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'Lessons Learned' Strategies & Ideas for the Marine Industry

Owner’s Pre-Contract Responsibilities

When a vessel owner contracts with a shipyard for vessel conversion or new construction, there is an underlying legally binding representation being made by the owner. Namely, the owner is representing that, in the technical package prepared by the owner, all the elements and components of the package are completely compatible with one another. That is, the shipyard can rely on the representation that all the bits and pieces of the owner’s technical package are consistent with all the other bits and pieces.

When it is discovered that such implied representation has not been fully achieved, the cost and schedule consequences of correcting that incompatibility are the owner’s responsibility. The following examples illustrate this principle.

HVAC and Deck Heights

A government agency was having a RO-RO vessel converted to a 400-person training ship, requiring (among many other alterations) a forward extension of the deckhouse over the weather deck using the same 2.6m deck heights as in the existing deckhouse. The shipyard’s design of the HVAC system had to achieve compliance with the performance specification within the owner’s technical package. The HVAC system design was completed after substantial completion of the new deckhouse structure. However, it was determined that the duct design satisfying the performance specification could not fit within the 2.6m deck height. The ducts were too large to penetrate through the deck beams, and if placed below the beams, interfered with adequate headroom for crew and passengers. The shipyard stated that the necessary fix was to increase the deck height of the first deck by 30 cm.

Initially the owner’s team alleged that, because the shipyard was responsible for the HVAC design, it was also responsible for the incompatibility of the duct sizes with the owner’s deckhouse structural design. After the shipyard challenged the owner to identify a smaller HVAC duct design that satisfied the performance requirement, the owner relented. The owner paid for the deckhouse extension to be raised sufficient to incorporate the minimum size ducts that satisfied the owner’s performance requirements. The fundamental problem was that the deck heights and the HVAC performance requirements, both part of the owner’s technical package, were incompatible with one another.

Replacement Fan Foundations

A cruise ship owner’s technical package required a shipyard to replace 14 fans in the ventilation system with new ones having the same brand name and model number as previously installed. When the shipyard sought to purchase the fans from the manufacturer, it was learned that the former model fan was no longer produced; a different model would have to be purchased. The owner’s team consented. When the replacement fans arrived, it was discovered that the foundations required for the replacement fans were not the same as the existing ones. The shipyard claimed that the owner had to pay for the extra work to modify the fan foundations because it could not have known, when bidding the job, that such work would be required.

Initially, the owner’s team argued that the shipyard should have checked with the fan manufacturer prior to bidding the job. In response, the shipyard pointed out that the owner’s team had the opportunity to do so before completing the technical package. The owner’s team conceded. The fundamental problem was that the owner’s technical package required the impossible; it assumed that certain fans would be available, but in fact were no longer being manufactured.

Lessons Learned

These examples, as well as many others that could be cited, serve to remind all participants in ship construction and conversion projects that significant professional efforts have to be completed before an owner’s technical package is presented to bidding shipyards. Ship owner’s representatives must remain mindful to ensure, during preparation of the owner’s technical package for ship construction and conversion, that each element of information and requirements within the package is wholly compatible with all the others.

LESSON LEARNED #39: Buying Used Vessels Creates Certain Risks

Lesson Learned

A prospective megayacht owner sought to purchase a used government tugboat for conversion to his private yacht. He engaged a yacht design firm and shipyard to accomplish the conversion. The government agency presented a different sister vessel for inspection, promising that the one that would be actually sold was substantially the same vessel. The owner accepted that representation, taking delivery of the previously uninspected vessel.  The designer and shipyard concurred that the actually-delivered tug was unsuitable for the conversion, even though the one shown would have been suitable. (The vessels started only as sister ships, not identical twins, and had not been modified identically during their lifetime.) At the last minute, the owner had to alter his order from one of conversion to one of newbuilding.

Lesson learned: purchasers of used vessels should be suspicious because sellers of used vessels never tell the full story, even when the seller is a government agency.


Good Shipbuilding Practice (“GSP”) – Part 2

Last month we introduced the concept that Good Shipbuilding Practice (“GSP”) imparts responsibilities on both the shipbuilder and the Purchaser.  This month, we continue with exploring this concept, beginning with the origination of GSP.

