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1997 ROAD BUILDING RATES AWARD
1.
This is an arbitration under the Timber Harvesting Contract and Subcontract Regulation,
B.C. Reg. 22/96 (the “Regulation”) to determine road building rates for the 1997 calendar year for
road construction conducted by Hayes Forest Services Limited (hereinafter “Hayes”) in conjunction
with its logging operations at Naka Creek, near Campbell River, on Vancouver Island, and at
Roderick Island, on the mid-coast. Both logging shows are located within Tree Farm Licence 25,
held by Western Forest Products Limited (hereinafter “Western”). The 1997 logging rates for Naka
Creek and Roderick Island were addressed in my Award of May 6, 1999, in this proceeding.
Background to the Dispute
2.
Effective December 31, 1996, Hayes took assignments of two replaceable logging contracts
made between Frank Beban Logging Ltd. (hereinafter “Beban”) and Western. Under the first of
these, dated October 1, 1991, Beban had agreed to log timber, and construct logging roads at Naka
Creek (the “Naka Creek Agreement”). By the second agreement, dated September 1, 1993, Beban
agreed to conduct logging and road building operations for Western on Roderick Island (the
“Roderick Island Agreement”).
3.
As I stated in my Award of May 6, 1999, when Beban assigned its interest in the Naka Creek
Agreement and the Roderick Island Agreement to Hayes, Beban had outstanding disputes with
Western regarding both logging and road building rates. Particulars of the various matters in dispute
between Beban and Western, and subsequently between Hayes and Western, are set out in
paragraphs 4 through 8 of my Award of May 6, 1999. For present purposes, it is sufficient to note
that Hayes and Western did not negotiate road building rates for 1997 at either Naka Creek or
Roderick Island, nor, on the evidence adduced before me, did they reach any agreement, prior to the
commencement of road building, on the full extent of the 1997 road construction programs for Naka
Creek and Roderick Island.
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Positions of the Parties
4.
Hayes contends that I should set “global” road building rates for Naka Creek and Roderick
Island based on Hayes’ actual audited costs of the roads constructed in 1997 at Naka Creek and
Roderick Island, plus an allowance for profit and risk in the amount of 15 per cent. For Naka Creek,
Hayes claims audited road construction costs of $533,928.00 for 5,328 metres of “road built,” plus a
15 per cent allowance for profit and risk for a total claim of $613,998.72. That would produce a
global rate of $115.24 per metre. For Roderick Island, Hayes claims that the 1997 road building rate
should be based on its audited road construction costs of $2,477,537.00 for 16,004 metres of road
built, plus a 15 per cent allowance for profit and risk, for a total of $2,849,192.12, which produces a
rate of $178.03 per metre. In addition, Hayes claims interest calculated from July 1, 1997, the midpoint of the logging year, to the date of the Award, at the Toronto-Dominion Bank prime rate, plus
one per cent compounded monthly, or alternatively, Court Order interest.
5.
Western argues that the proper application of section 25 of the Regulation requires me to set
a two part rate for road building consisting of rates per lineal metre, and hourly rates. Counsel for
Western submits that the appropriate 1997 rates on a lineal metre basis are $101.00 per metre for
Naka Creek, and $97.00 per metre for Roderick Island. Western maintains that hourly equipment
rental rates should be set for certain portions of the road building work, which are typically
performed for an hourly rate, including end hauls, bridges, and some culverts, and that those hourly
rates should be set by reference to competitive rates canvassed in the evidence of its experts.
6.
The parties have agreed, by way of Exhibits “57” and “58,” that Hayes constructed 5,002
metres of road at Naka Creek in 1997 to which a lineal rate would apply, if I were to reject Hayes’
claim for a global rate based on its audited road construction costs, plus the 15 per cent allowance for
profit and risk, and that Hayes also constructed 13,304 metres at Roderick Island to which a lineal
rate would apply. Exhibits “57” and “58” also record the various pieces of equipment, and the
number of hours to which hourly equipment rental rates would apply, if I were to set hourly rates for
Naka Creek and Roderick Island respectively.
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7.
According to Hayes’ audited Statement of Income for its Roderick Island Road Building
Division for the year ended December 31, 1997 (Exhibit “9,” Tab 2) and Exhibit “58,” Hayes
received revenues for its 1997 road building work at Roderick Island totalling $2,188,785.00. Of
that sum, $2,036,968.77 was paid by Western, and $151,817.02 was paid by Beban for road
construction completed by Hayes following the assignment of Beban’s interest to Hayes. For Naka
Creek, the audited Statement of Income for Hayes’ Naka Creek Road Building Division for the year
ended December 31, 1997 (Exhibit “9,” Tab 4) and Exhibit “57,” show that Hayes received road
building revenues totalling $535,188.24, of which $504,116.43 was paid by Western, and $31,071.81
was paid by Beban. Counsel for Western, in addition to urging me to set both lineal metre and
hourly rates for Roderick Island and Naka Creek, also submits that if the rates I set produce an
amount which exceeds the monies paid by way of provisional rates to Hayes by Western for 1997
road building work, then Hayes should only be entitled to Court Order interest on the shortfall from
August 1, 1997, the mid-point of the 1997 road building year, to the date of the Award.
Section 25 of the Regulation and the Arbitrator’s Jurisdiction to Set Rates
8.
Section 25 (1) of the Regulation sets out an arbitrator’s mandate in a rate dispute:
“25.
9.
(1)
A replaceable contract must provide that if a rate dispute is referred to
arbitration, the arbitrator must determine the rate according to what a
licence holder and a contractor acting reasonably in similar
circumstances would agree is a rate that
(a)
is competitive by industry standards, and
(b)
would permit a contractor operating in a manner that
is reasonably efficient in the circumstances in terms of
costs and productivity to earn a reasonable profit.”
