upon the field work, and the shipment of tools and material required in placing the element. It would seem that it is proper and right to charge all legitimate expenses of construction as a portion of unit costs except such charges as were of such a general nature as cannot be assigned to the special job involved in placing the unit. In view of this, it has been customary to include in the unit costs the above items and the labor charges of the plant men only up to and including the foreman of the gang especially engaged on the particular work involved. The superintendent of the plant and foreman are excluded, as their time usually is so spread among several lines of work that it is difficult, if not impossible, to make a proper separation and determination of the cost of their services on a particular job.

35. Unit costs-Losses on tools and material. — In the normal construction of a plant, tools must be used, and these tools wear out and must be replaced. This item is, therefore, a necessary and usual expense which must be included with the other costs in finding the replacement cost of a plant. Again, there is always a certain amount of false work, necessary in certain classes of construction, which will not be found by an inventory but is known as being necessarily incident to the construction. The same is true of a certain amount of material which is lost or broken during the process of construction.

All such losses are usual, inevitable, well known and established for each class of construction work. The tools and forms, required in the construction and placing of the several plant elements, differ so greatly that a figure can be obtained, to properly cover this item of expense, more accurately for an individual element than for the plant as a whole. The same general considerations are equally true for the expense arising from the

loss of material bought but not found in the plant at the time of the inventory.

Losses of this character can be assigned more accurately as a portion of unit costs, therefore, than as a general expense, difficult of allocation and, in consequence, made an overhead charge.

36. Unit costs-Insurance. All authorities agree that the expenditures made during the period of construction for insurance against fire, for the fidelity of its employees, and against losses due to injury to its employees or others, should form a portion of the capital expended in the construction of the plant. This item is intended to cover only the time during the actual construction work, or rather until such time as the new plant is turned over to the operating forces. Clearly this item of expense will be incurred to a greater or less degree depending upon the character of the element. It seems best, therefore, to include this cost as a portion of the unit costs rather than as an overhead charge.

37. Overhead charges General consideration. Unit costs as above described include all items of cost which can be determined and definitely attributed to the purchase of each particular unit and of getting it into its final position in the plant. There are several other items of cost which are necessarily incident to construction work but are of such a general nature that they cannot be definitely assigned to individual units, although they are indisputably present in the construction of the plant as a whole. An example of this is the general supervision of the construction work. The labor costs involved in placing units, as found for the unit costs and included in them, were those up to the gang foreman, that is to say the cost of labor of all those who actually were engaged in placing the units. But, there were over the gang foremen superintendents, local, district and

Not

general, all of whom gave a portion of their time to the construction of the plant and, consequently, indirectly a portion to the placing of each unit. It is impossible to determine and assign what portion of their time and, consequently, what expense should be attributed to the placing of each unit. It is, however, a simple matter to find what relation their salaries and expenses, attributable to construction work for the period of construction, bore to the total cost of construction. Knowing this relation, the cost of construction determined by means of the unit costs can be increased by a definite percentage to cover such overhead supervision. Charges of this character in the form of percentages are known as "overhead charges."

Overhead charges have been recognized and used in practically all large inventories, but have been the subject of much controversy and discussion due, in a large measure, to a lack of knowledge and proper appreciation, on the part of those questioning such charges, of what factors were included in the unit costs and what were omitted from such costs and applied as portions of the overhead charges. In what was said relative to unit costs, the items of expense which are to be included have been defined. The overhead charges, now under discussion, should be determined in percentages of plant cost to include all such costs of construction as are of such a general nature that they cannot be allocated to any individual or particular piece of work.

38. Overhead charges - Interest during construction. General consideration. In presenting this subject, the words of a recent decision bearing on this question will be quoted:

"A plant" of large size "cannot be constructed instantly. It requires time to assemble the physical properties and still a greater length of time to put these 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 the plant has cost him in addition thereto the use of the capital or a certain part thereof invested in the physical properties during the time of construction. A willing buyer could afford to pay and would pay more than the actual cost of labor and material, assuming that the plant has been economically constructed, because such cost would not represent the total expenditures the purchaser would have to make in order to construct the plant himself. In addition to such expenditures he would have to expend the earnings of his capital during the period of construction. No case has been cited, and in our investigation we have found no case involving this question where a reasonable amount has not been considered and allowed for loss of interest during construction as part of the cost of construction."

" 1

The loss of interest during the construction period is dependent in each special case upon what the construction period has been determined to be, following the line of reasoning described in the preceding chapter. In some cases the loss of interest would extend throughout a large portion of the construction period.

In most cases, however, such portions of the plant as could be made productive most quickly would be built first and extensions to the plant made with the same thought in mind. Yet even when a plant is thus constructed in a rational and businesslike manner, there must be much time which will elapse between the inception of the undertaking and the completion of the first portion of the plant. The money required to build the plant must be in hand or available from the outset up to

1 Supreme Court State of Oklahoma tenhaver et al. 118 Pac. 354 (1911).

Pioneer Tel. & Tel. Co. v. Wes

that time when portions of the plant are completed, paid for and turned over to the operating forces. During this period there will be a loss of adequate return upon the capital brought together for the development of the undertaking.

It is to be noted that for the usual case as above described, the period is not taken as the entire construction period but the time up to that when portions of the plant can be turned over to the operating forces. For each special case, therefore, a study must be made to determine when, in the entire development period, definite portions of the plant can be completed.

When a large property is created, some time is required to complete the organization, both of executive and of construction forces, to make engineering plans and specifications, and to order and obtain the material required for the plant. Money must be expended for this work before actual construction is undertaken. It has become usual, however, in making valuations, to date the period of construction from the time of beginning actual work upon the physical plant and to care for the loss of interest upon expenditures prior to that time as portions of other overhead charges, such as "organization," or "engineering," and to figure the loss of interest during construction only on the material and labor employed in actual construction work.

Again, as a practical matter, the cost of labor and of much material is paid for as the work progresses. It is now usual to assume that work of building a plant progresses fairly uniformly during the construction period, so that the mean time during which the interest upon the capital expended will be lost, will be one-half of the construction period.

Relative to this matter the Wisconsin Commission has said: