Fisher Maritime's Fairleads

'Lessons Learned' Strategies & Ideas for the Marine Industry


Identifying All the Contract Deliverables

In ship conversion and construction contracts, the owner expects the shipyard/contractor to provide numerous “deliverables” in addition to the ship itself. Experience with “difficult” ship construction and conversion contracts has revealed that ship owners often do not adequately address all the expected deliverables, leading to conflicts or disputes with the shipyards/contractors.
Examples of such deliverables may include:
  • detail or working drawings
  • engineering analyses/reports
  • test agendas and reports
  • megger readings
  • condition-found reports
  • updated schedules
  • equipment selection reports
  • regulatory approvals
  • classification approvals
  • tonnage certificates
  • regulatory certifications
  • tank tables
  • trim and stability reports
  • equipment and/or system manuals
  • placards
  • as-built drawings
Owners have to appreciate that a shipyard incurs considerable costs to achieve the production of all those non-hardware deliverables. To avoid disputes, the necessity of the shipyard’s development of those deliverables has to be clearly addressed in the bid package. Absent clear requirements for those deliverables in the bid package, bidding shipyards may not create adequate budgetary allowance for their development. The owner then risks getting an incomplete or insufficient deliverable, or none at all in particular categories.
Both ship owners and shipyards should consider reviews of draft contracts (agreements, specifications, plans) by third parties for completeness and consistency as well as to cut ambiguities. One of the items that should be focused upon is the identification of all the deliverables.


Unusual Contracting Brings Risks to Owners and Builders

The most costly lessons learned by both ship owners and shipyards occur when they venture into territory that is new to them or when they try to accelerate traditional activities Significant cost and schedule overruns are the predictable result of contracting decisions based on hopeful outcomes instead of basing them on careful analysis of capabilities, experience and risks. Examples of high-risk situations include:
  • Owners purchasing their first large vessel after owning smaller vessels of the same type.
  • Organizations undertaking major conversions, such as a VLCC to an FPSO.
  • Shipyards accepting fast-track construction or conversion projects predicated on significant owner-provided engineering.  They often find that the owner’s delayed engineering output impacts the shipyard’s engineering and production schedules.
  • Subcontractors taking on assignments larger than prior jobs also face considerable risk of overruns.
  • Design firms accepting assignments from a new category of client incur risks of misunderstandings, under-budgeting and time extensions.
  • Shipyards subcontracting engineering to design consultancies must be sure those designers have the shipyard interests in mind (least cost solutions consistent with all contract requirements). Shipyards must also ensure that the designers do not inadvertently improve the vessel’s design details at the shipyard’s expense.
The two highest risk project types are 1) major conversions and 2) projects relying on a lot of owner-furnished equipment (“OFE”). These risks exist in conversions because the starting point for conversions is often ill-defined, although the end-point of the conversion is well-defined. The highest risks that arise in conjunction with OFE are those of system integration involving products from many vendors.
To minimize project and contract risks, organizations should invest in industry-specific contract management (“CM”) training for all their involved personnel, not just the front-line staff that interacts with the other parties. Shipyard estimators and purchasers benefit just as much from the CM training as do the project managers. The ship owner’s technical staff need to understand the impacts of their role in on-going projects just as much as the owner’s representative. No profession in the marine industry is exempt from the need for continuing industry-specific project and contract management training.


The Second Translation of Technical Requirements

Technical specifications are an everyday fact of life in the repair, conversion and construction of ships and offshore equipment. The ultimate purpose of specifications is to describe what the customer wants the contractor to accomplish.  In vessel repair, unless there is a specification, the contractor cannot know what the customer really wants, aside from the generic vessel repair specification, “Its broke. Fix it.” For new vessels, the generic specification is equally vague: “Build it to last forever and easy to operate.” While these generic specifications may sound extreme, they present to a potential contractor the same problem that many other, more detailed specifications inadvertently create as well.