In Hayes Forest Services Limited v. Timberwest Forest Limited, Arbitrator Donald Munroe,
Q.C., in his Award of April 10, 1997, at pp. 3 - 4, observed:
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“Section 25(1) is mandatory. That is, I am obliged (“the arbitrator must”) to
determine a rate based on my appraisal of what a license holder and a contractor,
acting reasonably, would agree in the given circumstances to be an appropriate rate i.e., in the sense of being competitive by industry standards; and in the sense of
permitting the contractor to earn a reasonable profit (assuming reasonable efficiencies
and costs).”
10.
In an appeal from Arbitrator Munroe’s Award, Madam Justice Baker, in Hayes Forest
Services Limited and Forestland Industries Limited v. Timberwest Forest Limited, Supreme Court of
British Columbia, Vancouver Registry A971531 (December 2, 1998), stated at pp. 11 - 12, para. 25,
that s. 25 of the Regulation establishes an objective standard for the determination of rate disputes.
Commenting on Arbitrator Munroe’s Award, she said this:
“. . . But the language used in the award makes it clear that he understood that the
rate ultimately determined must fit within the objective parameters of s. 25, and that
while attempting to replicate the parties’ behaviour, the result must be objectively
capable of being tested against the standard imposed by the legislation, which is a
rate “according to what a licence holder and a contractor acting reasonably in similar
circumstances would agree . . . .”
11.
While section 25 (1) of the Regulation is mandatory, section 25 (2) provides an arbitrator
with discretion to take into consideration, in determining a rate under section 25 (1), the following
enumerated factors:
“25.
(2)
In determining a rate under subsection (1), an arbitrator may take into
consideration the following:
(a)
rates agreed to by the licence holder and contractor for
prior timber harvesting services;
(b)
the costs and productivity of the contractor for prior
timber harvesting services carried out by the
contractor;
(c)
relative to prior timber harvesting services, the impact
on costs and productivity likely to arise from:
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12.
(i)
changes in operating conditions including,
without limitation, changes to terrain, yarding
distances, hauling distances, volume of timber
per hectare;
(ii)
changes in the total amount of timber
processed;
(iii)
changes in the
configuration;
(iv)
changes in law if the changes affect costs or
productivity of the timber harvesting
operation;
(v)
changes in the underlying costs of timber
harvesting operation including, without
limitation, the cost of labour and the impact of
inflation on wages, fuel, parts and supplies;
required
equipment
(d)
the costs in the logging industry for each phase or
component of a similar timber harvesting operation;
(e)
the rates in the logging industry for similar timber
harvesting operations;
(f)
any other data or criteria that the arbitrator considers
relevant in ascertaining the rate that a licence holder
and a contractor acting reasonably in similar
circumstances would agree to.”
I am required to determine road building rates for the 1997 calendar year based upon what a
licence holder and a contractor acting reasonably in similar circumstances would agree are rates
which are competitive by industry standards, and would permit a reasonably efficient contractor to
earn a reasonable profit.
Two Part Rate v. Global Rate
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13.
I accept the submission of Mr. Rice, on behalf of Western, that it is necessary to set both
lineal and hourly rates in this case, rather than a single global rate for each show. Mr. Donald Hayes
testified there are certain types of road building work which are paid on an hourly basis, and that the
parties to a road building contract usually agree to a schedule of hourly rates for that work. Mr. Jim
Mitchell, RPF, an expert called by Western to provide his opinion on road building rates at Naka
Creek and Roderick Island, gave evidence that one of the four common methods of compensation for
logging road construction was by way of hourly rates. Furthermore, Exhibits “57” and “58” show
that Western paid Hayes a provisional rate of $90.00 per metre for 5,002 metres of road constructed
at Naka Creek, and $120.00 per metre for 13,304 metres of road constructed at Roderick Island.
Exhibits “57” and “58” also record the hourly rates paid by Western, on a provisional basis, for
various pieces of road building equipment, and the total number of hours for which Western paid
those rates for each piece of equipment. Mr. Mitchell states, in his report (Exhibit “23”), that
Western paid Hayes on an hourly equipment rate for end haul and road reconstruction at Naka Creek,
and for end hauls and bridge construction at Roderick Island. Thus, the practice of the parties
supports a two part rate.
14.
Furthermore, I also received evidence that Western paid Hayes’ predecessor, Beban, for road
building at Naka Creek and Roderick Island on the basis of a lineal rate, and hourly equipment rental
rates. Exhibit “6,” Tab 4 is a letter dated March 17, 1995, from Western to Beban, which sets a rate
of $75.00 per metre effective June 15, 1994, for road constructed at Naka Creek, and also contains a
table of all found equipment rental rates effective January 1, 1995, for both Naka Creek and
Roderick Island. I also received evidence that Western had entered into road building contracts with
other contractors operating within Tree Farm Licence 25 that contained rates per lineal metre, and all
found equipment rental rates for hourly work (Exhibits “50” and “54”).
15.
Taking into account all of this evidence, I conclude that a licence holder and a contractor
acting reasonably in similar circumstances would agree that in order to determine a rate which is
competitive by industry standards, it is necessary to set a two part rate for each of Roderick Island
and Naka Creek. I will determine rates per lineal metre, and hourly equipment rental rates, which the
parties may then apply to the roads constructed on a lineal metre basis, and to the units of work
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performed at an hourly rate, as set out in Exhibits “57” and “58”.
Rates Per Lineal Metre
Road Building Conditions at Roderick Island and Naka Creek
16.