Accordingly, it can be appreciated that GSP begins during the formation of the shipbuilding contract. It starts with the Purchaser developing a well-defined objective of the shipbuilding process, through the use of specifications and plans if it is not a standard design vessel offered by the shipbuilder. Typically, not all details of the vessel that have to be developed for its construction are described by either design or performance specifications and drawings at the time of contract formation; those details have to be developed after the contract is executed. During contract formation the Purchaser has the opportunity to decide which party will be responsible to develop those details. Then, after contract execution, both parties must keep in mind the assignment of rights and responsibilities regarding the development of those details. Again, as described in “Ship Design and Construction” at §9.3.2, Non-Included Features:

The Contract Specifications and Contract Plans define the unique features of the vessel and other non-unique features that are not already addressed by the appropriate regulatory requirements and classification rules. …[N]umerous details which are not already defined in the Contract Specifications and Contract Plans will have to be developed by the Contractor after the contract is executed. … [T]he authority to make those additional decisions as to the form of the numerous details was passed from the Purchaser to the Contractor. The Purchaser’s naval architects and marine engineers who are developing the Contract Specifications and Contract Plans must keep in mind that they will have yielded to the Contractor the right to make those decisions. Thus, if the exact form of any lesser details is important to the Purchaser, the Contract Specifications and Contract Plans should describe them to an appropriate level of detail. If such details are not already incorporated into the Contract Specifications and Contract Plans, generally the Purchaser will have to accept the Contractor’s solution to those details. The Purchaser’s staff should bear in mind that it is most likely the Contractor will be seeking minimum-cost solutions to those technical details when working under a fixed-price contract.

Thus, it is realized that the Purchaser has to decide in advance what features and details are to be defined and described by the contract documents, giving the Contractor little room for variation from them, and which features and details can be determined by the Contractor. Once the contract is executed, the Purchaser cannot unilaterally revoke the authority given the Contractor to make decisions regarding those otherwise ill-defined features and details.

Also, of course, when making those decisions, the Purchaser has keep in mind that, under fixed-price contracts, the Contractor will inevitably seek minimum-cost solutions that are otherwise consistent with the contractual requirements. This means that in developing a fixed-price bid for the vessel, the content of the Purchaser-developed specifications and plans have to be amenable to being quantitatively translated into the expected cost components that the successful bidder will encounter. This has also been addressed in “Ship Design and Construction” at § 9.3.6, Defining the Complete Scope of Work:

A Purchaser should not rely on requirements such as first class marine practice or best marine practice or other ill-defined phrases in order to ensure quality of material selection or quality of workmanship. Highly subjective requirements, phrased as those, are not conducive to quantitative estimating, and thus cannot be included in the price of the shipbuilding contract.

It should be remembered that, in soliciting bids or requesting pricing from a potential Contractor, the Purchaser is seeking quantities; quantities of production hours, material costs, subcontractor costs, facility and equipment costs, and schedule days. Accordingly, all aspects of the Contract Specifications and Contract Plans must be suitable for translation into such quantities. Broad concepts … are not directly translatable into quantification prior to accomplishment of most of the remaining design development, and thus do not constitute well-defined specifications.

Accordingly, it is appreciated that for the fixed price and fixed schedule of the contract, the Purchaser is entitled to receive only that which was quantitatively translatable from the specifications and plans. When the specifications require the Contractor to comply with certain standards or incorporate features required by contractually identified standards or regulations, the Contractor has to factor in the costs to achieve compliance with those contractual requirements, as well. But for the fixed price and fixed schedule, the Purchaser is not entitled to receive the benefits of features, standards, methods or performance capabilities that are not unambiguously defined in the contract documents.

Nevertheless, in numerous contractual situations the Contractor has been directed by the Owner’s representatives to provide features that were not quantitatively knowable at the time of bidding. Also, Contractors are often directed to utilize the Owner’s more-expensive interpretations of contractual requirements than the lesser-cost solutions that the Contractor incorporated into its bid for items that were ambiguously defined in the bid package.

In summary, the accomplishment of Good Shipbuilding Practice creates responsibilities for both the Owner and the Contractor. Implementation of GSP starts before the contract is executed, when the Owner’s team commences defining the technical requirements of the ship being constructed, converted or repaired. The Owner’s team’s GSP-based obligations continue through the contract execution, requiring the Owner to respond promptly to questions, to resolving ambiguities, and to recognizing that the contract establishes both obligations and rights of both parties.

