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, 1900 1901. 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 25 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 expenses. 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 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. 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. |