There was a consensus among the expert witnesses that road construction conditions at
Roderick Island were more difficult than those encountered at Naka Creek. Mr. Dennis Bendickson,
RPF, an expert called by Hayes, whose evidence focused on logging and road building rates for 1995
and 1996, identified the heavy rainfall of the mid-coast, relatively poor construction materials, and
the fact that road building and logging operations were conducted at the same time with consequent
congestion and reduced productivity, as factors which tended to exert considerable upward pressure
on road building costs at Roderick Island. I heard evidence from Harold Hayes that congestion
caused by simultaneous road building and logging operations was also a problem in 1997. Mr.
Bendickson also identified end hauls as a major cost driver in his report (Exhibit “1”). However,
since end hauls were paid at an hourly rate, they should not affect the rate per lineal metre.
17.
Mr. Bendickson also reported that the topography at Naka Creek was somewhat more
favourable than Roderick, that better quality ballast material was available at Naka, and that road
work there was less dependent on drilling and blasting than at Roderick.
18.
Mr. Doug Ruffle, RPF, of Simons Reid Collins, testified that road construction conditions at
Naka Creek were average for the coast. At page 5 of his report (Exhibit “12”), he characterized the
road building chance at Roderick Island in these terms:
•
19.
road construction in the Mid-coast area is very difficult due to heavy rains,
unstable soils and large wet areas or swamps. Road usually need to be
ballasted or surfaced to a higher degree than in other areas along the Coast.
In addition, environmental concerns also affect road building practices to a
greater extent.
Similarly, Mr. Mitchell described the terrain at Naka Creek as “typically coastal Vancouver
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Island, with relatively broad valleys, moderate slopes, and for the most part stable terrain” (Exhibit
“23”). At Roderick Island, he described the terrain as consisting of broad stretches of gently sloping
wet muskeg between moderately sloping hills with rock very close to the surface. He also
recognized that Roderick Island’s isolation was a factor which increased costs there.
Evidence on Lineal Rates
20.
Hayes argued that the most compelling evidence that its proposed rates based upon its audited
road building costs, plus an allowance of 15 per cent for profit and risk, are competitive rates is the
evidence of Beban’s actual road building costs for 1995 and 1996 at Naka Creek and Roderick
Island, as supported by the expert opinion of Mr. Bendickson, regarding the reasonableness of those
costs. I am asked to infer that Beban’s actual costs, plus a reasonable allowance for profit and risk,
produce a reasonably competitive rate for the years 1995 and 1996, which would establish a
framework for me to assess the reasonableness and competitiveness of the global rates proposed by
Hayes for 1997.
21.
According to Mr. Gordon Hubley, the external accountant for Beban, the actual road
construction costs incurred by Beban, as shown in Exhibit “48, Exhibit “B” were as follows:
“
Naka Creek
1995
22.
road building
volume in metres
6,711
total cost paid per metre
93.75
Roderick Island
1996
1995
3,003
194.95
9,245
163.06
1996
21,289
163.04”
Adding a 15 per cent allowance for profit and risk would produce a Roderick Island road
building rate for 1995 and 1996 of $187.00. If one were to average Beban’s road building costs at
Naka Creek for 1995 and 1996, and add a 15 per cent allowance for profit and risk, the result would
be an average rate of $143.61 per metre.
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23.
In his report (Exhibit “1”), Mr. Bendickson estimated average road construction costs for
Roderick Island for 1995 and 1996 in the range of $140.00 per metre to $170.00 per metre. He also
estimated road construction rates for Naka Creek in both 1995 and 1996 in the range of $115,000.00
to $125,000.00 per kilometre, or $115.00 to $125.00 per metre.
24.
Because I have already concluded that it is necessary to set a rate per lineal metre, and an
hourly rate for each of Roderick Island and Naka Creek, I do not find that comparisons to inferred
global rates for Beban’s road building operations at Naka Creek and Roderick Island in 1995 and
1996 are of any real assistance. Furthermore, my task is to determine 1997 rates, which meet the
requirements of reasonableness and competitiveness mandated by section 25 of the Regulation. The
very substantial variation in Beban’s reported road building costs for Naka Creek as between 1995
and 1996 demonstrates the extent to which road building costs may vary from year to year depending
upon the particular conditions encountered. In addition, the road building experience of another
contractor in prior years may be of only limited utility in determining the 1997 rate. More
fundamentally, the approach urged by Hayes fails to break out the hourly work such as end hauls and
bridges, and, therefore, tends to drive up the rate per metre.
25.
Mr. Bendickson acknowledged in cross examination that he had not made any attempt to
determine his rates by reference to the Ministry of Forests’ Coast Appraisal Manual allowances for
road building costs, but conceded that, if he had done so, he suspected that road construction rates
indicated by the Coast Appraisal Manual would probably be around $100,000.00 per kilometre for
Roderick, and perhaps slightly less for Naka Creek. He testified that while the Coast Appraisal
Manual served as an indicator of costs, one could argue about its accuracy for any particular road
building operation. However, he made no attempt to determine the Coast Appraisal Manual costs for
road building at either Roderick or Naka, and to then adjust those indicated costs for the particular
conditions at Roderick Island or Naka Creek. For all of these reasons, I am unable to place very
much weight on Mr. Bendickson’s evidence regarding 1995 and 1996 road building rates as an
indicator of competitive rates for 1997.
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26.
Hayes also relied upon the evidence of Mr. Kevin Davie, RPF, who provided an opinion that
the actual audited road building costs of Hayes were reasonable, and supported Hayes’ proposed
1997 “global” road building rates of $115.24 per metre for Naka Creek, and $178.00 per metre for
Roderick Island.
27.