The contractor is expected to “translate” specifications and drawings into three dimensional, tangible hardware. After all, that is what is ultimately needed – a repaired or converted or new vessel that is tangible hardware. But what is often overlooked is that customers also want from the contractor another form of translation of the specifications. Namely, the customer wants a fixed price for the described work in advance. This means that the contractor has to accomplish this other form of translation before commencing the tangible work. This is the quantitative translation.

In order to be meaningful, a fixed price for the contract work, agreed upon in advance, has to include all the anticipated work. The contractor has to be able to reliably translate the specifications into estimated quantities of man-hours, material costs, subcontractor costs and schedule days.  Thus there is burden on the writers of specifications to provide to contractors sufficient information to enable a quantitative translation, so a firm, fixed price can be negotiated and relied upon.

Examples of specifications that cannot be reasonably translated into quantities include these. None of these examples are fictitious, but we’ll keep the identities confidential to prevent embarrassment.

  • Vee and weld eroded bottom plate welds as considered necessary” [tug boat].
  • “Repair or replace seals and bolts as needed” [work boat].
  • “Furnish and install suitable lighting in all passenger-occupied spaces” [crew boat].
  • “All work necessary to accomplish the specified work shall be deemed specified whether specified or not” [fisheries vessel].

How many man-hours and how much material costs should the contractor have included in its budget for each of those items? Obviously, a contractor cannot know whether it is 10, 100 or 1000 man-hours or any other approximate number.

The specification writer has to keep in mind that when asking for a fixed price bid, the contractor has to first translate the specifications into reasonably close quantitative estimates of man-hours, material costs, subcontractor costs and schedule days.   Often, specification writers are too familiar with their own specifications to see that they cannot be reasonably translated into those forms of quantities.   Another major form of ambiguity that is often overlooked by persons drafting specifications is the identification of the standards by which the workmanship and/or materials will be judged acceptable.

Accordingly, specification writers should reexamine their writings, before sending them out in a bid package, to ensure that the specs can be quantitatively translated.  Third-party quality assurance and risk-minimization reviews of major specifications are also merited for conversions and newbuildings to ensure that all the ambiguities and vagueness are identified and corrected before the bid package is released to potential contractors.


Contracting Strategies Central to Success of Project

Well-designed ships often become poorly executed shipbuilding projects due to lack of a comprehensive contracting strategy. The contracting strategy should take into account the resource limitations of potential shipbuilders and a realistic view of the on-going capabilities of the ship owner. Some exemplar considerations when forming your own strategy include the following:

  • The reality of many recent shipbuilding and ship conversion projects is that the shipbuilders do not have substantial in-house engineering and design capabilities. When faced with such obligations, they subcontract them out as best they can manage. This means that there are multiple layers of contract between the ship owner’s staff and the team that is translating the owner’s design concepts. Thus, whenever trade-offs occur during design development, whether large or small, they are made out of sight of the owner.
  • Ship owners may often promise to provide detailed information pertaining to owner-provided equipment, but fail to do so on a timely basis. This may lead to project delays and extra costs.
  • Contractual overruns of both schedule and costs have been seen to occur when shipyards want the structural design completed rapidly to enable physical work to commence (and thus cash flow) while the design team has not yet finished the remainder of the design. This leads to unnecessary design compromises later when it is realized (for example) that the structural layout and design should have taken into account the distributive systems. An example of this led to a very costly change to increase deck heights in a deckhouse after physical construction had already begun — all because the structural design was completed before the distributive systems were considered. By the time the problem was identified, it was too late to redesign the structure to take those systems into account. Another example involved reconfiguring a deck and relocating a davit when it was realized that the rescue boat could not be launched from the intended location. This occurred because the structural design was finalized before equipment selection.
  • In many newbuilding or conversion projects, commercial shipbuilding contracts can no longer simply give the shipyard the responsibility to complete the design from the contract plans and specifications. The risks of unwarranted design compromises, construction delays and extra costs cannot be tolerated by either the owner or the shipyard. Thus, a comprehensive contracting strategy needs to be developed for both the design and construction, especially for relatively-unique vessel designs and for nearly all conversion projects.

The key observation is this: the success of a project is just as dependent on good contracting strategy as it is on good ship design. One without the other inevitably leads to a compromised outcome.