Although these Owner GSP-based obligations do not serve to reduce the Contractor’s GSP-based obligations, the Owner’s representatives have to remain mindful that the persons who prepared the technical requirements for the Owner ceded certain detail design development rights and equipment selection rights to the Contractor, for which minimum-cost solutions are an expectable goal of the Contractor. The costs and/or schedule impacts of such Owner-directed variations from those Contractor-selected solutions are a proper basis for contractual modification.

LESSON LEARNED #38: Undertake Emergency Evacuations Without Delay

Lesson Learned

A shipyard was undertaking the replacement of insulation in reefer spaces on a vessel. After removing the stainless steel liners, the old insulation was ripped out. New insulation was being glued into place, using brushes for the glue that was sitting in an open bucket in the reefer space. A residential-type extension light was in use by the installers. No special ventilation of the glue fumes had been arranged. Upon being cautioned by the owner’s representative to immediately replace the extension light with a non-explosive, double-globe one, and to commence ventilation of the space, the contractor personnel were allowed to continue their work without attending to the light and ventilation issues. The next day, another reminder was matched by continuing indifference to the hazard. On the third day, an explosion in the reefer space caused significant burns to the workers.

In settlement of litigation, the ship owner as well as the shipyard had to compensate the injured parties. Unfortunately, this is not merely an issue of extra costs and schedule delays. This is a matter of personal injury or possibly death. Concerns by the owner’s staff about not interfering with the work or procedures of contractor personnel is, in those circumstances, irrelevant.

Lesson learned: personnel safety comes before concerns about contractual interference; when an explosive atmosphere is detected and imminent risk of explosion or fire is identified, everyone must immediately evacuate the entire vessel until appropriate measures have been taken by trained hazard-reaction personnel, regardless of the impact on project schedule.



Good Shipbuilding Practice (“GSP”) – Part 1

Many contracts for projects being executed in a shipyard include the requirement that all engineering services provided, all materials supplied and all workmanship accomplished are consistent with “Good Shipbuilding Practice” or “First Class Marine Practice” or similar lofty-sounding principles. Owner’s representatives often use that contractual requirement as a basis for pushing the shipyard to enhance the quality of workmanship, to modify initially-offered design details, or to purchase alternative (i.e., more costly) items of equipment or material. Having analyzed numerous contract disputes over the past 44 years, it has become obvious that many Shipowner’s representatives consider that obligation to be one-sided; that is, they perceive that it creates obligations for the Contractor but not for the Owner. That one-sided perception is, in fact, quite erroneous, and often is the underlying cause of disputes that arise during contract execution.

In order to appreciate the extent to which both parties to a contract are bound by the tenets of Good Shipbuilding Practice, a clear understanding of that principle is necessary. As seen below, this analysis is entirely consistent with published treatises on the subject. The several major elements of Good Shipbuilding Practice are these:

  • Purchaser’s pre-bid development of a comprehensive and internally consistent definition of the ship and bid package, including a clear definition as to where the Owner’s design definition rights end and the Contractor’s obligation to detail the design for production begins.
  • Contractor’s quantitative translation of the bid package into a bid sufficient to accomplish necessary engineering, purchasing, production and testing as unambiguously defined by the bid package.
  • Purchaser’s timely approvals of drawings and equipment selections made by Contractor (if required by the contract) and timely inspections based on the contractually-defined standards of acceptability.
  • Joint identification and cooperative resolution of problems arising from vendors, suppliers, errors, omissions and inconsistencies.
  • Contractor’s fulfillment of all contractually required objectives, consistent with the identified, well-defined standards.
  • Purchaser’s acceptance of the vessel or its modifications as contractually defined (not as wished-for by its representatives).

In multiple instances, Owner’s representatives have made demands of Contractors under the implicit admonition that the Contractor had to fulfill those demands in order to comply with the Contractor’s obligation to use Good Shipbuilding Practice. Often, compliance with those demands has resulted in the Contractor incurring extra costs and/or schedule impacts that the Contractor claimed to be the responsibility of the Owner. Concurrently, however, the Owner’s team has ignored its own obligations under the requirements of Good Shipbuilding Practice (“GSP”).

In order to appreciate why the costs and schedule impacts of fulfilling the Owner’s GSP-based demands are legitimate extras to the contract, the relevant industry custom and practice is reviewed by reference to the marine industry’s primary text on ship design and construction, Ship Design and Construction, published by the Society of Naval Architects and Marine Engineers.