I have concluded that I cannot place the same reliance on Mr. Davie’s opinions respecting
road building rates as I did on his expert evidence concerning logging rates in my Award of May 6,
1999. Mr. Davie was asked to pronounce upon the reasonableness of the Hayes’ audited road
building costs, which are recorded in its financial statements (Exhibit “9,” Tabs 2 and 4), on a global
basis with no distinction between costs for work performed on a lineal basis, and costs incurred in
connection with work paid at an hourly rate. For Naka Creek, Mr. Davie made productivity
estimates based upon completed road, including culverts and end hauls, which were paid at hourly
rates, as well as road built and paid for at a lineal rate. Because road building work paid for at hourly
rates is time-intensive, I accept Western’s argument that productivity for work performed at a lineal
rate would likely be greater than that estimated by Mr. Davie, and the cost per lineal metre would
likely be less than his suggested rates. Furthermore, Mr. Davie conceded in cross examination that
he had made a number of errors in calculating the daily equipment costs for the Naka road side, and
when those corrections were made, his costs per metre (based on his “global” productivity rates)
ranged from $101.43 to $121.17 per metre.
28.
In some instances, Mr. Davie used current purchase prices for equipment, rather than those
which prevailed in 1997.
29.
For Roderick Island, Mr. Davie also made errors in his calculation of the daily equipment
costs for the road side equipment which, when corrected, resulted in a reduction of his estimated net
daily costs from $5,226.36 per day reported in Exhibit “2B,” p. 27, to $5,040.15.
30.
I also accept Mr. Rice’s submission that Mr. Davie failed to adequately explain how, having
estimated a rate of $158.36 per metre for Roderick Island, to which he incorrectly added an
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additional $7.97 for culverts, supervision, and some overheads, to arrive at a “base rate” of $166.33
per metre, he could then add a further $12.00 per metre to come up with a range from $166.00 to
$178.00 per metre.
31.
Finally, Mr. Davie acknowledged that his road building estimates were only estimates, and
were accurate within a range of anywhere from 5 per cent to 20 per cent.
32.
Mr. Willms, on behalf of Hayes, argues that no weight should be given to Mr. Ruffle’s report
(Exhibit “12”). Counsel for Hayes points out that Mr. Ruffle’s experience is in the appraisal of
standing timber, rather than bidding road construction contracts. Furthermore, Mr. Ruffle did not
conduct site inspections, or review engineering and road construction plans for Naka Creek and
Roderick Island.
33.
Mr. Ruffle’s report incorporated three approaches to the determination of road building rates.
He looked at rates which were competitive by industry standards from other coastal operations, he
developed construction rates derived from the Coastal Appraisal Manual, and he considered historic
rates at Roderick Island and Naka Creek back to 1993, either as negotiated between Western and
Beban, or as paid as provisional rates pursuant to section 26 of the Regulation. While I accept that
Mr. Ruffle’s analysis of competitive contract rates lacks any detailed comparison between the
operating conditions of the 33 company and contractor operations referred to in his report, and
tabulated in Exhibit “13,” and the conditions which prevailed at Naka Creek and Roderick Island in
1997, his opinion on competitive road construction rates is based on a survey of 20 per cent of the
logging road construction performed annually on the coast, and, therefore, provides some indication
of a coastal average rate per lineal metre.
34.
Mr. Ruffle was of the opinion, which I accept, and which, in essence, was consistent with the
evidence of both Mr. Bendickson and Mr. Mitchell, that road building conditions were close to the
coastal average at Naka Creek. In his view, the industry average rate of $98.00 per lineal metre
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should apply to Hayes’ operations at Naka Creek in 1997.
35.
For Roderick Island, Mr. Ruffle felt there should be a 25 per cent increase over the average
coastal rate to reflect its isolation, and the more difficult road construction conditions which
prevailed there. On Mr. Ruffle’s analysis of competitive road construction rates, that would produce
a 1997 road construction rate for Roderick Island of $122.15 per lineal metre.
36.
Mr. Ruffle adjusted the reported costs for company operations contained in his survey of 33
coastal road building operations by including an allowance of 10 per cent for profit and risk in order
to approximate contractor rates. He did not accept that 15 per cent was the industry standard for the
allowance for profit and risk.
37.
Subject to the conclusion I express later in these Reasons that the appropriate allowance for
profit and risk is 15 per cent, and bearing in mind that Mr. Ruffle’s opinion on competitive road
construction rates does not attempt to identify and analyse those coastal road building operations
among his sample of 33 shows which are most directly comparable to Naka Creek or Roderick Island
for 1997, it, nonetheless, in my view, given all of the variables involved in determining a rate,
provides at least a rough indication of competitive rates for Naka Creek and Roderick Island.
38.
Mr. Mitchell also provided his opinion, on behalf of Western, for both lineal and hourly rates.
He determined his lineal rates for Naka Creek and Roderick Island by reference to the Coast
Appraisal Manual. Mr. Mitchell reviewed Western’s engineering plans for each segment of road
constructed in 1997 at Naka Creek and Roderick Island. Because he had the advantage of inspecting
the roads after they were built, he was able to take into account the physical conditions affecting road
construction for each road segment at each location.
39.
The 1997 Coast Appraisal Manual draws on industry costing information from 1995 and
1996, and incorporates a trend factor to adjust labour and certain other costs in order to come up with
projected costs for 1997. Rather than using the 1997 Coast Appraisal Manual trend factor of 1.2, Mr.
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Mitchell, after receiving advice from the Ministry of Forests Revenue Branch that the 1997 projected
road costs used in the Coast Appraisal Manual were appreciably greater than those actually realized,
applied a trend factor of 1.1. I accept his evidence that it was appropriate to do so.
40.
In so far as road building conditions at Naka Creek were close to average conditions, and
because the Coast Appraisal Manual provides costs for average conditions, Mr. Mitchell’s
adjustments to determine a rate which reflected conditions at Naka Creek were relatively minor. He
included an allowance for camp accommodation for the crew, and reduced the rate indicated by the
Coast Appraisal Manual from $106.43 per lineal metre to $101.43 per lineal metre to reflect the fact
that Western supplied metal culverts to Hayes at its own cost. Mr. Mitchell also noted the Coast
Appraisal Manual determined road construction costs by using machine productivity and equipment
rental rates as outlined in the Province of British Columbia Equipment Rental Rate Guide (the “Blue
Book”). It provides for a 15 per cent allowance for profit and risk on equipment rental rates.
