and Frank B. Hall, engineers, in 1910. In their report Messers Judson and Hall say: 17 In placing a valuation on the plant, prices on all materials used were procured from manufacturers, agents and dealers, f. o. b. Seattle, at present market prices; from these prices, together with the cost of labor, and the customary allowance of 10% for engineering and superintendence, 10% for general expense and 6% for interest, a unit schedule of costs was prepared covering all parts of the plant except Central Office Equipment, Real Estate and Buildings, and the valuation figured out from the itemized inventory. On Central Office Equipment the original copies of contracts for the installation of apparatus was taken for that part installed in the various exchanges by the Stromberg-Carlson Telephone Manufacturing Company, and a unit schedule of costs prepared covering that part installed by the company, with the usual 10% added to all for engineering and superintendence. The case was then submitted to the Washington Railroad Commission for determination and Henry L. Gray, engineer to the commission, made an independent appraisal. In regard to overhead charges, Mr. Gray says: 18 There was included in the estimate an allowance for engineering, supervision and organization expense, amounting to 10 per cent of the cost of all labor and material; for interest during construction, 5 per cent of the cost of all labor and material, including engineering, supervision, etc., based upon the assumption that two years would be required to reconstruct the plant and that the sum required would be invested an average of one-half of the time, the interest rate being 5 per 17 Report to the Department of Public Utilities of the City of Seattle on the value of the properties and cost of service of the Independent Telephone Company and the Pacific Telephone and Telegraph Company by C. H. Judson and Frank B. Hall, Engineers, September 26, 1910. 18 Appraisal of the Seattle Telephone Companies for the Railroad Commission of Washington, by Henry L. Gray, in Engineering and Contracting, May 3, 1911, pp. 520–24. cent per annum. Contingencies were provided for by an allowance of 5 per cent of all preceding items. No item for discount was included, but an allowance of 5 per cent of 75 per cent of the total estimated cost of reproduction was made to cover brokers' fees, based upon the theory that if 25 per cent of the capital stock was paid up, the bonds would sell at par, the brokers' commissions amounting to 5 per cent. The total net loading charge, composed of the percentage allowances for engineering, supervision and organization expense, interest, contingencies and brokers' fees, amounted to 23.82 per cent. § 261. Wisconsin railroad appraisal, 1903. For tax assessment purposes Prof. Wm. D. Taylor, engineer to the Wisconsin state board of assessment, made an appraisal of the railways of the State for the year ending June 30, 1903. In the following tabulation the overhead charges allowed in this appraisal are shown in percentages of inventory cost: 19 In this appraisal the reproduction-cost-less-depreciation was also determined but the overhead charges were not 19 Report of Prof. Wm. D. Taylor, Engineer to the State Board of Assessment, upon the appraisal of the physical properties of the Wisconsin railways for the year ending June 30, 1903. In Report of the Wisconsin Tax Commission, 1907, pp. 269, 285. depreciated. The overhead charges amounted to 16.5% on the inventory-reproduction-cost-less-depreciation. § 262. Wisconsin Railroad Commission. In valuations made by the Wisconsin Railroad Commission for rate regulation or for municipal purchase, the general rule as to water, gas and electric plants has been to allow 12% on the total inventory-reproduction-cost to cover engineering, superintendence, legal expenses, interest during construction and contingencies. The 12% allowed is not usually segregated between the above items but in certain cases the Commission has said that the 12% allowance was made up of 5% for engineering and superintendence, 4% for interest during construction and 3% for legal expenses, organization, casualties, omissions, etc.20 In a few cases the total overhead charge has been 10% but 12% seems now to be the general rule. In certain cases the companies have contended strongly for a higher percentage but the Commission has rejected the demand.21 § 280. Engineering and superintendence. Some allowance for engineering and superintendence is made in all appraisals. The case of City of Ripon v. Ripon Light and Water Company, 5 W. R. C. R. 1, 13, decided March 28, 1910, involves the valuation of a water and gas plant for rate purposes. In regard to engineering and superintendence the Wisconsin Commission says (at page 13): The allowance of 5 per cent for engineering and superindence is in accord with accepted practice and, when applied on the total cost of the physical plant, will in all probability 20 See City of Ripon v. Ripon Light and Water Company, 5 W. R. C. R. 1, 13, decided March 28, 1910. 21 Re La Cross Gas and Electric Company, 8 W. R. C. R. 138, 157, November 17, 1911. The 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. 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. |