shaped life cycle. If the budget is cut by 10%, a
major portion of the benefit is lost. For these life cycle curves, however, further cuts have
less impact than the first. With an S-shaped curve the loss of benefit increases with each
cut. For a linear curve, a 10% cut in budget would cause a 10% loss in benefit, and each
subsequent cut would have proportionately the same amount of benefit loss.

Question 23: Interpret the columns of data in Figure 7-11. Does the $14,744 value
mean that the project is expected to return only this amount of discounted
money?
The columns in Figure 7-11 summarizes the results of the simulation data based on
these trial runs performed. The $14,744 value doesn’t indicate the exact value of the
project. Rather, it indicates the mean value based on the simulations runs in this
analysis.

Question 24: How would you find the probability in Figure 7-10 of an NPV of over
$25,000?
To find the probability of an NPV greater than $25,000 (in Figure 7-10), you would enter
“25,000” in the box in the lower left corner of the screen. The probability would then be
displayed in the “Certainty” box situated in the middle of the screen.

Question 25: Does the spread of the data in Table 7-4 appear realistic? Reconsider
Table 7-4 to explain why the simulated outcome in Figure 7-11 is so much less
than the value originally obtained in Table 7-3.
The spread of data in Table 7-4 is realistic given the nature of the PERT estimates
(pessimistic, most likely, and optimistic). This method provides a range of likelihoods
based on different scenarios. The simulated outcome in Figure 7-11 is lesser than the
value originally obtained in Table 7-3 because of the inclusion of the lower “minimum
inflow” column in Table 7-4. This reduces the overall values because it decreases the
estimates.

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PROBLEMS

Problem 1: Using the cost estimation template and Actuals in Figure 7-5, compare
the model in the figure with the following estimates derived from a multiplicative
model. Base your comparison on the mean bias, the MAR, and the tracking signal.
Comment.
Period: 1 2 3 4 5 6 7 8

Estimated: 179 217 91 51 76 438 64 170

Tracking
Period Estimate Actual (A(t)/F(t))-1 |(A(t)/F(t))-1| MAR Signal
1 179 163 -0.08939 0.08939
2 217 240 0.105991 0.105991 0.10 0.17
3 91 67 -0.26374 0.26374 0.15 -1.61
4 51 78 0.529412 0.529412 0.25 1.14
5 76 71 -0.06579 0.06579 0.21 1.03
6 438 423 -0.03425 0.03425 0.18 1.00
7 64 49 -0.23438 0.23438 0.19 -0.28
8 170 157 -0.07647 0.07647 0.17 -0.74
Total -0.129
Again, the bias has reduced considerably and changed sign but the MAR is somewhat
greater. Hence, the Tracking Signal is substantially smaller and shows an acceptable
level of bias on the part of this estimator.

Problem 2: Conduct a discounted cash flow calculation to determine the NPV of

the following project, assuming a required rate of return of 0.2. The project will
cost $75,000 but will result in cash inflows of $20,000, $25,000, $30,000, and
$50,000 in each of the next four years.
Year Cash Flow PVIF PV$
0 $(75,000) 1 $(75,000)
1 $20,000 1.200 $16,667
2 $25,000 1.44 $17,361
3 $30,000 1.728 $17,361
4 $50,000 2.0736 $24,113
Rate 20% NPV $502

Problem 3: In Problem 2, assume that the inflows are uncertain but normally
distributed with standard deviations of $1000, $1500, $2000, and $3500,
respectively. Find the mean forecast NPV using Crystal Ball®. What is the
probability the actual NPV will be positive?
To convert this spreadsheet to a Monte Carlo simulation, Crystal Ball® will be assigned
to generate cash flow values following a normal distribution.

