this paper concerning overhead charges, but very little about the items
considered in determining the unit values or unit prices used; and does
not the latter greatly affect the former? For example, in discussing the
Michigan appraisal, the author says:
"For many items, such as clearing, grubbing, earthwork, masonry,
etc., the price was fixed by agreement during the discussion at a
figure which represented the fair average cost of this particular
item during the 5-year period preceding the appraisal."
The "fair average cost" under what conditions? This word "cost" is
understood by different men in as many different ways as the word value.
Mr. Riggs very clearly gives the items included in "fair value" as
finally arrived at by him, but it would seem to be as important to
define "fair cost" as used in arriving at the unit prices, for otherwise
the chain has a weak link.
What may be considered a fair cost per unit of measure for a particular
item differs greatly: First, with the point of view and breadth of
horizon of the man stating such cost; and second, with the methods of
letting contracts and accounting with which he may be familiar, as
applied to such items of work. Because of the first, a fair average unit
cost may mean one thing to a contractor, another to a division engineer,
still another to a chief engineer, and a fourth to a manager or
consulting engineer; and because of the second, the understanding of the
term may differ among men of the same class. All of this quite aside
from what may be termed the personal equation of the individual. Thus
the subject of overhead charges can only be discussed profitably in the
light of knowledge concerning what has already been included in fixing
the unit prices used. For example, the element of hazard common to all
construction, but differing in degree on different classes of work, may
be included in the unit cost used, or it may be added as a percentage to
resulting sums, but it cannot rightly be included twice. This is equally
true of other elements of cost of a similar character.
The foregoing is pertinent, for any valuation will probably be attacked
in the Courts, and the unit values will be one of the most tempting
points for assault, for the very reason that this wide difference of
understanding in regard to cost, and particularly in regard to unit
costs, exists. This same difference of understanding is usually the
reason for the wide difference in unit costs testified to by able
engineers and, consequently, for the distrust often felt for such
testimony. The methods followed in taking expert testimony usually work
to make "confusion worse confounded." The judge or layman, hearing two
engineers testify to widely different unit prices as a fair average cost
for certain work, forms a low opinion of their judgment, or worse,
whereas the real difficulty may, and usually does, lie in a different
understanding of the meaning of the term "cost," or "unit cost." To the
speaker, this seems to be the weakest point in an admirable paper.
_Paving._—Whether the value of the paving between and for a space
outside of the tracks is an element of value in a street-car line, or
whether the cost incidental to the construction and maintenance is in
the nature of a tax, is a much disputed point in all valuations of
street-railway properties, and an important one, for it may amount to
$15,000, or more, per mile. It is interesting to remember that the
custom of requiring street-railway companies to maintain the pavement
between the rails and for a space of about 2 ft. outside of them, which
has become almost universal, developed during the use of horses to draw
the cars, the animals causing great wear on that portion of the street.
This question of values is a difficult one. It would seem that the most
tenable position is that: If the fee to the pavement is not in the
company, and if the rule concerning cost of reproduction less
depreciation is to be followed, the cost of taking up and relaying the
pavement is an element of value in the physical worth of the track, for
it would be impossible to reproduce the track without incurring the cost
of such work.
S. D. NEWTON, ASSOC. M. AM. SOC. C. E. (by letter).—The general scope of
this paper is admirable. The author's views and definitions are
unusually sound, clear, and forcibly expressed. To one minor detail,
however, the writer is unable to subscribe. Referring to "the physical
property element of value," he states that:
"This consisted of those things which are visible and tangible,
capable of being inventoried, their cost of reproduction determined,
their depreciation measured, and without which the property would be
unable to produce the commodity on the sale of which income
depends."
Take the case of an industrial spur for some minor industry along a
line of railroad. It is often a question in the minds of the
management whether or not the car-load business done by such an
enterprise is sufficient in quantity to warrant the expense of a
spur track. There are probably other facilities in the neighborhood
which could be used to take care of this business at the expense of
some inconvenience; in a large proportion of cases, the railroad
will handle the business anyway, and the spur can in no sense be
called a necessity. Still, it is visible, tangible, and capable of
being inventoried, and should be included in an inventory of the
property the same as any track or section of track belonging to the
Company. This may also be said of an extra settling basin or filter
bed in the case of a water-works plant. If such basin or bed were
not in existence, and a leak should occur in the original plant, the
business of supplying water to its customers could, in all
probability, be carried along in some manner until the break could
be repaired; nevertheless, such a tank or bed is desirable, and its
value should most certainly be included in an inventory.
