Overhead Charges.
There are certain expenses connected inseparably with the construction of any public work, which, on the completion of that work, are not capable of physical identification, but which, nevertheless, belong to and must be a part of the cost of the physical property. These expenses are legitimate; and, as long as the property is operated, a very large part, if not all, of the entire expense remains in the present value of the property as a "going concern."
Appraiser Cooley and his staff took up the discussion of these items and disposed of those which were carried into the valuation by the placing of a percentage. These items are:
Engineering.—This covered all the cost of preliminary and location surveys, design, and supervision of construction of the work, and all expenses connected therewith. This was covered by a charge of 4% of the cost of reproducing the permanent way and structure, but not the equipment.
Legal Expense.—This item is inseparable from the construction work, and was fixed at one-half of 1% of the cost of the same items as affected by the engineering charge.
Organization Expense.—This covered the cost of promotion, financing, and general supervision of construction, together with general office expense. These items were covered by an application of 1½% of the cost of the above items.
Interest.—This item is intended to cover interest on money during the period of construction. The length of time taken to build would, of course, be variable. It was assumed that 3% on the entire cost of construction and equipment would be conservative, and this figure was used.
Discount on Bonds.—This was not included, for the reason that it was considered, not as a proper capital charge, but rather as an adjustment of the interest rate to the existing market condition, and as chargeable to interest account and not capital.
The discussion among members of the staff indicated such a wide range of opinion as to the proper percentages to apply, that the final determination of the rates was passed upon by the Board of Review. There can be no question as to the propriety of these items as proper elements in the first cost of construction of a new railroad. On the theory that the cost of reproduction of the physical property should include every item of expense which would enter into the cost of reproducing the property as it existed on the date of the appraisal, they are proper terms to include in the appraisal. As to whether the fixed rates were high enough in every case, is an open question.
The Charge of Ten Per Cent. for Contingencies.—Perhaps no single feature of the Michigan appraisal of physical property has been so generally criticised as the charge of 10% of the entire estimated cost, including all the percentage charges, to cover "contingencies."