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The setup for the inflow during year one looks like this:

In a similar manner, normal distributions with the given standard deviations are setup for
the inflows in years one through four. The NPV is assigned as the forecast value. Then
after trials are run, a typical result looks like this:

For this distribution, the mean value is about $549 dollars and the chance that the NPV
is positive is determined by sliding the left hand slider until it is over zero ($0.00): The
resulting display from Crystal Ball® looks like this:

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The histogram generated by this trial did not have any values at zero, so the lowest
positive value of $4.00 is chosen. The area between this point and infinity gives the
probability of the NPV being positive, 58.6%.

Problem 4: A production lot of 25 units required 103.6 hours of effort. Accounting

records show that the first unit took 7 hours. What was the learning rate?
The learning rate can only be determined in reality by trial and error.
For this problem a simple spreadsheet will be used. The learning curve factor reduces
the time spent producing the lots, from the base time of 7 hours. We also know that the
total production hours for 25 units are 103.6 hours. A spreadsheet calculating the cycle
time for each lot based on a learning curve would look like this:
Base Adjusted Trial
Unit Time Multiplier Time Rate
1 7 1.00 7.00 0.90
2 7 0.90 6.30
3 7 0.85 5.92
4 7 0.81 5.67
5 7 0.78 5.48
6 7 0.76 5.33
7 7 0.74 5.21
8 7 0.73 5.10
9 7 0.72 5.01
10 7 0.70 4.93
11 7 0.69 4.86
12 7 0.69 4.80
13 7 0.68 4.74
14 7 0.67 4.69
15 7 0.66 4.64
16 7 0.66 4.59
17 7 0.65 4.55
18 7 0.64 4.51

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19 7 0.64 4.47
20 7 0.63 4.44
21 7 0.63 4.41
22 7 0.63 4.38
23 7 0.62 4.35
24 7 0.62 4.32
25 7 0.61 4.29
Total 124.0

Note that for this example, the multiplier for year two is calculated as:

2 (log(0.90)/log(2)) or 2 (-0.045/0.301) or 2 (-0.149) = 0.9

Each multiplier is calculated in turn based on the unit number it represents. In each case
the multiplier is used to modify the base cycle time of 7 hours and then totaled at the
bottom.
The total in this example does not equal 103.6 hours because the learning rate is
incorrect. One could insert different values and find the correct value by trial and error, or
use the Solver feature of Microsoft® Excel. To use Solver, the total hours are set as the
“Target Cell” and the “Trial Rate” is designated as the cell to be changed subject to the
limitation that it may not exceed 1.0 using this technique, the spreadsheet with the
correct learning rate would be:
Base Adjusted Trial
Unit Time Multiplier Time Rate
1 7 1.00 7.00 0.85
2 7 0.85 5.95
3 7 0.77 5.41
4 7 0.72 5.06
5 7 0.69 4.80
6 7 0.66 4.60
7 7 0.63 4.44
8 7 0.61 4.30
9 7 0.60 4.18
10 7 0.58 4.08
11 7 0.57 3.99
12 7 0.56 3.91
13 7 0.55 3.84
14 7 0.54 3.77
15 7 0.53 3.71
16 7 0.52 3.65
17 7 0.51 3.60
18 7 0.51 3.55
19 7 0.50 3.51

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20 7 0.50 3.47
21 7 0.49 3.43
22 7 0.48 3.39
23 7 0.48 3.36
24 7 0.47 3.32
25 7 0.47 3.29
Total 103.6