Take the extreme case of a piece of machinery which is utterly broken
down or so far out of date as to be entirely worthless for the purposes
for which it was designed. Yet such machinery has, at least, a scrap
value, and as such it should be included in the inventory as part of the
tangible assets of the concern at the date in question.
Of course, in many instances, certain interests endeavor to have
inventoried items which should either be omitted altogether or included
at a much reduced valuation from that sought to be placed on them, and,
in such cases, the very best judgment of the appraising engineer must be
called into play in order that injustice may not be done to either
party; but to say, as Mr. Riggs' definition virtually does, that nothing
should be inventoried which can, either with or without inconvenience,
be dispensed with, is absurd, and the writer does not believe that such
is the meaning the author intended to convey. Probably, if the word
"economically" were inserted in the definition, it would more nearly
represent the proper idea.
WILLIAM V. POLLEYS, M. AM. SOC. C. E. (by letter),—In his very thorough
and painstaking paper Mr. Riggs states that it is confined to a
discussion of methods for arriving at a correct figure of cost, and
disclaims any intention of considering the propriety of using said
figure when reached.
Inasmuch, however, as he devotes the next eight or ten pages to a
dissertation on law, political economy, rate-making, finance, and advice
to railroad employees, with a word of encouragement to the good, and
firm reproof to the bad ones, it is fair to assume that he intends this
disclaimer in a Pickwickian sense, and that the real intent of the paper
is to show that the physical valuation of property is, with certain
determinative, corrective factors, a proper standard for gauging
taxation, bond issues, and kindred evils.
Is it not a fact, however, that taxation is based on a much more
intangible structure, and that the net earnings must necessarily have
more to do with it than the physical valuation of the property—whether
it be that of a wicked public service corporation, or that of an honest
haymaker—rather on what their property can produce, than on what it
would cost to produce the property? Is it not rather a battle of
business acumen between the taxer and taxee, a battle which, among other
things, is regulated more or less by the fact that an extreme in either
direction will bring disaster to one or both, followed by the inevitable
reaction and readjustment?
Take, for instance, an extreme case: A manufactory is erected on
comparatively worthless ground. A million dollars or more is invested in
a plant, with the result that surrounding real estate values go up with
a bound. Supposing that the manufacturer has not made any previous
arrangements for immunity, and the assessors are both acute and honest,
the property will be taxed for a large figure, which tax, if the factory
is making money, will be paid, with more or less grumbling, up to the
economical breaking point. Suppose that, owing to a sudden permanent
change in business conditions, it becomes impossible to operate this
plant, and it is abandoned. A corps of experts may be thrown into the
mill, before the last employee has left the building, and may carefully
scrutinize and caliper the machinery, count the bricks in the wall, tap
the stay-bolts in the boilers, and bore into the furniture to see
whether it is solid or veneer, and when they are through and their
figures are all in, they have not arrived at anything that is of the
slightest use as a basis for a bond issue or taxation, and very little
that would be of use for sale. In such an extreme (but by no means
unheard-of) case physical value bears no relation to real value.
This is not to say that a physical valuation is without worth, and even
great worth in some cases; it is merely offered as an opinion that the
physical value is in many (and probably most) instances a very
treacherous guide to the real value—a far poorer guide, as a general
rule, than the accounting department; a minor quantity, in fact.
It seems doubtful whether there is a scientific way of arriving at the
true value of a going property by the physical-valuation route. There is
too large a percentage of values which, being intangible, are matters of
judgment. At best, the determination of value must be that of opinion,
and the worth of that opinion hinges principally on the practical
qualifications and disinterestedness of the person who gives it.
Unfortunately, or fortunately, as the point of view may be, the
disinterested person is not apt to be qualified, nor the qualified
person to be disinterested, and it seems extremely probable to the
writer that, while weapons may be changed and excuses vary, the tax war
will be waged as of yore, and the fool and his money will continue along
diverging paths until something more ingenious than physical valuation
is invented, however well the valuation may be made.
C. P. HOWARD, M. AM. SOC. C. E. (by letter).—While there may be no
material differences of opinion as to the principles on which a physical
valuation should depend, such a detailed description of organization and
methods as that presented by the author should be of great service to
others undertaking similar investigations.
It may not be amiss, however, to mention certain features affecting the
non-tangible values which should be more fully considered in any general
discussion of the subject.
The author calls attention to one or more particulars in which the
methods of the Michigan appraisal may "fail as a method of determining a
value for use as a basis of rate-making." Later, after quoting various
court decisions, he dismisses this phase of the subject with the words:
"In view of these dicta, it is needless to argue whether a rate of 6% or
10%, or 15%, or more, be reasonable."
