and everybody takes his profit. Now it is not necessary nor is it customary for companies to follow such a practice throughout all their construction work. It is customary to do so at the start, but extensions are often made, new power houses built and additional equipment purchased without the aid of a general contractor. The company deals directly with the sub-contractors and eliminates the general contractor's profit. Re Metropolitan Street Railway Reorganization, 3 P. S. C. 1st D. (N. Y.) 113, 143, decided February 27, 1912, also relates to capitalization upon reorganization. The applicants asked that 72% should be added to actual cost as shown by vouchers as subcontractor's profits and that to this amount there should also be added 10% for general contractor's profit. The Commission rejected the claim for subcontractor's profit as in this case purely fictitious but allowed 10% for general contractor's profit on certain items. The Commission says (at page 143): Net cost represents not only the cost of labor and materials to the contractor who performs the work, but all of his expenses plus his profit. The only witness for the applicants who was familiar with the details of the estimate for net cost towards the close of the proceeding asked that an additional allowance of 72 per cent. upon certain items, totaling $1,301,323, should be added as sub-contractors' profit-this in addition to the claim that a general contractor's profit of 10 per cent. should be allowed upon the entire cost. It appeared that the applicants have the actual cost for 70 or 80 per cent. of the items to which this sub-contractors' profit of 72 per cent. applied, and that the remaining 20 or 30 per cent. was computed from records of actual cost. These costs cover whatever profit the sub-contractor made. Consequently, the witness virtually asked the Commission to allow a profit of 72 per cent. above actual cost as a profit that was never paid and for which there is no justification. Naturally, the Commission does not allow this fictitious item. The applicants claim that there should be allowed a general contractor's profit of 10 per cent. upon all items except the last three in Table II. Mr. Connette did not accept this estimate as reasonable, maintaining that an allowance of 10 per cent upon the estimated cost of removing obstructions and repaving, rolling stock, tools, supplies, furniture, etc., was not justified by experience, the records of the company or the estimates of net cost. It will be noted that Tables II and III indicate that the net cost for removing obstructions and repaving over them was carried throughout without any addition for contractor's profit, engineering, etc., and without any reduction for depreciation. The net cost is asserted to be sufficiently liberal to cover all expenditures, direct and indirect, and, as no depreciation has been deducted, it is considered that the final amount at which it appears in Mr. Connette's estimate of present value is abundant and perhaps larger than should be allowed. Mr. Connette also maintained, and it is believed properly so, that a 10 per cent. profit upon the cost of rolling stock is unjustified. Cars are ordinarily bought directly from the manufacturers, who bear all expenses connected with the designing, construction and testing of the cars, and the prices charged are sufficient to cover all such costs. The unit prices adopted by Mr. Connette and Mr. Uebelacker, the witness for the applicants, include delivery in New York City, the cost of assembling and other incidental expenses. The applicants have presented no evidence to show that a general contractor's profit of 10 per cent. above such unit prices has ever been paid, and it would be considered wasteful and extravagant to pay a general contractor a profit of nearly $1,000,000—10 per cent. of net cost-for doing practically nothing. Indeed, companies ordinarily buy direct from the manufacturers, and this practice is considered economical and prudent. The same may be said regarding the other items upon which Mr. Connette does not allow a general contractor's profit. A company needs no middle man to negotiate for the purchase and delivery of tools, supplies, fixtures, etc. However, the question is not so much whether 10 per cent. should be computed upon this or that item as whether the 251 total allowance for contractor's profit is reasonable. Mr. Connette has estimated that $3,315,477 is entirely adequate upon the basis of a net cost of $47,600,000, particularly in view of the position taken upon other points. In the first place, as has been pointed out, the unit prices are liberal and generally above original cost. Secondly, they include a profit to the subcontractor. Thirdly, there is nothing in the record to indicate that the company had recourse to a general contractor, even upon a considerable portion of the work. It is not common for a street railway company to employ a general contractor at a profit of 10 per cent. for the construction of its entire system from the early beginning to the date of appraisal. It is not uncommon for a new company when starting to let a contract for the erection of the initial plant to a construction