Problem 5: If unit 1 requires 200 hours to produce and the labor records for an Air
Force contract of 50 units indicates an average labor content of 63.1 hours per
unit, what was the learning rate? What total additional number of labor-hours
would be required for a follow-on Air Force contract of 50 units? What would be
the average labor content of this second contract? Of both contracts combined? If
labor costs the vendor $10/hour on this second contract and the price to the Air
Force is fixed at $550 each, what can you say about the profitability of the first and
second contracts, and hence the bidding process in general?
A spreadsheet similar to the one used in problem 5 can be used for this problem as well.
Here the total hours for the first 50 units can be calculated based on the given average,
specifically 50  63.1 = 3,155 hrs. The spreadsheet with the correct learning rate would
look like this:
Base Adjusted Base Adjusted Trial
Unit Time Multiplier Time Unit Time Multiplier Time Rate
1 200 1.00 200.00 26 200 0.26 51.73 0.75
2 200 0.75 150.00 27 200 0.25 50.92
3 200 0.63 126.76 28 200 0.25 50.16
4 200 0.56 112.50 29 200 0.25 49.44
5 200 0.51 102.54 30 200 0.24 48.74
6 200 0.48 95.07 31 200 0.24 48.09
7 200 0.45 89.18 32 200 0.24 47.46
8 200 0.42 84.37 33 200 0.23 46.85
9 200 0.40 80.34 34 200 0.23 46.28
10 200 0.38 76.91 35 200 0.23 45.72
11 200 0.37 73.92 36 200 0.23 45.19
12 200 0.36 71.30 37 200 0.22 44.68
13 200 0.34 68.97 38 200 0.22 44.19
14 200 0.33 66.88 39 200 0.22 43.72
15 200 0.32 64.99 40 200 0.22 43.26
16 200 0.32 63.28 41 200 0.21 42.82
17 200 0.31 61.70 42 200 0.21 42.39
18 200 0.30 60.26 43 200 0.21 41.98
19 200 0.29 58.92 44 200 0.21 41.58
20 200 0.29 57.68 45 200 0.21 41.19
21 200 0.28 56.52 46 200 0.20 40.82

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22 200 0.28 55.44 47 200 0.20 40.46

23 200 0.27 54.43 48 200 0.20 40.11
24 200 0.27 53.48 49 200 0.20 39.76
25 200 0.26 52.58 50 200 0.20 39.43
Sub-Total 2038.0 Total 3155.0

To answer the second part of the question, the spreadsheet is extended to 100 units.
The portion of the spreadsheet for units 51-100 is shown here:
Base Adjusted Base Adjusted Trial
Unit Time Multiplier Time Unit Time Multiplier Time Rate
51 200 0.20 39.11 76 200 0.17 33.15 0.75
52 200 0.19 38.80 77 200 0.16 32.97
53 200 0.19 38.49 78 200 0.16 32.79
54 200 0.19 38.20 79 200 0.16 32.62
55 200 0.19 37.91 80 200 0.16 32.45
56 200 0.19 37.62 81 200 0.16 32.28
57 200 0.19 37.35 82 200 0.16 32.12
58 200 0.19 37.08 83 200 0.16 31.96
59 200 0.18 36.82 84 200 0.16 31.80
60 200 0.18 36.56 85 200 0.16 31.64
61 200 0.18 36.31 86 200 0.16 31.49
62 200 0.18 36.07 87 200 0.16 31.34
63 200 0.18 35.83 88 200 0.16 31.19
64 200 0.18 35.60 89 200 0.16 31.04
65 200 0.18 35.37 90 200 0.15 30.90
66 200 0.18 35.14 91 200 0.15 30.76
67 200 0.17 34.93 92 200 0.15 30.62
68 200 0.17 34.71 93 200 0.15 30.48
69 200 0.17 34.50 94 200 0.15 30.35
70 200 0.17 34.30 95 200 0.15 30.21
71 200 0.17 34.09 96 200 0.15 30.08
72 200 0.17 33.90 97 200 0.15 29.95
73 200 0.17 33.70 98 200 0.15 29.83
74 200 0.17 33.51 99 200 0.15 29.70
75 200 0.17 33.33 100 200 0.15 29.58
Sub-Total 4054.4 Total 4835.7
Note that both the sub-total and the total include the hours for the first 50 units.
Therefore, the hours to produce the second fifty units are 4,835.7 – 3,155 = 1,680 hrs.
The average labor content would be 1680hrs/50units = 33.6 hrs/unit. The combined
average is found by 4835.7hrs/100 units = 48.4 hrs/unit. If labor were $10/hr then the
first 50 cost, $10  63.1 = $631 each, so the firm lost money. However, the second 50
cost $336 each, so the firm made a profit of $550 – $336 = $214 each. Overall the total
labor cost would be 4835.7 hrs  $10/hr or $48,357 and the revenue would be $550/unit