A value for purposes of rate-making might more properly be called a
"permissible value." The writer holds no brief for the corporations, and
would not like to fall under the imputation of being "apparently incited
by, either the direct interest of corporations, * * * or an effort to
confuse the subject of valuations," but will venture the following,
which, while it does not exactly represent any particular case, it is
hoped may be recognized as an illustration drawn from life.
A, B, C, and their associates, being familiar with a certain territory,
its resources, transportation facilities, and growing development,
believe that the time has come to build another railroad through their
State or States. They have made careful estimates of the amount of
tonnage that may be expected from the development of its mines, timber,
farms, etc., and conclude as follows:
_First._—The road, completed along the most approved lines, will cost,
with equipment, $50,000,000.
_Second._—It will take five years to construct and equip the road and
put it in fair running order.
_Third._—The traffic, when fully developed according to their hopes and
expectations, will eventually afford at usual tariffs a handsome profit,
say, from 8 to 12% per annum on the capital invested. This condition,
they believe, in all human probability, will be attained in from 5 to 10
years after completion.
_Fourth._—That half the traffic anticipated will pay 5% on the
investment.
_Fifth._—They are obliged to admit (though the chances of this are so
remote as to be in their opinion negligible) that, due to unforeseen
causes, obstruction, competition, etc., there is a possibility that, as
has so often happened in the past, the enterprise may prove a financial
failure, or that the period of prosperity may be postponed so far into
the future as to amount to practically the same thing.
Here is a bold undertaking; but were it $5,000,000 instead of
$50,000,000, the conditions would be essentially the same. Nevertheless,
they have the courage of their convictions and go ahead.
Now, with all the risks and uncertainties attending an enterprise of
this sort, if the ultimate profits were limited in advance to 5 or 6% on
the capital invested, less depreciation, who but the Government itself
could afford to build a railroad?
Evidently, when an existing railroad makes small additions from time to
time to extend or take care of its business, the risk is not so great.
Such extensions will continue more or less under any limitations.
For rate-making, it is evident that an appraisal based on earnings will
utterly fail of its purpose if made during the lean years immediately
following construction. If made some years later, when the property has
begun to pay, the risk and necessary financial loss of the lean years
should be remembered, as any one building a road in the future will
necessarily have the same problems to meet, together with the expenses
of interest, depreciation, loss from operation, etc., both during the
construction and the lean years following, all of which must properly be
considered a part of the real cost of constructing and developing a
property.
J. E. WILLOUGHBY, M. AM. SOC. C. E. (by letter).—The determination of
the cost of reproducing the property of any steam railway involves,
together with other items, an estimate of the present cost of:
_First._—The acquirement of the right of way, to the extent, in the
form, and on the location of that held in connection with the
railway to be reproduced;
_Second._—The construction thereon of the roadway, to the form and
dimensions, and of the materials which the roadway to be reproduced
exhibits; and
_Third._—The seasoning and adaptation of the roadway to the state of
perfection which the roadway to be reproduced exhibits at the time
the estimate of cost of reproduction is made.
The first conception, for fixing the cost of the several items, is to
consider the railway to be reproduced as being non-existent at the time
the estimate is made, but having the environment which then exists along
the operated railway, although that environment may be largely of the
railway's own creating. The cost of the right of way is to be fixed as
ungraded and unimproved property attached and forming a part of the
adjoining improved property, which adjoining property will be entitled
to receive, in addition to the market value of the land taken, all
consequential damages due to the taking off of the right of way in the
form and location that the land has actually been taken, and for the
purpose of railway construction and operation. This adjoining property
is to give credit on the consequential damages for the incidental
benefits which it derives, if any, from the construction and operation
of the railway.
In fixing these values, the drift of public sentiment—the bias of juries
of view and of trial juries—at the time the estimate of cost of
reproduction is made must be considered, since that sentiment may affect
enormously the cost of the right of way. The amount to be paid for a
right of way is in the end that which a condemnation court will award.
The question as to whether or not the right of way was originally
donated can no more enter into the determination of the cost of
reproduction, for the purpose of lessening the estimate of cost of
acquiring the right of way, than the fact that donations of lands or
bonds (or of convict labor and slave labor, as in the South prior to
1860) made by governmental authority or private enterprise, at the time
of the original construction, can be used to reduce the reproduction
cost of the excavation made in the formation of the roadway.
