American Society of Civil Engineers.

Transactions of the American Society of Civil Engineers (Volume 81) online

. (page 122 of 167)
Online LibraryAmerican Society of Civil EngineersTransactions of the American Society of Civil Engineers (Volume 81) → online text (page 122 of 167)
Font size
QR-code for this ebook

which would represent the actual cost of similar items of property
built as they necessarily were or would be likely to be built by methods
different from, and in some cases more expensive than, those that
could be used on the main property.

^. — What Should he Included as Elements of Cost in the Unit
Prices? — There has been an unfortunate lack of uniformity in valua-
tion practice in the manner of arriving at the estimate of reproduction

Apparently, some engineers have used material prices which were
based on net costs at the point of delivery, and labor costs based on
contract prices for performing certain work, and then, realizing that
these do not give complete cost, but without making a full analysis,
have added percentages to the total valuation for omissions, con-
tingencies, incidentals, errors, contractors' profit, or other blanket

It may be that such a method, when used with good judgment, will
lead to a result which is as close to the truth as when a more elaborate
analysis is made, but it is much more difficult of satisfactory proof.

In the opinion of the Committee, the unit prices which are applied
to specific items of property should include every element of cost to
the owner capable of definite assignment to those items, and no such
elements should be included as a blanket, overhead charge.

For example, the material may be purchased in the open market,
the normal price may be capable of determination, and the freight
rate to the point of use may be secured and applied, but to these two
main elements there should be added, wherever they are properly
applicable and obtainable:

(a) — The cost of purchasing;

(&) — House or material yard service;

(c) — Local transportation;

(d) — Waste, loss, and breakage;

(e) — Direct supervision.

(a) — The Cost of Purchasing. — The organization and expense of
the purchasing department might with propriety be treated as an over-


head charge; it may with equal propriety be treated as a charge to
material, and is capable of determination with definiteness in most
cases. In the case of a large operating company, where purchases
cover material for maintenance and also large expenditures for con-
struction, there is grave danger of overlooking this item of expense.
Usually an analysis of the accounts will give actual costs of purchas-
ing of large quantities of material, thus permitting an allocation of
purchasing costs on construction material.

(6) — House Service or Material Yard Service. — The cost of ware-
housing, material yard handling, or what may be termed "House
Service" or "Material Yard Service", is an expense which on a large
property is great in the aggregate although a comparatively small per-
centage on cost of material purchased. The extent of the charge and
its division depends on how much of the material is purchased for
direct delivery, how much goes through a material or storage yard,
and how much goes into a warehouse for delivery in small lots as

(c) — Transportation. — In almost all valuations, the greater part
of the material involved incurs a transportation expense over and
beyond the railroad freight rate to the point of delivery. In the case
of railroad materials of all kinds, the material is usually purchased,
f. o. b. cars, at the most convenient delivery point on the line of the
road, and a haul of possibly several hundred miles on the company's
own line is necessary. The determination of the average length of haul
for the material of each class on a railroad and the determination
of a proper rate to apply constitute a very important element in the
determination of the correct unit prices. In connection with this
matter of the rate, attention may be called to the fact that, under con-
struction conditions, on a new road, with traffic all in one direction,
without the advantage of an old established operating organization,
the cost will exceed the cost of service on an old road. This has been
recognized by the Oklahoma and California Commissions.

The local transportation may consist of haul by truck or wagon to
the site, and, if so, is a present element to be computed, if not other-
wise provided for. In estimating cost of transportation, it is to be
assumed that all transportation facilities existing at the date of esti-
mate—except the property under consideration in case it is a trans-
portation property — are available.

{d) — Waste, Loss and Breakage, or Overplus Over Measurements. —
These are elements of either unit cost or of allowance in measurement
of quantities rather than of contingencies, for the reason that they vary
so greatly, from nothing at all on some materials to a very considerable
percentage on others. In this class would come allowances for sag in
wire or cable, waste in lumber, loss and breakage in fragile materials,
and all other allowances over net quantities which are necessary to in-


sure enough material to complete the work. In the case of some ma-
terials, quantities are derived by rules which give theoretical or geo-
metric quantities, though the actual quantities moved and paid for
may considerably overrun.