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 100 units or $55,000. Assuming no other costs, this would give a net profit of $55,000
– $48,357 = $6643. This suggests that the company underbid the first contract with the
expectation of winning a more profitable follow-on contract. [In practice, contractors
developing the price for repetitive products, even with a short a run as two ships, use a
learning curve when bidding on government contracts.] This manufacturer takes on
considerable risk since the contract may be cancelled in the middle or no follow on
contract may ever be offered.

Problem 6: Your firm designs PowerPoint slides for computer training classes,
and you have just received a request to bid on a contract to produce the slides for
an eight-session class. From previous experience, you know that your firm
follows an 85 percent learning rate. For this contract it appears the effort will be
substantial, running 50 hours for the first session. Your firm bills at the rate of
$100/hour and the overhead is expected to run a fixed $600 per session. The
customer will pay you a flat fixed rate per session. If your nominal profit margin is
20 percent, what will be the total bid price, the per session price, and at what
session will you break even?

The total bid price will be $41,351.87 and the breakeven point will be in the 7th session.

Problem 7: A light manufacturing firm has set up a project for developing a new
machine for one of its production lines. The most likely estimated cost of the
project itself is $1,000,000, but the most optimistic estimate is $900,000 while the
pessimists predict a project cost of $1,200,000. The real problem is that even if the
project costs are within those limits, if the project itself plus its implementation
costs exceed $1,425,000, the project will not meet the firm’s NPV hurdle. There are
four cost categories involved in adding the prospective new machine to the
production line: (1) engineering labor cost, (2) nonengineering labor cost, (3)
assorted material cost, and (4) production line downtime cost.
The engineering labor requirement has been estimated to be 600 hours, plus or
minus 15 percent at a cost of $80 per hour. The nonengineering labor requirement
is estimated to be 1500 hours, but could be as low as 1200 hours or as high as
2200 hours at a cost of $35 per hour. Assorted material may run as high as
$155,000 or as low as $100,000, but is most likely to be about $135,000. The best

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guess of time lost on the production line is 110 hours, possibly as low as 105
hours and as high as 120 hours. The line contributes about $500 per hour to the
firm’s profit and overhead. What is the probability that the new machine project
will meet the firm’s NPV hurdle?
In the spreadsheet shown below the project cost, nonengineering labor hours, material
cost, and downtime hours were all modeled using a triangular distribution. The
engineering labor hours were modeled using a uniform distribution over the range of 510
to 690 hours. As shown in the spreadsheet below, the project has a 92.37% chance of
meeting the firm’s NPV hurdle.

Problem 8: A four-year financial project has estimates of net cash flows shown in
the following table. It will cost $65,000 to implement the project, all of which must
be invested at the beginning of the project. After the fourth year, the project will
have no residual value. Assume that the cash flow estimates for each year are
best represented by a triangular distribution and that the hurdle rate is 20 percent.
(a) Use Crystal Ball® to find the expected NPV of the project.
(b) What is the probability that the project will yield a return greater than the 20
percent hurdle rate?
Year Pessimistic Most Likely Optimistic

1 $14,000 $20,000 $22,000

2 19,000 25,000 30,000

3 27,000 30,000 36,000

4 32,000 35,000 39,000

Most
Year Pessimistic Likely Optimistic Used PVIF PV$
0 $ (65,000) $ (65,000) $ (65,000) $(65,000) 1 $(65,000)
1 $ 14,000 $ 20,000 $ 22,000 $ 20,000 1.200 $ 16,667