No rule as to the sale of property for commercial purposes in the
vicinity of an operated railway can be rightfully adapted as covering
the line as a whole. While the cost of right of way through farm or
timber lands bears a general relation to the value of those for
agricultural purposes, where improvements thereon bear but a small
proportion to their total value, this relation is wholly wanting in the
cost of a right of way through a village or city or at any point where
the improvements on the property bear a large proportion to its total
value. The relation is also wanting where a right of way is obtained
through agricultural lands devoted to special purposes, like that of
country homes for the rich. It is also wanting where the right of way is
taken out of the narrow river lands in the Appalachian Mountains, where
the total value of the whole farm is dependent on the small acreage of
flat land along the river bank. The general rule of prefixing a constant
to the current selling price of lands, in order to determine the
estimated cost of right of way, should be limited to agricultural and
timber lands, and to those which, owing to their extent, the carving out
of the right of way does not wholly destroy for the continuation of
agricultural and timber operations.
For villages and cities, and for lands devoted or adapted to special
purposes, an accurate estimate of the cost of reproduction of the right
of way can be determined only by a specific investigation of the
conditions in each community. While it is difficult to conceive all the
activities and sentiments which have growth in, from, and of railway
operation, as being in existence without the railway, it is only through
such an assumption that one can estimate correctly the make-up of the
items of cost of reproducing a railway as such railway may now exist. To
assume that the railway, not existent for the purpose of estimating the
cost of reproduction, will now receive the donations of land and moneys
that were made half a century ago, is merely going back to a
determination of what the road has actually cost; and that is contrary
to the intent of the theory of the cost of reproduction. The conception
of a parallel line is not correct, for it imposes thereby a further
burden on properties which have already contributed to the public good,
probably to an extreme extent, and gives an abnormal cost for right of
way, as shown when a railway seeks to enlarge its terminals in a crowded
community, or to find a new entrance into a populous city.
So, too, in estimating on the formation of the roadway, one must
consider the roadway to be reproduced as being obliterated—all cuts and
borrow-pits refilled, and all embankments and spoil banks removed from
the right of way—but all other lines of transportation, except the
railway to be reproduced, must be considered as being in existence as
they actually are at the date when the estimate of cost of reproduction
is made, and that such other lines of transportation are available for
bringing in machinery, tools, teams, materials, and supplies for the
construction of the railway to be reproduced. It is only by such an
assumption that the benefit of the improved means and methods of
construction now prevalent can be obtained; but it is not permissible to
estimate for the construction of a railway with different grades,
alignment, roadbed, widths, or with different materials than that of the
railway to be reproduced merely because such construction at this day
might be actually cheaper or better than to construct it in exact
duplication. For example, if the rock cuts on the roadway to be
reproduced be only 18 ft. wide, with ¼:1 slopes, one must not figure on
the greater economy of steam-shovel excavation, because the steam shovel
cannot be worked in cuts of that width; nor can the spoil from such cuts
be carried long distances to eliminate a possible solid-rock borrow
originally made elsewhere, because long hauls are practicable in
steam-shovel work, but wanting in excavations where the mule is the
transportation force. So, too, it is not permissible to estimate on
reinforced concrete bridges to take the place of more costly cut-stone
arches, if cut-stone arches are the structures that have been actually
built. The idea of cost of reproduction is not synonymous with the idea
of the cost of building a railway capable of serving the same
transportation purpose. If all our railways were to be built anew, in
the light of our present knowledge, and with our present traffic
offerings and financial resources, vast changes would be made in the
character of construction. The physical fact of existing construction
prevents a theoretical substitution of what is the best construction for
any community, together with its costs for the construction which was
actually made years ago.
In the event that an estimate of reproduction costs be made for a State
as a whole, or for a great railway system as a whole, the conception of
reproduction is modified so that the construction may take the form of
progressive construction, the principal lines being built first and the
less important lines afterward. This method will require the estimate
for interest during the construction period to be greater.
The money cost of the seasoning and the adaptation of the roadway to
such a condition as will permit heavy trains to be run at high speeds,
is great, but the amount is not readily ascertained. An estimate of cost
of reproduction, to be true, must consider this item; and probably the
more usual method of ascertaining it is to assume it to be an amount in
some proportion to the cost of the excavation. This proportion will vary
with the character of the material through which and of which the cuts
and fills are made, and with the methods of construction necessarily
adopted. There are many railways on which this cost will exceed 25% of
the total cost of excavation.
After the estimate has been made, including the item for seasoning and
adaptation, there should be added a contingent fund to cover the omitted
work, consisting of small borrow-pits 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.
The more convenient form into which an estimate of cost of reproduction
of a steam railway is to be put is to follow the sub-accounts, as
prescribed by the Interstate Commerce Commission for Expenditure for
Road. Each item given in that accounting has a place in the estimate.
These comments are confined to the items covering the roadway, namely,
Right of Way and Station Grounds, Grading, Tunneling, Bridges, Trestles,
and Culverts.