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

during construction. People ex rel. New York, Ontario & Western Railway Company v. Shaw, 143 App. Div. (N. Y.) 811, 128 N. Y. Supp. 177, decided March 8, 1911, is a case involving the assessment of railroad right of way in a New York tax district. Reproduction cost was accepted as the measure of value for the purposes of this case. Judge Kellogg says (at page 813):

We may say in passing that the item of interest was properly rejected by the court as speculative in amount and unsupported by the evidence. Of course, each dollar, as it was expended in the railroad, ceased to produce income until the road could be placed in operation. One witness thinks it would take eighteen months to put the road in operation. That must be mere guesswork. It is evident that about five miles of railroad may be built in much less time, and that the time employed would depend entirely upon the manner in which the work is pushed. There is no substantial basis upon which the item of interest may be computed.

§ 292. Interest-Minnesota Railroad Rate Case, 1911.

The case of Shepard v. Northern Pacific Railway Co., 184 Fed. 765, 809, decided April 8, 1911, involves the valuation of certain railroads for rate purposes. Circuit Judge Sanborn discusses allowance for interest during construction as follows:

Exceptions were taken to the allowance of interest at 4 per cent. per annum on the cost of the reproduction of the railroad properties during one-half of the estimated times of their construction. But the evidence is conclusive that moneys invested for the purchase of rights of way for, and in the construction of, railroads, ordinarily produce no net income during the period of construction, that the amount of capital thus losing returns is ordinarily equal to one-half of the cost of reproduction during the entire period of construction, or to the entire cost during one-half of that period. There is no doubt that interest at a fair rate on the capital invested in materials and labor

that remains idle during construction is as much a part of the cost of constructing or reproducing a railroad as is the money paid for those materials or that labor. Brunswick Water District v. Maine Water Company, 99 Me. 371, 59 Atl. 537, 542. Mr. Morgan, the engineer and witness for the defendants, allowed in his report to the Commission, and verifies the justice of an allowance, of 4 per cent. per annum during one-half of the period of construction; but the amounts he allowed were less than those found by the master, because his estimates of the cost of reproduction and of the times requisite for construction were less. The weight of the testimony on this subject, however, sustains larger amounts than those fixed by Mr. Morgan or the master, and there was no error against the defendants in the latter's finding and allowance of the item here under consideration in either of the cases in hand.

§ 293. Interest-Oklahoma Telephone Rate Case, 1911.

The case of Pioneer Telephone and Telegraph Company v. Westenhaver, involves the valuation of a telephone plant for rate purposes. In regard to interest during construction the Oklahoma Supreme Court says:

It is

that

a

into a

29

Item No. 3, disallowed by the Commission, is for interest on the capital invested during the period of construction. . . a matter within the observation and knowledge of all plant, the cost of whose physical units put together completed plant approximates $100,000, cannot be constructed instantly. It requires time to assemble the physical properties, and still a greater length of time to put those units into place, where they may be used to render service. During this period, the capital invested must of necessity be idle, and no income can be derived therefrom. When the construction of the plant is completed, no willing seller, who is not forced to sell, would take for his plant the cost of the physical units and the cost of the labor in the construction, because

Pioneer Telephone and Telegraph Company v. Westenhaver, 118 Pac. 354, 357, decided January 10, 1911.