One very notable example of this is given in the Panama Canal
Keport for the year ended June 30th, 1912, which states that the
geometrical quantity in. the dredged channel of the Panama Canal,
from deep water on the Atlantic side to a short distance beyond the
shore line, was to that date 10 169 000 cu. yd., though the actual
quantity taken out of the channel amounted to 22 886 000 cu. yd., an
excess of 125 per cent. The great excess of dredging in this case over
the geometrical quantity was due to the quantity of material washed
into the channel by waves and currents.

There are certain standard weights of cast-iron water pipes, and
pipes of these weights are ordered. As the pipe foundries cannot make
pipes of the exact weight, the full price per ton is paid for any ad-
ditional weight that there may be, up to a certain limit. The pipes
are not allowed to run much below the standard, because it is provided
that the thickness of the metal shall not be less than the prescribed
thickness at any place by more than a very limited amount. The
average actual weights, therefore, are more than the standard weights.

In valuing an earthen dam, the net volume in the embankment
is generally measured or computed from the records, and it might be
correct to use this net volume if the unit prices to be ' used were
derived from the cost per cubic yard of other similar embankments.
If, however, the unit prices to be used were derived from measure-
ments of the quantity of material taken from borrow-pits for the
purpose of building the dam, a considerable allowance should be made
for the shrinkage of the material when placed in the embankment
and consolidated, and for the waste of material which almost inevitably
takes place in building a dam across a stream as the result of floods
and other causes. The waste, as a rule, is exceptionally large when a
dam is built by the hydraulic fill process.

It seems much better that judgment should be used in deter-
mining the actual quantities of material involved in a given construc-
tion than to make an allowance for such additional material as a

(e) — Direct Supervision. — Inspection. — It has been the custom in
many appraisals to treat as an overhead charge, under the account
"Engineering" all charges for Engineering, Inspection, and Super-
vision of work, and to base such charges on a general percentage of
the entire physical property estimate.

The Committee holds the opinion that, wherever it is possible to
do so, charges for direct supervision should attach to the different
units or groups, rather than to the property as a whole, and that all


such charges as can be localized to certain materials, units, or groups
should be treated as affecting the unit price, and should not be added
as a percentage. This would permit the charge for general engineer-
ing to be treated as an "Overhead Charge" and include only those
costs of general engineering, surveying, design, and supervision which
were applicable to the property as a whole, and not capable of
definite assignment to different groups of units or individual units
of property.

As examples of elements of cost properly assignable to units or
groups of units, the Committee cites the following cases:

The inspection cost on rail, water pipe, structural steel, and other
materials purchased is capable of separation and inclusion in the unit

The local engineering and inspection costs of a large building, a
dam, an underground conduit line, or other individual units or
groups of units may be capable of analysis and comparison with like
costs incurred in the construction of other like units, and a more
accurate estimate is likely to be secured than if the total engineering
charges be found as a percentage of the cost of the entire property,
based on the experience with similar properties.

Each valuation must of necessity be an independent work, and
each unit price should have such consideration as will insure that
it is applicable to the case in hand, and that all elements, of which
those above stated are only a part, have been taken into account.
When unit prices for different items in the schedule are made up
on the basis of the amount of labor involved, it must be remembered
that the labor costs are by no means covered by the sums included
for laborers on the pay-roll. There must be, in addition, proper
allowances for insurance, injuries, and damages, lost time of monthly
men, costs or losses due to interruption, or failure to co-ordinate the
work at all times, decreases in efficiency due to such conditions, the
cost of supervision, including accounting and timekeeping, and other
actual costs.

When unit prices are based on contractor's prices, most of the items
above mentioned would naturally be included by the contractor in
such prices or as extra work, for which payment must be made to the
contractor; but, wherever contract work is done, there is generally a
considerable additional cost to the company as the result of subse-
quent work by its own forces.