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2 $ 19,000 $ 25,000 $ 30,000 $ 25,000 1.44 $ 17,361

3 $ 27,000 $ 30,000 $ 36,000 $ 30,000 1.728 $ 17,361
4 $ 32,000 $ 35,000 $ 39,000 $ 35,000 2.0736 $ 16,879
Rate 20% NPV $ 3,268

Now the green (or shaded) cells in the column labeled “Used” (with the exception of the
initial investment of $65,000) are calculated by Crystal Ball® using a triangular
distribution with the end points selected based on the pessimistic and optimistic values
given. The setup for year one looks like this:

The net present value is then calculated for each of 1000 trials and results are displayed
by designating the NPV cell as a forecast. Typical results look like this:

By adjusting the triangular sliders it can be seen that the chance of the NPV exceeding
$0 (and the hurdle rate) is about 87%. The mean value for this distribution is $2770.

Problem 9: If an inflation rate of 2 percent, normally distributed with a standard

deviation of .333 percent, is assumed, what is the expected NPV of the project in
Problem 8, and what is the probability that it will qualify?

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Most
Year Pessimistic Likely Optimistic Inflation Used PVIF PV$
0 $ (65,000) $ (65,000) $ (65,000) - $(65,000) 1 $(65,000)
1 $ 14,000 $ 20,000 $ 22,000 2% $ 20,000 1.220 $ 16,393
2 $ 19,000 $ 25,000 $ 30,000 2% $ 25,000 1.4884 $ 16,797
3 $ 27,000 $ 30,000 $ 36,000 2% $ 30,000 1.8158 $ 16,521
4 $ 32,000 $ 35,000 $ 39,000 2% $ 35,000 2.2153 $ 15,799
Rate 20% NPV $ 510
Now the column labeled “Inflation” has been added. Each of these cells is individually
calculated by Crystal Ball® with a normal distribution using a standard deviation of
0.33% to allow different inflation values for each year. The result is added to the “PVIF”
calculation used to determine the individual PV results.
Now the forecast values for NPV look like this:

The probability that the NPV exceeds $0 is about 50%. The mean value for this
distribution is -$85. This analysis indicates that there is only a 50-50 chance that the
project will qualify (meet the hurdle rate).

Problem 10: A cloud storage startup has decided to upgrade its server computers.
It is also contemplating a shift from its Unix-based platform to a Windows-based
platform. Three major cost items will be affected whichever platform they choose:
hardware costs, software conversion costs, and employee training costs. The
firm’s technical group has studied the matter and has made the following
estimates for the cost changes in $000s.
Using Crystal Ball® and assuming that the costs may all be represented by
BetaPERT distributions, simulate the problem 1000 times. Given the information
resulting from the simulation, discuss the decision problem.
Low Likeliest High Low Likeliest High

Hardware 100 125 200 80 110 210

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Software 275 300 500 250 300 525

Training 9 10 15 8 10 17.5

Windows

Unix

INCIDENTS FOR DISCUSSION

Preferred Sensor Company

Questions: Under these circumstances, would Sean be wise to pursue a top-down
or a bottom-up budgeting approach? Why? What factors are most relevant here?

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Other documents randomly have
different content
"We have had no money, dear Grandfather," she said. "And I have had to sell everything of value—
everything out of my mother's chest of souvenirs.
"The castanets were the last to go. Juan had offered to buy them from me for a great dancing master,
and today I was on my way to Juan's shop. But I—I—stopped in the Murillo Garden—and—and danced
—oh!"
"Go on, Pilly dear," said her grandfather patiently.
"As I was dancing," she continued, "a gentleman came up to me and asked to see the—the castanets.
When I showed them to him, he said that he would like to buy them. He said that he was the dancing
master of whom Juan had spoken.
"Oh, Grandfather, he offered me so much money for them, and I—I—"
"What did you do, Pilly?" asked the old man.
"I could not sell them, Grandfather!" sobbed Pilar. "I—I could not! I ran away from him. I ran away!"