Ultimately, for Naka Creek, he concluded that the reasonable rate per lineal metre for 1997 road
construction at Naka Creek would be in the range of $96.00 to $106.00, with the mid-point at
$101.00 per lineal metre.
41.
I set out below a summary of the expert evidence on 1997 road building rates per lineal metre
for Naka Creek:
Davie
$101.00 to $121.00 (mid-point $111.00)
Ruffle
(competitive rate analysis)
$98.00
Mitchell
$96.00 to $106.00 (mid-point $101.00)
Determination of Lineal Rates
42.
In circumstances where there is no prior history of rates agreed by Western and Hayes for
road building at Naka Creek, or Roderick Island, and similarly, no pre-1997 history of Hayes’ costs
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and productivity there, I must rely, to a considerable extent, on the opinion evidence of the experts in
order to determine lineal rates which meet the requirements of section 25 of the Regulation. The
expert witnesses acknowledged the difficulties inherent in determining road building rates. As I
have previously noted, Mr. Davie stated that his rates were estimates only, and were accurate within
a range of 5 to 20 per cent. Mr. Mitchell, in his report (Exhibit “23”), states that road construction
costs are difficult to evaluate. I have previously expressed my reasons for concluding that I cannot
accept Mr. Davie’s evidence regarding lineal road building rates. For Naka Creek, I prefer Mr.
Mitchell’s evidence to that of Mr. Ruffle. Although both experts had the benefit of on site
inspections, only Mr. Mitchell determined the rate per lineal metre based upon a detailed review of
the design, construction, and conditions on the ground for each road segment. I am satisfied that
$101.00 represents a reasonable and competitive rate for road building performed at Naka Creek in
1997 on a lineal metre basis.
43.
Mr. Mitchell performed a similar analysis for 1997 road construction at Roderick Island in
order to come up with a rate per lineal metre there. Again, he separated out end haul and bridge
work, which were paid at hourly rates, and assessed road construction costs by reference to the 1997
Coast Appraisal Manual, and his own observations of road building conditions for each segment of
road constructed at Roderick Island. He deducted steel culvert costs, and adjusted the rates indicated
by the Coast Appraisal Manual by a 10 per cent increase to allow for crew transportation and
accommodation, and by a further 5 per cent to allow for costs associated with the isolation of
Roderick Island. He concluded that a reasonable rate per lineal metre for Roderick Island in 1997
would be in the range of $93.00 to $101.00, with the mid-point at $97.00 per lineal metre.
44.
Western places considerable reliance upon Exhibit “54,” its 1997 contract with Wade
Contracting Ltd. for road building at Yeo Island, in order to demonstrate that its proposed rate of
$97.00 per lineal metre for Roderick Island is both reasonable and competitive. Yeo Island is located
on the mid-coast, near Roderick Island. The 1997 Yeo Island road building contract stipulates a rate
of $95.00 per lineal metre.
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45.
Mr. Willms points out that, unlike the Roderick Island Agreement assigned by Beban to
Hayes, the 1997 Yeo Island road building contract provided for Western to bear the costs of
mobilization and demobilization if the contractor successfully completed the road building contract.
It also provided that any funds received from Forest Renewal B.C. for the training of First Nations
employees at Yeo Island would be credited to the contractor’s account. I have heard no evidence on
whether such funds were credited to the contractor.
46.
I did, however, receive evidence of Western’s 1997 road capitalization requirements for Yeo
Island (Exhibit “16”). That document contemplated the expenditure by Western of $993,600.00 for
the construction of 5.6 kilometres of road at Yeo Island, or $177,429.00 per kilometre. Of that sum,
$120,536.00 per kilometre was allocated for road construction, other than end hauls, bridges, and
major culverts, all of which were to be paid at hourly rates under the 1997 Yeo Island road building
contract. I conclude from my review of Exhibit “16” that Western had budgeted $120,536.00 per
kilometre to cover all of the costs associated with road construction performed at Yeo Island on a
lineal metre basis.
47.
As I have already found, the evidence before me indicates that road construction conditions at
Roderick Island, by virtue of heavy rainfall, unstable soils, and the presence of more rock, were more
difficult than at Naka Creek. In order to arrive at a rate per lineal metre which is reasonable and
competitive for Roderick Island, some upward adjustment must be made to Mr. Mitchell’s proposed
rate of $97.00 per lineal metre. He had calculated a rate of $101.00 per lineal metre for Naka Creek,
a location with road building conditions close to the coastal average. On all of the evidence before
me, including Mr. Ruffle’s opinion as to the adjustment necessary to take into account the more
challenging conditions at Roderick Island, I have concluded that an upward adjustment of 25 per cent
to the Naka Creek 1997 rate per lineal metre is appropriate. That would produce a rate per lineal
metre for Roderick Island of $126.25. While this rate is substantially in excess of the $95.00 per
lineal metre stipulated in the 1997 Yeo Island road building contract, it is within the range of the
amount actually budgeted by Western for all work performed on a lineal metre basis at Yeo Island in
1997, which I accept, together with Mr. Ruffle’s opinion on competitive road construction contract
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rates, as providing some evidence that a rate for Roderick Island of $126.25 per lineal metre would
constitute a competitive rate.
Reasonable Efficiency
48.