Illustrations of Actual Cost Affecting the Cost per Unit. — One
illustration which shows the extent of these items that have been
referred to, and the desirability of more detailed analysis of costs
than is frequently made, is that of an electric light and power prop-
erty in the Middle West, in a city of more than 400 000 population.


During a period of 2^ years, the company spent in construction
476 000, divided as follows:

Actual material entering into permanent construction . $6 808 000
Actual labor costs in building permanent work 1 515 000

Total cost of labor and material in structures

capable of scheduling $8 323 000

A.— Construction tools $110 000

B. — Store and supply expense 288 000

C. — Purchasing expense 39 000

D. — Injuries and damages 48 000

E. — Engineering, general 122 000

F. — Engineering, direct supervision 546 000 1153 000

$9 476 000

This does not take into account costs for interest, taxes, organization,
or other costs which were incurred in the nature of actual overhead

The aggregate cost, over and above those of bare labor and mate-
rial, was 12.1% of the total, or 13.8% of the items capable of inventory.

It was found that full analysis of these costs gave very different
percentages for different classes of construction, as. for example:

Tool expense was approximately 2% of labor and material on over-
head and underground construction, and 1% on buildings and

Stores and supplies expense, or the cost of handling, warehousing,
and material yard, varied even more widely, as follows, being based
on total material in each account:

Buildings 2.78%

Steam plant equipment 0.74%

Electric plant equipment 5.96%

Lines overhead and underground 7.35%

Other property 2.45%

Direct supervision, or those engineering and inspection charges
which wore capable of exact assignment, bore the following relation
to total labor and material charges to each account:

Buildings 8.46%

Steam and electric plant equipment.... 7.36%

Lines overhead and underground 4.60%

Other property 1.37%

These varying percentages are a strong argument in favor of more
careful cost keeping on construction work and of more careful analysis


of existing records of actual cost, when a valuation of property is

„ Illustrations of Earthwork Unit Costs. — There are various classes
of construction, such as earthwork, masonry, concrete, and other
like construction, in which labor largely enters, where the conditions
of construction may vary widely, and where there are available many
contract prices, published or unpublished. The danger of basing a
series of unit prices on contract prices, without analysis of further
actual costs, may be shown by the discussion of one of these, and
earthwork appears to offer a number of excellent examples.

In building a railroad or. other property involving large quantities
of earthwork, it is usual to pay for material, according to classification,
as earth, loose rock, solid rock, etc. It is also usual to pay for over-
haul beyond a certain specified haul limit.

In making estimates of cost of reproduction, unless all original
notes, profiles, and estimates are available, it is a difficult and expen-
sive matter to secure even a close approximation of actual yardage,
and practically impossible to determine classification of loose rock,
hardpan, or other material the character of which changes due to the
effect of weather, or the identity of which may be concealed by growth
of vegetation or otherwise. It is equally difficult to determine the
quantity of overhaul or the amount of work which may have been
done as a necessary incident to the grading of the embankment, such
as changing of stream channels or roads.

All these things were encountered in the building of the property,
and must in some way be accounted for in its reproduction. In some
cases the unit price on unclassified earth in place is the fairest figure,
and capable of better support than would be the attempt to classify
or to separate overhaul.

In addition to these elements of cost which may be encountered
in all earthwork, the railroad company encounters the expense to
the company of transportation of men and contractor's plant, and
the cost of work done after the contractor leaves the job.

The adopted unit price should be such a figure as will cover all
expense, of every nature whatsoever, as is directly chargeable to grad-
ing the measurable embankment. Three or four examples will illus-
trate the possibility of grave error in failure to analyze unit costs
sufficiently :

Example 1. — A high-class interurban railroad built in Michigan
during 1912-13-14.—

Total material moved 924 630 cu. yd.

Contract price of overhaul 0.01 per yd. station.

Hardpan, if encountered, to be paid by agreement.