TRIANA BRIDGE, SEVILLE

CHAPTER XV
 A STRANGER ARRIVES
"Do not cry any more, Pilly," said her grandfather. "You have done no harm by keeping the castanets.
Perhaps you have done good. I shall tell you why later on. But first let us have our dinner."
Pilar tried to smile. She brushed away her tears. Her grandfather was actually hungry! Oh, this meant
that really and truly he was getting well!
Pilar started toward the kitchen. She had planned such a splendid dinner for tonight, and now they
would be obliged to eat beans and drink milk.
If only she could prepare her grandfather's favorite omelet stuffed with creamed fish, or a bowl of stew,
made out of chick-peas, garlic, potatoes, sausage, peppers, and cabbage! But—
What was that white thing lying under the door? Pilar stooped down and picked up a letter. It was
postmarked "U.S.A."
Now very few of Pilar's friends would have known what those initials meant. And even if they had been
told, many of them would have shrieked with laughter and cried, "Only red Indians live there!"
But Pilar's grandfather had been in America long ago, and, of course, her mother had danced there.
The letter came from Antonio Santaella, and that was Tony—Tony, who had lived in Seville as a boy and
was now an important merchant in America. Enclosed in the letter, Pilar found paper bills—money—
more money than Pilar and her grandfather had seen in many years!
Tony wrote that he would always remember Pilar's mother, known as "The Little Spanish Dancer." He
also asked Pilar whether she, too, would become a dancer when she grew up.
Pilar's eyes shone.
"Oh, Grandfather!" she cried. "What a kind man Señor Tony is! How much I love him! How I wish to be
a dancer like my mother! Shall we have eggs or stew for dinner?" She had said it all in one breath. She
rushed to open the door on her way to market, adding, "I shall be right ba—pf-f-f!"
With a terrible thud, Pilar had bumped into a tall gentleman who stood at the door. It was the great
dancing master.
"Good evening," he said. "Are you Señorita Pilar?"
 A NET MAKER, SEVILLE

Pilar backed into the room. She looked like a scared little rabbit. What did he want? Had he come to
take her castanets?
"Ah, yes, you are the Señorita Pilar," continued the gentleman. He came into the room, closed the door
behind him, and sat down calmly.
"And this, I believe, is señor, your grandfather. No?" He smiled at the old man, who lay quietly in his
bed. "You see, I found out all about you, señorita. After you ran away from me in the garden, I made
up my mind to follow you, and I did."
Suddenly Pilar's eyes flashed angrily.
"You cannot have the castanets!" she cried.
She was standing in the center of the room, and her face was white with fury. Her small body was
drawn up, rigid and tense.
"I'll never let you have them!" she screamed. "They're mine! Mine! Mine!"
She stamped her foot and threw back her head. But the tall gentleman did not seem in the least
disturbed. He just sat there looking at her and smiling as if he were watching a play.
Indeed, one had the impression that he might begin to clap at any moment. But he did not.
Instead, he just laughed good-naturedly and said, "What a little firecracker you are! And how graceful,
too! Now, listen, child."
He had stopped smiling. He leaned forward and spoke to Pilar in a serious voice.
"Listen to me, Pilar," he said. "I do not want your castanets if you do not care to sell them to me. But—"
He hesitated for a moment while Pilar stared at him, still with that look of anger and fear in her eyes.
"But I do want something else!"
Pilar's grandfather raised himself upon his pillow. "What is it that you wish, Señor?" he asked.
"The Little Spanish Dancer!" replied the gentleman. "I want Pilar!"