company. If the latter is paid the cost of labor and materials, including subcontractors' profit, plus 5 or 10 per cent. to cover its profit and certain expenses, this contract would certainly be considered a good one from its standpoint; but such a plan is not generally followed throughout the life of an undertaking if there is thrifty, progressive management. Additions and extensions are commonly constructed and supervised by the operating company itself without the intervention of a general contractor, and there is nothing in the record to show that this common practice was not followed in the case of the Metropolitan system. It is also undoubtedly true that if a general contract were let for the reproduction of the entire Metropolitan system, the net cost of labor and materials would be less than that computed by Mr. Connette, because an expenditure of nearly $50,000,000 would make it possible for a general contractor to secure unusually low prices for all of the materials and supplies which he would purchase prices below those used as the basis of the estimates. In the opinion of the Commission, therefore, the allowance of $3,300,000 for contractor's profit is generous. § 290. Contractor's profit-Valuation of Falmouth, Mass., water plant. The case of Town of Falmouth v. Falmouth Water Com pany, 180 Mass. 325, 62 N. E. 255, decided January 3, 1902, involves the valuation of a water plant for purposes of municipal purchase. A statute gave the town the right to take over the plant on payment of actual cost with interest. The company had made a contract with a contractor to build its works agreeing to pay the "market value at that time," with a certain percentage added for engineering expenses. During the progress of the work the market value of machinery and materials increased so that the contract price paid by the company was considerably greater than the actual cost to the contractor. The town claimed that the actual cost which they were to pay was the actual cost to the contractor plus only an ordinary profit. Justice Loring said (at page 258): It is argued by the town that this result amounts to substituting market value for actual cost, and actual cost excludes everything in the nature of a profit. It is true that actual cost excludes everything in the nature of a profit; but what is actual cost to the company includes a profit to the contractor, just as what is actual cost to the contractor includes a profit to the merchants of whom he buys his material. The company had to pay a profit to the contractor, as the contractor had to pay a profit to the material men. The legislature no more intended to open up the speculative question of the reasonableness of the profit made by the contractor in his contract with the company than that of the reasonableness of the profit made by the material men in their contract with the contractor. What it intended to do was to provide that the price to be paid by the town should not depend upon opinions as to the market value of the property when taken, but should be restricted to what it had cost the company, with interest at 5 per cent. That it did not forbid the company in the first instance fixing the price which it was to pay for the construction of its works at the market value on completion, if it thought it to be for the best interests of those interested in the corporation to make a contract for its plant on that basis. § 291. Interest during construction. In approved systems of uniform accounts, interest during construction is recognized as a proper capital charge. It is customary to include an allowance for interest during construction in appraisals for rate or public purchase purposes. In the case of Brunswick and T. Water District v. Maine Water Company, 99 Me. 371, 59 Atl. 537, 542, decided December 14, 1904, the Supreme Judicial Court of Maine in laying down rules to govern appraisers in making a valuation of property for purposes of municipal purchase says in regard to interest during construction: And a fair rate usually the prevailing rate of interest upon the money invested in the plant during construction, and before completion, is as much a part of the cost of construction, as is the money itself which is expended for materials and labor. The case of the Long Branch Commission v. Tintern Manor Water Company, 70 N. J. Eq. 71, 62 Atl. 474, 481, decided November, 1905, involves the valuation of a water plant for rate purposes. In this case the New Jersey Court of Chancery allowed an item of $117,000 to cover interest during construction on a total construction cost of $1,270,000. Though court decisions considering interest during construction are few the above and decisions quoted in §§ 245, 246, 254, 292, 293, as well as the uniform allowance for this item in the decisions of state commissions, fully establish it as a proper charge. However, in Lincoln Gas and Electric Light Co. v. City of Lincoln (see § 247) there is no allowance for interest during construction, and in Cedar Rapids Gas Light Company v. Cedar Rapids (see § 240) this item is considered speculative, and in the following instance the Appellate Division of the Supreme Court of New York has disallowed interest |