In my Award of May 6, 1999, on 1997 logging rates, I concluded that, overall, Hayes was
reasonably efficient in its logging operations at Naka and Roderick in 1997, but went on to find that
it was more likely than not that inadequate supervision in some instances affected Hayes’
productivity. With respect to road building, Mr. Trevor Boniface, Western’s Regional Manager
responsible for Naka Creek in 1997, gave evidence and documented in his diary (Exhibit “34”)
various instances of inadequate supervision of road construction, complaints that some of the road
was too narrow, or inadequately surfaced, that ditches were too shallow, and that remedial work was
not promptly performed. None of these complaints were reduced to writing and communicated to
Hayes.
49.
Mr. Lamb, Western’s Area Manager responsible for Roderick Island in 1997, also testified
concerning his perceptions of inadequate supervision by Hayes of road building at Roderick Island.
Furthermore, Hayes’ supervisors at Roderick, according to Mr. Lamb, confessed that they had little
prior experience or knowledge of road building. Mr. Lamb also described problems relating to the
location and placement of culverts.
50.
Western’s General Manager, Mr. Bernie Zimmermann, described his observations at
Roderick Island, including the construction by Hayes of one road off its designated centre line, which
necessitated the reconstruction of that road, and some additional work to rehabilitate the trespass
area. Mr. Zimmermann was also highly critical of Hayes’ supervision of its road construction crews
at Roderick Island.
51.
I conclude that the reconstruction of the road initially built in trespass, off the centre line,
must have involved some increased cost to Hayes at Roderick Island, and that inadequate supervision
of the road construction crews, particularly at Roderick Island, would tend to reduce productivity,
Page 17
and likely lead to some increase in costs over those which would be experienced by a reasonably
efficient road building operator. The fact that there were inefficiencies which would tend to reduce
productivity and increase costs at Roderick Island is another factor I take into account in declining to
accept Mr. Davie’s opinion as to reasonable rates per lineal metre at Roderick Island.
Conclusion on Rates per Lineal Metre
52.
At the end of the day, I conclude that a licensee and a contractor acting reasonably in similar
circumstances would agree that 1997 rates of $101.00 per lineal metre for Naka Creek, and $126.25
per lineal metre for Roderick Island are rates which are competitive by industry standards, and which
would permit a reasonably efficient operator to earn a reasonable profit.
Hourly Equipment Rental Rates
53.
Mr. Mitchell filed a report (Exhibit “50”) setting out his opinions on 1997 hourly equipment
rental rates for Naka Creek and Roderick Island. Hayes responded with a report from Mr. Davie,
which critiqued Mr. Mitchell’s work (Exhibit “55”). Mr. Davie’s own opinions on hourly equipment
rental rates are found in his original report (Exhibit “2B”).
54.
Ultimately, Hayes urged me to set hourly rates based upon the Blue Book base rates adjusted
upward to take into account such factors as travel time, overtime premiums, transportation, and room
and board costs.
55.
Western argued that I ought to set hourly rates for Roderick Island by reference to the hourly
equipment rental rates contained in Exhibit “54,” Western’s 1997 Yeo Island road building contract,
and that for Naka Creek, I should rely primarily upon the competitive contract rates referred to in
Appendix IV to Mr. Mitchell’s report (Exhibit “50”).
56.
I am not inclined to set hourly equipment rental rates derived solely from Blue Book rates.
As Arbitrator Wallace observed at paragraphs 9.3 through 9.10 of his Award in Pacific Forest
Page 18
Products Limited v. Hayes Forest Services Limited, the Blue Book serves as a guide for determining
short term equipment rental rates for highway, and B.C. Hydro construction projects. I accept Mr.
Mitchell’s evidence that where equipment is rented for longer periods, then the rental rate will tend
to be lower than the Blue Book rates (Exhibit “23” - 1997 Naka Creek road building opinion, p. 13,
and 1997 Roderick Island road building opinion, p. 15).
57.
Mr. Mitchell calculated hourly equipment rental rates for each of the types of machine
actually used by Hayes for road building at Naka Creek and Roderick Island in 1997. While he did
not have the exact age of each piece of equipment, he did estimate the age and condition of each
machine based upon his assessment of the machinery that a reasonably efficient operator would
deploy for road building at Naka Creek and Roderick Island. He then obtained purchase prices for
each piece of equipment from equipment dealers, and made reasonable assumptions regarding the
estimated life of the equipment, and its residual value. He calculated ownership costs for each
machine, used an 8 per cent interest rate to calculate hourly interest costs, and 1 per cent of the 1997
equipment value to calculate insurance costs.
58.
In determining his hourly rates, Mr. Mitchell used actual labour costs derived from the 1997 -
2000 IWA Master Agreement (Exhibit “56”), and took into account the annual adjustment to wage
rates, which took effect on June 15, 1997. He also used Hayes’ actual payroll loading factor of 42
per cent. He allowed 7 per cent for overhead costs, which was consistent with Hayes’ own financial
records, and an allowance for profit and risk of 12.5 per cent on all costs, inclusive of depreciation.
59.
Next, Mr. Mitchell determined a base hourly equipment rental rate for each type of machine
used at Naka Creek and Roderick Island to which he then made certain adjustments to come up with
estimated hourly rates.
60.
Mr. Davie did not quarrel with Mr. Mitchell’s methodology, but maintained that there were
errors in its application. I find that many of Mr. Davie’s criticisms were misplaced. For example, in
his opinion, an upward adjustment of 3.5 per cent was necessary to Mr. Mitchell’s calculations to
Page 19
allow for the cost of statutory holidays. Mr. Davie did not appreciate costs associated with statutory
holidays were already included in the 42 per cent payroll loading factor.
Mr. Davie also
misunderstood the basis upon which Mr. Mitchell determined residual value, and the expected
working life of the machines used. His criticism that Mr. Mitchell underestimated ownership costs
of these machines was, therefore, in error.
61.
Having said that, I do accept that some adjustments are necessary to Mr. Mitchell’s estimated
hourly equipment rental rates.
62.