TOLEDO

Both Pilar and her grandfather started. What was this man talking about?
"I want to take Pilar to my school," he went on, "and teach her. For I believe that some day she will be
a wonderful dancer. And I should know, for I have taught some of the best dancers in Spain."
Now Pilar realized who he was. Often she had passed the window of his dancing school. She had
watched the fortunate pupils and listened to the strains of a tango and the clatter of castanets.
Upon the walls of the school were colored posters showing scenes of bullfights. Girls and boys, young
and old, stamped their feet and twirled to fiery music.
It had always made Pilar's heart beat faster. She had longed to join them. But lessons were only for
wealthy children and—
"But, señor," said Pilar's grandfather, as if he had been reading Pilar's mind, "we have no money to
spend on lessons."
"I shall ask no money," replied the dancing master. "No. Our school will some day be proud of Señorita
Pilar."
He stood up and put out his hand to the little girl.
"Come tomorrow for your first lesson," he said. "My brother will instruct you. My brother, you know, is
the second greatest dancing master in Spain."
"And who is the first, señor?" asked Pilar's grandfather.
"Why, I am, of course!" answered the tall man proudly, and walked out of the room.
When he had left, there was much rejoicing in the tiny house. Pilar went out and bought a basket full of
good things, and they had dinner.
After dinner, they sat together, silent and happy, the old man's wrinkled hand caressing the child's
glossy black hair.
Then all at once, in a low, mysterious voice, the grandfather began to recite:

"Castanets, with magic spell,

Never lose or give or sell;
If you do, then grief and strife
Will follow you through all your life."

PILAR AND HER GRANDFATHER

When he had told Pilar about the magic castanets and the legends with their strange lessons, she felt a
wave of joy sweep through her.
"Oh, then, it must have been the magic of the castanets that brought us all this good fortune,
Grandfather!" she cried.
Her grandfather smiled wisely and shook his head.
"No, Pilly," he said. "Good fortune always comes to those who think good thoughts and who work hard.
There is no magic in that."

THE END
PRONOUNCING VOCABULARY
Alcazar äl-kä´thär
Algeciras ăl´jē̍ -sē´rȧs
Andalucia än´dä-lo͞ o-thē´ä
Avila ä´vē̍ -lä
Babieca bä bie´ca
Barcelona bär´sĕ-lō´nȧ
Boabdil bō´äb-dēl´
Burgos bo͞ or´gōs
Cadiz kăd´ĭz
Castanet kăs´tȧ-nĕt´
Cervantes sẽr-văn´tēz
Cid sĭd
Cordoba kôr´dō̍ -vä
Damascene dăm´ȧ-sēn
Damascus dȧ-măs´kŭs
Don Quixote dō̍ n-kē̍ -hō´tā̍
El Escorial ĕl ĕs-kō´rĭ-ăl
Fiesta fyĕs´tä
Granada grȧ-nä´dȧ
Guadalquivir gwä´dăl-kwĭv´ẽr
Jerez hā̍ -rāth´
Juan hwän
Montserrat mŏnt´sĕ-răt´
Mosque mŏsk
Murillo mū̍ -rĭl´ō
Odyssey ŏd´ĭ-sĭ
Prado prä´dō
Pyrenees pĭr´ē̍ nēz
Rodrigo de Bivar rō̍ -drē´gō de be-vär´
Salamanca săl´ȧ-măng´kȧ
Segovia sā̍ -gō´vyä
Señor sā-nyōr´
Señorita sā´nyō-rē´tä
Seville sē̍ -vĭl´
Tagus tā´gŭs
Toreador tŏr´ē̍ -ȧ-dôr´
Torero tō̍ -rā´rō
Tormes tôr´mās
Torre del Or tôr´rā̍ dĕl-ō´rō
Valencia vȧ-lĕn´shĭ-ȧ
Valladolid väl´yä-thō̍ -lēth´
Visigoth vĭz´ĭ-gŏth
Transcriber's Note: The list of illustrations with their page
numbers have been added after the table of contents. Images have
been moved from the middle of a paragraph to the closest
paragraph break.
 *** END OF THE PROJECT GUTENBERG EBOOK THE LITTLE
SPANISH DANCER ***

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