It might perhaps be supposed that in an appraisal of existing property no allowance should be made for contingencies. This, however, is not the case, for there are many elements which would enter into the cost which are not represented in the inventory. Among these may be mentioned the following: damages incidental to the work, such, for instance, as interfering with a farmer's water supply, or cutting off access to his land; temporary structures which have been built in the progress of the work, but which are afterwards removed; foundations of structures, the difficulties incident to which are entirely uncertain, since the foundations themselves are below ground or below water and inaccessible; dredging incident to the construction of foundations in water; expense incident to the presence of quicksand or water in cuts, which after the cut has been made and the ground drained are not easily realized; subsidence of embankments where they pass over swamps; temporary stations, bridges and other structures required, in case work such as double tracking, or the elimination of grade crossings, should be carried on subsequent to the original construction of a portion of the road; similarly, expenses incident to other improvements if made subsequent to first construction, such as reducing grades, involving lowering cuts while maintaining traffic, in which case, especially if the cut is in rock, the expense is enormously greater than it would be to construct the line in its final form in the first instance; increase in quantity of ballast over that estimated, due to the fact that some of it gradually works into the grading; and many other elements which might be enumerated. Personally, I believe this charge, like that for engineering, should be more than 5 per cent., but I have taken it at the latter figure.

§ 284. Contingencies-St. Louis Public Service Commission,

1911.

In the valuation for rate purposes contained in a report of the St. Louis Public Service Commission to the Municipal Assembly on rates for electric light and power, February 17, 1911, the Commission did not include a general

overhead charge for contingencies but included a percentage for contingencies on specific items in cases where it was deemed necessary. Thus in valuing the overhead and underground systems there was a 5% general contingency allowance but this allowance did not represent all of the contingency allowance made as it is stated that most of the subitems contained some special percentages for contingency.

§ 285. Contingencies-Oklahoma Telephone Rate Case, 1911. In the case of Pioneer Telephone and Telegraph Company v. Westenhaver, involving the valuation of a telephone plant for rate purposes, the company asked for an allowance of about $2,000 on a total cost to reproduce of $94,000 to cover contingencies. The Oklahoma Supreme Court, however, disallowed this item. 28

Item No. 1, it is contended, should be allowed to cover unforeseen emergencies and contingencies which always add to the cost of construction, but are not visible in the completed structure, such as loss, breakage, or destruction of material and emergencies requiring extra labor. It may be that replacement costs in some cases cannot be correctly ascertained without a separate allowance of the character here contended for; the amount of such allowance to be determined by the character of the plant, of the physical units of which it is composed, the character of labor required to construct it, and the experience of others in constructing other similar plants; but the evidence in behalf of appellant that any amount should be allowed in this case is very meager. There is a statement of one of its witnesses that the arbitrary sum of 5 per cent. of the reproductive value of the physical units in the complete plant should be allowed for this purpose. We do not think this contention sufficiently supported by the record to require the holding of the Commission on this item to be disturbed.

"Pioneer Telephone and Telegraph Company v. Westenhaver, 29 Okl. -, 118 Pac. 354, 356, January 10, 1911.

§ 286. Contingencies-Wisconsin Railroad Commission, 1911. The Wisconsin Railroad Commission has uniformly included a comparatively small allowance for contingencies. This question is discussed in the case of City of Beloit v. Beloit Water, Gas and Electric Company, 7 W. R. C. R. 187, 239, decided July 19, 1911:

These remarks aid us in making the distinction, which should be emphasized, in regard to the difference between estimates of construction cost and estimates of the cost of reproduction. It is ordinarily impossible for the designer of plants, such as those involved herein, to foresee the exact conditions and contingencies which may be encountered in the actual construction work. This is true to some extent even where specifications and estimates are drawn by men of large experience and familiarity with local conditions. Again, it is seldom but what departures are made from specifications, due to new inventions, changes of policy on the part of those in control of the work, the encountering of unforeseen conditions, and for numerous other reasons. In fact, specifications are often purposely left open in some particulars to permit of changes due to later decisions by those in charge. On the other hand, the cost of reproduction of such properties is made after the plant has been completed and with all units and equipment in place and the plant in operation. Access is often had in valuation work of this kind to the books and records showing the actual cost of construction of all or a part of the physical property. Again, where unusual conditions were met with in the construction work which called for particular skill and caused additional expense not provided for in the original estimates, these circumstances are not commonly permitted to escape the attention of those conducting the inventory and appraisal.

§ 287. Contractor's profit.

A specific allowance for general contractor's profit has not usually been included in appraisals. Whether such an allowance should be included depends on the method of determining the unit prices. If the unit prices are

based on cost to a general contractor and such cost is less than the cost would be were the company to do the work without such contractor then there should be an allowance for contractor's profit. If, however, the unit prices are based on the actual cost of such work performed without the intervention of a general contractor, there is no occasion for the addition of contractor's profit. Cost with contractor's profit added should not at least be greater than the price at which the company could do the work, for it is only in case the general contractor will do the work cheaper that there is any justification for procuring his services.

In the valuation of the Chicago surface railways, percentages on various items of from 5% to 15% were allowed to cover organization, engineering, superintendence, and incidentals. It was stated that the item "incidentals" would include contractor's profits when "such are justly a part of the estimate." In Paulhamus v. Puget Sound Electric Railway, decided February 26, 1910, the Washington Railroad Commission states that while making no percentage allowance for contractor's profit, an amount has been added to the unit prices of material ordinarily handled by contract sufficient to allow for contractor's profit.

§ 288. Contractor's profit-St. Louis Public Service Commission, 1911.

In the valuation for rate purposes contained in a report of the St. Louis Public Service Commission to the Municipal Assembly on rates for electric light and power, February 17, 1911, the Commission declined to make an allowance for general contractor's profit. The Commission says (Report, pp. 45 and 46):

The company's claim for a contractor's profit of 10 per cent. to be added to the construction cost of the plant under the

assumption that in rebuilding the plant new the whole work would be let to a general contractor, illustrates very clearly the difference in treatment of the whole question as advanced in their theory of cost of reproduction new, and the method adopted by the Commission.

The Commission takes the position that as a matter of fact, there was no general contractor's profit. Moreover, in the creation of such plants as the one under consideration, as they are generally created, there is seldom such an expenditure.

It has been argued that if such a plant were to be created new it would be economy to employ a general contractor, but in taking the figures upon which to base their profit, the company has used approximately the actual construction cost of a plant created without such contractor, and therefore without the assumed consequent economy. These facts make the company's position inconsistent, and would prevent the contractor's profit being added to the original cost even if the commission admitted the correctness of allowing such a charge to enter into the value of the property.

§ 289. Contractor's profit-New York Public Service Commission, First District.

In the appraisals made by the New York Public Service Commission for the First District, the unit prices themselves include for certain items a subcontractor's profit and there is included in addition a percentage allowance for general contractor's profit. Re Third Avenue Railroad Reorganization Plan, 2 P. S. C. 1st D., decided July 29, 1910, involves a valuation as a basis for capitalization on reorganization. The Commission says:

In this connection, it should be understood that the above allowance for contractors' profit is not the profit of the subcontractors. The unit prices upon which Table III is based include a profit to sub-contractors. The contractors' profit of $2,370,000 allowed in Table IV is a general contractor's profit. It is assumed that the company turns the work over to a general contractor. He sublets various portions to sub-contractors,