Mr. Mitchell incorporated, in Exhibit “50,” at Tables 1, 2, and 3, alternative calculations of
hourly equipment rental rates for Naka Creek depending upon whether or not one included or
excluded room and board allowance for the road building crew, and Sunday time. Similarly, Tables
4 and 5 of Exhibit “50” set out alternative all found hourly equipment rental rates for Roderick
Island. In Table 4, room and board and air fares are included, while those items are both excluded
from Table 5.
63.
Mr. Mitchell opined that at Naka Creek there should be no allowance for Sunday time since
given that show’s proximity to Campbell River, a reasonably efficient operator would operate a five
day week, with week-ends off, and would have his crews commute, rather than stay at camp. In fact,
Hayes operated at Naka Creek on a fourteen days on, seven days off work schedule. Under
Supplement No. 8 to the 1997 - 2000 IWA Master Agreement (Exhibit “56”), that schedule could
only be altered by the company with the Union’s agreement. Mr. Donald Hayes testified that no such
variance was negotiated with the Union. Given the fourteen and seven work schedule, a seven per
cent allowance for Sunday time is clearly appropriate.
64.
Western also submitted that Hayes had included all costs associated with its camps, including
accommodation and room and board, in its logging rates, and that to make an allowance for room
and board for the road building crews as part of the 1997 hourly road building rates would result in
double compensation. I am not persuaded on my review of Exhibit “9,” Tabs 1 through 4 (Hayes’
Page 20
Audited Statements of Income of its 1997 logging and road building operations), or Exhibit “3”
(Hayes’ Costing Statements for the year ended December 31, 1997, for its Logging and Road
Building Divisions at Naka Creek and Roderick Island, that costs for room and board for the road
building crew, as distinct from camp capitalization costs, are all accounted for in Hayes’ logging
costs. Furthermore, I note that Mr. Mitchell, in calculating his rates per lineal metre for Naka Creek,
included an allowance for room and board in that part of his road building rate. I, therefore, find that
the allowance for room and board should be included in both Naka Creek and Roderick Island hourly
rates, and that the hourly rate for Roderick Island should also include an allowance for the cost of air
fares paid by Hayes for the transportation of its road building crews.
65.
Finally, having previously determined, in my Award of May 6, 1999, that on the evidence
before me in these proceedings, a 15 per cent allowance for profit and risk on costs inclusive of
depreciation is the industry standard, I find that it is necessary to adjust Mr. Mitchell’s estimated
hourly rates to reflect that allowance.
66.
Mr. Mitchell’s estimated hourly equipment rates, modified to incorporate a 7 per cent
adjustment for Sunday work, the allowance for room and board, and a 15 per cent allowance for
profit and risk, are set out in Exhibit “52” for Naka Creek, and Exhibit “53” for Roderick Island. I
set out below the hourly equipment rental rates for the particular pieces of equipment for which I
have been asked to determine equipment rates at Naka Creek as derived from Exhibit “52,” together
with my own calculation for the hourly rental rate for the M-32 tank drill with helper, incorporating
the same adjustments to Mr. Mitchell’s estimated rate for Sunday time, the allowance for room and
board, and a 15 per cent allowance for profit and risk:
SPECIFIC TO NAKA
EQUIPMENT
BASE
(A)
15 %
PROFIT
TRAVEL
9.0 HRS
O.T.
PREMIUM
ROOM
&
BOARD
SUNDAY
WORK
@7%
SUBTOTAL
(B)
7%
OVERHEAD +
15 % PROFIT
TOTAL FOR
NAKA
(A)+(B)+(C)
M-32 Tank
Drill
135.53
3.64
1.81
6.11
2.39
13.95
3.22
152.70
Page 21
(without
helper)
M-32 Tank Drill
(with helper)
171.35
6.35
3.62
12.22
3.12
25.31
5.84
202.50
JD 690 ELC
121.41
3.64
1.81
6.11
2.44
14.00
3.23
138.64
25 TON TRUCK
95.25
2.71
1.81
6.11
2.16
12.79
2.94
110.98
67.
For the 1997 all found hourly equipment rental rates for Roderick Island, I employ the same
methodology. However, it is necessary to make a further correction to the rates set out in Exhibit
“53” to account for the proper allowance for air fares, which is $2.31 per hour, rather than the $3.19
originally employed by Mr. Mitchell. The results are as follows:
1997 ALL FOUND EQUIPMENT RENTAL RATES - BASED UPON MR. MITCHELL’S
ADJUSTED RATES AS SET OUT IN EXHIBIT “53” ARE AS FOLLOWS
SPECIFIC TO RODERICK
EQUIPMENT
BASE
(A)
15 %
PROFIT
TRAVEL
9.0 HRS
O.T.
PREMIUM
ROOM
&
BOARD
FARES
SUNDAY
PREMIUM
@7%
SUBTOTAL
(B)
7 % OVERHEAD
+ 15 % PROFIT
(c)
TOTAL
FOR
RODERICK
(A)+(B)+
(C)
D-8
123.20
5.46
1.81
6.67
2.31
2.31
18.56
4.28
146.04
CAT 235
175.38
5.46
1.81
6.67
2.31
2.44
18.69
4.31
198.38
14G GRADER
104.36
1.81
6.67
2.31
2.20
12.99
2.99
120.34
980F F.E.L.
143.09
5.46
1.81
6.67
2.31
2.20
18.45
4.25
165.79
966F F.E.L.
118.55
5.46
1.81
6.67
2.31
2.20
18.45
4.25
141.25
M-32 Tank Drill
(without
helper)
135.53
5.46
1.81
6.67
2.31
2.39
18.64
4.29
158.46
M-32 Tank
Drill
(with helper)
171.35
9.07
3.62
13.34
4.62
3.12
33.77
7.78
212.90
JD 690 ELC
121.41
5.46
1.81
6.67
2.31
2.44
18.69
4.31
144.41
25 Ton
95.25
3.61
1.81
6.67
2.31
2.16
16.56
3.76
115.57
Kenworth
Truck
76.29
3.61
1.81
6.67
2.31
2.16
16.56
3.76
96.61
68.
