exceed rather than fall short of the true expense for this purpose. The latter is more likely to be true of the small plant, in the construction of which engineering complications are quite infrequent. The physical valuation upon which such percentage is computed is the value of the plant in its present entirety, consisting of the original plant, plus the additions and the betterments over a number of years. These additions consist of a large number of separate charges, many of them for improvements of a comparatively simple nature. The services of engineers are seldom engaged in such instances, these duties being performed by the general officers of the plant whose entire salaries are included in operating expenses. Every aggressive and progressive utility is constantly called upon to make additions in order to adapt itself to the changing needs of the community served. The determination of these changes is within the legitimate scope of the general officers' duties, so that an allowance of 5 per cent on the total value can be regarded in no other light than that of liberality. The same subject is discussed by George F. Swain in his report to the Joint Board on the validation of assets and liabilities of the New York, New Haven and Hartford Railroad. 22 This is a valuation for purposes of capitalization. Mr. Swain says (at page 58): The charge for engineering is a necessary one in the execution of any engineering work. It includes the salaries of engineers, draftsmen, inspectors, etc., and in general all the expert services required for design and superintendence. The amount of this charge will, of course, vary according to the kind of work. In the case of a railroad it is generally as large as has been assumed, if not larger. In the first place, a large expense has to be incurred for preliminary surveys, to determine the proper location of the line. The expense of this work will vary according to the topography. In a level country, as in 22 Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51-154. our western states, where a railroad can be located anywhere, the expense may be comparatively small, while in a mountainous country a large sum may be expended before the proper location is found. After a preliminary survey has fixed the route approximately, the precise location has to be determined and the line laid down upon the ground. Contracts and specifications are then prepared, designs made for the different portions of the work, and contracts let for its construction. These contracts require supervision on the part of the engineering force, and estimates of quantities to serve as a basis of payments to the contractor. Inspectors are also necessary to see that the specifications are properly carried out. Five per cent. is a common charge for engineering, used in preliminary estimates of cost. Actually, as explained, the charge may be greater or less, but is frequently greater. For instance, to give some examples, the following have been the engineering charges for work in Boston and vicinity: East Boston tunnel.... about 6.4 per cent. . about 6.1 per cent. .about 6.2 per cent. In the latter case, the percentage is estimated on the total cost, exclusive of overhead charges, but of this total cost nearly 50 per cent. was for the purchase of existing water works, on which there was no engineering charge, so that the engineering charge on the balance would be nearly 12 per cent. A charge of 5 per cent. will therefore be seen to be low. Personally, I believe it should not be less than 6 per cent. § 281. Contingencies. Some allowance for contingencies is customary in any appraisal that is not based on complete records of work recently constructed. In discussing railroad appraisals J. E. Willoughby says: 23 After the estimate has been made, including the item for sea23 Proceedings of American Society of Civil Engineers, January, 1911, p. 119. soning and adaptation, there should be added a contingent fund to cover the omitted work, consisting of small borrowpits and ditches, undetermined foundations, unexpected conditions encountered, unavoidable "force account" work, minor changes of streams and highways, damages to adjoining lands due to the methods of construction and to diversion of water, etc. This item will not exceed 5% of the cost of the roadway if the estimate be accurately made. In the general state railroad appraisals, Michigan, Wisconsin, Minnesota and South Dakota made a special allowance for contingencies, while Texas and Washington made no such allowance. Chief Engineer Gillette, in his report on the Washington valuation, states that inasmuch as a detailed examination was made of the records of the companies showing the original costs and amounts, an allowance for contingencies was unnecessary.24 Engineer Morgan, in his report on the Minnesota valuation states, that, while engineers allow 10% to cover contingencies on any estimated cost of new construction, he believes that an allowance of 5% is all that is required in making an appraisal of a railroad already constructed.25 He says: "The essential difference rests in the fact that in reproduction cost the estimate is prepared in the light of known conditions, whereas for a projected line, the contingencies are wholly unknown." In Paulhamus v. Puget Sound Electric Railway, decided February 26, 1910, the Washington Railroad Commission allowed 5% for contingencies on the cost of reproducing the roadbed and other structures. § 282. Contingencies-Michigan railroad appraisal, 19001901. Henry Earle Riggs in his account of the Michigan rail24 See Second and Third Annual Reports of the Railroad Commission of Washington, 1907-1908. 25 See Annual Report of Minnesota Railroad and Warehouse Commission, 1908, p. 43. road appraisal 26 states that there was considerable criticism of the allowance of 10% for contingencies. He maintains that the allowance was a proper one in the Michigan appraisal, and gives the following reasons: (a) The conditions under which this particular inventory and appraisal were made, as to time and lack of co-operation of the companies, made it practically certain that some items of value were missed in the appraisal, such as station and miscellaneous equipment, frogs, switches, track structures, buildings owned by the companies and occupied by others, etc. (b) That there were many and large elements of physical cost not ascertainable by a physical inspection, such as deep foundations, many thousands of yards of earth in swamps and sinkholes (a very general condition of roads in the Southern Peninsula), concealed classification due to growth of grass or washing of banks, and many other cases of work actually done, invisible after a lapse of years. The writer knows of many such instances on property which was in his charge many years ago; in several cases there were expenditures of from $20,000 to $50,000 which are now entirely invisible to an engineer passing over the line. (c) The failure on the part of railroad companies to keep anything like a complete history of construction operations, and the changes of operating officials from year to year, cause the loss of record of practically all the expense due to extra hazard and risk which the construction engineer provides for by his "contingencies." (d) The inclusion in operating expense, every year, of sums which are properly construction, and which, if added to unit prices of construction work, would cause the cry that such unit prices were too high. For instance, the appraisal estimate on earth was 17 cents per cu. yd., with no allowance for overhaul. Very much of the grade in the State had actual costs far in excess of this figure, and practically every road spends a large sum annually for the first four or five years, which is charged to operation but is in reality a part of the cost of completing the roadbed. (e) No 26 See Proceedings American Society of Civil Engineers, November, 1910, p. 1418. account was taken of appreciation of any of the elements entering into a road. There is no doubt that roadbed, for example, does appreciate, due to ballasting and track work. These items go far toward accounting for the contingencies item on an old road such as the Michigan Central. (f) There is a considerable amount of cost, which cannot be taken out of capital, where facilities are abandoned or line or grade changed. These changes are common to all growing roads; they are due to the demands for greater traffic; they are necessary to the welfare of the community served; they are often made at points where no charge of defective design will apply. They might be termed expenses due to the development of the State, and, in the development of the railroad business, they were absolutely necessary for its present standard of efficiency. They are incapable of exact and definite determination, and must of necessity be included as contingent ex penses. It is to be noted that in the above, Mr. Riggs, in part at least, includes under contingencies, the cost of adaptation and solidification of roadbed, for which a special allowance has been made in various railroad appraisals. It should be noted also, that he includes under (f) various expenses for capital sunk in changing line or grade, and that these are expenses which under approved systems of accounting are taken care of by depreciation reserves. § 283. Contingencies-Massachusetts appraisal of N. Y., N. H. & H. R. R., 1911. George F. Swain, in his appraisal for purposes of capitalization of the property of the New York, New Haven and Hartford Railroad, discusses the allowance for contingencies as follows (at page 86): 27 27 Report to the Joint Board on the validation of assets and liabilities of the New York, New Haven and Hartford Railroad under Chapter 652, Acts of 1910, by George F. Swain, Engineer in Charge. Published in Report of the Massachusetts Joint Commission on the New York, New Haven & Hartford Railroad Company, February 15, 1911, pp. 51–154. |