In this case the company actually paid on its final estimate for:

774 387 cu. yd. earth at $0.28 $216 828.36

1860 " " loose rock " 0.40 744.00

300 " " solid rock " 1.00 300.00

776 547 Total classified material at prices

named in the contract $217 872.36

In addition to which, there was allowed:
148 083 cu. yd. "Hardpan" and "Wet Earth" at 38,

40, and 50 cents 60 912.94

924 630 Total cu. yd., unclassified, at $0.30, average. $278 785.30

It thus appears that the "rock" is a negligible item, but that
the average cost of the unclassified material exceeded the contract
price of earth by 2 cents per cubic yard.

In addition, the company paid:

For overhaul $29 237.51

For force account on work after contractors left... 13 988.42

Total $43 255.93

Thus making the total direct cost of the work $322 011.23, or an
average of $0,348 per cu. yd.

Practically all of this excess was for elements of cost which could
not be determined from either a careful reinspection of the property
or from most accurate measurement, and, if reflected in the repro-
duction estimate at all, must appear in the unit price.

Example 2. — Among the exhibits introduced in the Minnesota rate
case was one by A. H. Hogeland, M. Am. Soc. C. E., Chief Engineer,
Great Northern Eailway, entitled "Hogeland, 2d Amended Exhibit 4",
which gives in detail the cost of grading on lines built between 1898
and 1910 aggregating 1 553.2 miles. This exhibit shows the contract
prices for each class of material, and also the total charges to grading.
The exhibit shows the details for each line built during those years.

A very brief abstract of this exhibit shows:

Earth. . . 28 693 523 cu. yd. average contract price 19.3 cents $5 545 074.31
Hardpan 9 260 156 " " " " " 34.7 " 3 211 293.53


rock.. 3115 093 " " " " " 40.7 " 1270 666.25


rock.. 6 209 349 " " " " " 94.7 " 5 876 720.69

47 278 121 " " average of all. . 33.6 cents $15 903 754.78


Brought forward $15 903 754.78

yg, It ia to be noted that, over and above these contract
prices, the company paid for overhaul, force account
items, transportation, and other such charges, the total
sum of 4 928 725.25

Total cost $20 832 410.03

Average cost per cubic yard 44.11 cents

Cost in excess of contract price 10.5 cents

These figures are affected by the large yardage of rock, which pre-
sumably could be largely determined in a valuation. In order that rock
be eliminated, an analysis of this exhibit was made and 300.29 miles
having no rock were tabulated separately.

On this mileage the total yardage moved was 3 293 244 cu. yd.

Total contract price, $506 869, an average of 15.4 cents per cu. yd.

Total Company cost over contract, $264 727, or 8 cents per cu. yd.

A total cost of $771 596, or 23 cents per cu. yd.

It is here shown that actual cost per unit exceeded contract price
per unit by 52.22 per cent.

Example 3. — A steam railroad built in Wisconsin in 1912 and 1913 :

Total contract price for grading $1 259 567.81


Contractors extra bills $42 830.86

Railway Company labor 8 413.74

Train service 215.03

Rental of equipment 522.79

Miscellaneous material and labor.... 2 028.98
Transportation of contractors men... 46 736.96
Transportation of equipment 73 483.36 174 267.72

Percentage of extras to contract price 13.84 per cent.

In this contract there were the following quantities:

Earth excavation, 4 097 881 cu. yd. at 20 and 22 cents. . . $868 314.66

236 300" " classified material.. 137 589.38

4 334 181 cu. yd., at average 23.2 cents $1 005 904.04
Added to this was overhaul 253 663.77

$1 259 567.81

Thus the overhaul added to the cost 6 cents per cu. yd., or 25 per

"Example 4. — In the construction of the Musconetcong tunnel of
the Lehigh Valley Railroad, the contract cost, based on unit prices,


a list of which is given in Drinker's 'Tunneling' (page 1085), was
$883 938, whereas the actual final cost, including the payment of con-
tractors' claims not settled until four years after the completion of the
tunnel, was $1 282 149, an increase of nearly 50% over the cost as
reflected in the commonly accepted unit prices."