It is necessary to consider whether the hourly rates set out above were rates which a licence
holder and a contractor acting reasonably in circumstances similar to those at Naka Creek and
Page 22
Roderick Island in 1997 would agree are competitive by industry standards. Western submits that
the appropriate comparison for Naka Creek is the contract described in Appendix IV to Mr.
Mitchell’s report as VIM No. 9, an operation on Vancouver Island with no camp or room and board
costs. Mr. Mitchell compared his rates, as set out in Exhibit “50,” Table 2 (which excluded room
and board and week-end overtime), and an allowance for profit and risk of 12.5 per cent, rather than
15 per cent, with the VIM No. 9 rates. The results are set out at Exhibit “50,” Table 6, page 23. He
concluded that, to the extent that the equipment in question was comparable, his rates were slightly
higher than the rates paid by Western at VIM No. 9. Mr. Mitchell suspected that the difference was
attributable to Western paying rates at VIM No. 9 for equipment which was older than that used by
Mr. Mitchell for calculating his rates for Naka Creek. I have found that it is appropriate to include
an allowance for room and board for the road building crews in the hourly equipment rates for Naka
Creek. The comparison to VIM No. 9 is, therefore, of only limited utility. Moreover, I am satisfied
that when one takes into account the necessary adjustment for costs for room and board, and the age
and condition of the particular equipment upon which Mr. Mitchell based his estimates, the all found
hourly equipment rental rates set out in paragraph 66 are both reasonable and competitive.
69.
For Roderick, Western urges a comparison to the hourly equipment rates it paid under its
1997 Yeo Island road building contract. Very few of the pieces of equipment at Yeo Island were the
same types of machine as those used by Hayes at Roderick Island in 1997. For those machines, the
1997 Yeo Island hourly rates, were:
D8 CAT
$110.00
Articulated truck $85.00
70.
At Yeo Island, the contractor used a PR 66-600 rock drill for which it was paid a rate of
$140.00. I heard no evidence on the point of whether that drill was comparable to the M-32 tank
drills used by Hayes. However, I do note that the rates paid by Western to Wade Contracting Ltd. at
Yeo Island for each of these pieces of equipment were less than the provisional rates paid to Hayes as
set out in Exhibit “58”. Furthermore, I have no evidence concerning the age or condition of the
Page 23
equipment used at Yeo Island. I find it unlikely that a reasonable contractor of the size and
sophistication of Hayes, and with Hayes’ particular equipment complement, would agree that hourly
rates which, in some cases, are significantly lower than the 1997 provisional rates for Roderick
Island, are rates which it would accept as being competitive by industry standards. I make that
observation fully appreciating that, ultimately, the rate must be one agreed to by both a licensee and a
contractor. I also take into account Mr. Mitchell’s evidence that hourly equipment rental rates have
traditionally been determined in the forest industry by what the market will bear.
71.
In fact, when Mr. Mitchell compared his estimated hourly rates for Roderick Island
(including room and board and air fares as set out in Exhibit “50,” Table 4) with the rate information
provided to him by Western, he did not limit his comparison to Yeo Island, but considered all of the
hourly rates set out in contracts VIM Nos. 2 through 7, and reproduced in Appendix IV to his report.
The result of that comparison was that, apart from the two F.E.L.s for which there is no comparison,
Mr. Mitchell’s estimated rates for Roderick Island were between 0 per cent and 10 per cent higher
than those paid by Western under the contracts included in his sample. Of course, the hourly rates
which I have set out in paragraph 67 are slightly higher than those contained in Mr. Mitchell’s Table
4 because, although they incorporate a reduced allowance for air fare, they are also calculated with a
15 per cent allowance for profit and risk, rather than Mr. Mitchell’s 12.5 per cent. Given the
isolation of Roderick Island, the conditions which obtained there in 1997, and Mr. Mitchell’s
reasonable assumptions regarding the age and condition of the machinery in question, I am
persuaded that, on balance, the hourly equipment rates set out in paragraph 67 above, are rates which
a licence holder and a contractor acting reasonably in similar circumstances would agree are
competitive by industry standards, and would permit a reasonably efficient operator to earn a
reasonable profit.
1997 Road Building Rates Award for Naka Creek and Roderick Island
72.
The 1997 road building rates per lineal metre, which I award are $101.00 per lineal metre for
Naka Creek, and $126.25 per lineal metre for Roderick Island. The hourly equipment rental rates
which I award for Naka Creek and Roderick Island respectively are those set out in the right-hand
Page 24
column of the tables contained in paragraphs 66 and 67 of this Award.
73.
I trust that the parties will be able to promptly determine the amount payable by Western to
Hayes after deduction of the various 1997 provisional rates previously paid by Western.
Interest
74.
Under section 6 of the Regulation and section 28 of the Commercial Arbitration Act,
R.S.B.C. 1996, c. 55, I have the jurisdiction to award interest. I have decided that an award of
interest at Court Order Interest Act rates is appropriate in this case. Accordingly, I would direct that
interest be calculated at Court Order Interest Act rates from August 1, 1997, the approximate midpoint of Hayes’ 1997 road building operations at Naka Creek and Roderick Island.
Costs
75.
As requested by both counsel, I will hear submissions on costs with respect to both the 1997
Logging Rates Award, and the Road Building Rates Award at a time convenient to counsel.
It is so awarded.
DATED at the City of Victoria, in the Province of British Columbia, this 5th day of June,
1999.
Page 25
Paul J. Pearlman, Q.C.
Arbitrator