These few examples indicate clearly the danger of adopting arbi-
trarily, as a unit price for reproduction cost, some figure based on a
coiTtract price or an average of contract prices, without most thorough
study of the results of actual similar work. Many other illustrations
as to the effect of the several elements of cost on the final price of
various classes of work into which labor largely enters, and in which
the hazards of construction are great, might be cited. Enough has
been said, however, in the opinion of the Committee, to emphasize
the statement that in each case conditions must be examined to find
out what elements of cost do enter into the unit price, and that each
unit price must be supported, if supported at all, by actual costs of
similar work under similar conditions.

Unit costs found by general inquiry of supplying companies, engi-
neers, contractors, and others are rarely reliable because of the lack
of full knowledge on the part of those furnishing the information con-
cerning the character of the work and the specifications and conditions
under which it is to be done, and because of the fact that they are not
likely to make the detailed, intelligent study which might justify sub-
sequent expression of opinion. Even competitive bids on detailed
specifications may not furnish reliable figures. Recent actual final
construction costs on the plant being estimated or on similar prop-
erties, located under similar conditions, furnish the safest criteria.
All such data should be interpreted in the light of sound judgment and
wide construction experience.

An examination of the tabulated bids of any large contract letting
will disclose the unreliability of individual opinion. It must be borne
in mind that such bids are based on identical plans and specifications
and conditions. It is not at all unusual to find variations in bids on
individual items varying from 15 to 40% to as much as 100% or more.
In some cases the opinions of contractors, as expressed by their bids,
may represent a proper figure based on wide experience and full knowl-
edge of local conditions, but other bids may be in no wise repre-
sentative, and be radically high or low.

To conclude the discussion of unit prices, the Committee is of the
opinion that a rational sequence of construction should be followed
in the reproduction of a property ; and that rational assumptions should
be made as to the manner of doing the different parts of the work,
whether by the forces of the company or by contract. Unit prices,
based where possible on the actual cost of doing similar work, in a


similar manner, under similar circumstances, should be determined by
persons of experience and sound judgment.

If, on the basis of the assumed conditions, piecemeal construction
is required, and if the most appropriate way of executing such piece-
meal construction is by doing the work directly by the company's
forces within the assumed periods of construction and development,
then the cost of work done in this way should be used in determining
the reproduction cost. If the assumed conditions indicate that other
portions of the work could be done more economically by contract,
then the unit prices should have as their basis the price which a con-
tractor would charge for doing such work, but to this must be added
all other elements of cost or expense to the owner which can be
separately allocated.

The unit prices should be based on the normal average cost of
work for a considerable period — say, 5 or 10 years — in order to give
stability to the valuation, so that it may be used for a subsequent
term of years. In the case of items which are steadily increasing
or decreasing in value, the prices adopted should be normal for the
time of the valuation.

Full consideration should be given to the time allowed for con-
struction, and due weight given to climatic conditions and the effect
of weather on the cost of the work.

The Committee emphasizes the necessity for full information from
trustworthy sources as to the actual complete cost of doing similar
work under similar circumstances. The greater the amount of such
data, making possible the adoption of complete and correct unit costs,
the smaller the amoimit of overhead percentages which are necessary
for providing for proper total construction costs.

The Cost of Eeproducing Land Holdings.

For the reproduction cost of land holdings the Committee will
base its arguments and conclusions on the law as expressed by selected
and apparently authoritative Court decisions, and on those results of
attempts of public or private purchasers to acquire properties for
public purposes which are of common knowledge to engineers and
others having to do with such matters. Examples of some of these
results, fortifying the arguments and conclusions of the Committee,
will be given.

Lands not All of Similar Character, — Classes of Land. — Not all
lands acquired by public service corporations fall under one class ; there
are radical differences, and it is essential that a proper classification

Online LibraryAmerican Society of Civil EngineersTransactions of the American Society of Civil Engineers (Volume 81) → online text (page 122 of 167)