The use of GSP is a procedural goal of nearly every shipbuilding contract. Since its use is one of the goals of shipbuilding contracts that are executed by two parties—the Purchaser and the Contractor—it is appreciated that both parties have expectations of benefits arising from its use. Also, however, when the elements of GSP are examined, it is realized that the development of GSP is dependent on a contribution by both parties through achievement or fulfillment of their respective obligations and responsibilities. That is, the achievement of GSP is not solely the responsibility of only one of the parties. This fundamental premise is stated in “Ship Design and Construction” at § 9.1.6, Purpose of Shipbuilding Contracts.

A shipyard and a shipowner enter into a contract for mutually-beneficial reasons; namely, the shipowner wishes to acquire a ship which is suitable for the shipowner’s needs, and the shipyard wishes to construct, for payment, a ship within its shipbuilding capabilities in order to earn a return on its investment in shipbuilding facilities…More formally, the purpose of a shipbuilding contract is to define the entirety of the temporary relationship between the Contractor and the Purchaser. Essentially, the contract in its entirety establishes the rights, responsibilities, rules of conduct and assignment of risks between the two parties pertaining to all foreseeable technical, cost and schedule matters, questions or disputes that may arise between the parties.

Next month we’ll continue with the beginnings of GPS during the formation of the shipbuilding contract and examine how obligations are responsibilities for both parties develop.

LESSON LEARNED #37: Geometry of Replacement Parts

Lesson Learned

A vessel owner arranged to have the heads of several ballast tank vents replaced with new ones. The owner’s team specified that the heads were to be the type to bolt onto an 8″ vent line. Upon arrival of the vent heads, it was found that the top elements of the heads were several inches larger in diameter than the original ones, although they mated to the 8″ line. In order to accommodate the larger vent heads, a number of nearby handrails had to be modified, requiring hot work when no hot work would otherwise have been needed. This resulted in considerable extra cost to the owner.

Lesson learned: the owner’s team should confirm in advance the suitability of all aspects of the geometry of replacement parts, not just one or two key measurements.



What Does “Approval” Mean

Many technical specifications for ship repair and construction require that the shipyard submit to the ship owner reports, equipment selection choices, or drawings showing proposed installations, for which the shipyard is to receive the owner’s approval before proceeding. The owner’s approval is usually construed to mean that the shipyard can proceed as suggested by the shipyard. However, there are other ‘approvals’ involved in the ship repair or construction processes, usually from classification and/or regulatory authorities, as well as possibly from technical specialists. When ’approval’ is used for multiple purposes, there may be confusion as to what it means. At the end of this article, a recommendation is made; but first, here is some discussion about the use of ‘approval.’

When a regulatory authority approves a drawing, or equipment installation, it means only that there is no immediately apparent inconsistency with the applicable regulations. It is not a guarantee of safety or seaworthiness. Further, it is not a guarantee that a regulatory violation or inconsistency will not be found later upon closer review. Regulatory approvals do not substitute for approvals by any other party, and certainly not a contractually required approval from a ship owner.

When a drawing receives approval from classification, it is a representation that the contents and depictions communicated by the drawing reasonably comply with classification’s own interpretation of its own rules. Subject to further review by classification’s on-site surveyor, the incorporation into the vessel of the features conveyed by the drawing will be acceptable for issuance of a certificate of classification. When equipment selection or workmanship is approved by classification, it has the same significance stemming solely from classification’s own perspectives. Certainly these classification approvals do not carry or even imply approval by the ship owner, although obtaining classification approvals is a necessary part of the shipyard’s workscope.

When a coatings manufacturer’s technical representative approves the conditions for application of coatings, the approval serves only to activate the warranty given by the coating manufacturer. The same is true of technical representatives of equipment manufacturers: their approval of installation means only that the manufacturer’s warranty is activated—the equipment has been installed in a proper manner.

But a ship owner’s role in ship construction, conversion or repair is not as narrowly focused as are the roles of regulators, classification or manufacturer’s representatives. Typically, through the contract, the ship owner has required the contractor (shipyard) to obtain the approvals of representative of certain other organizations as previously described. Inasmuch as the ship owner is the party that has required the shipyard to obtain those approvals, a perception may have been created that a ship owner’s approval of a particular item is superior to, or in place of, the approval of one of the other organizations, such as classification, regulatory or manufacturers’ technical representatives.

Approvals of the Owner Do Not Substitute for Other Approvals Required by the Contract

That is, the approval of anything by a ship owner could easily (though improperly) be construed to mean that the owner considers the approval of the item to be in place of, or superior to, approvals by any other organization. It could be (and unfortunately has been) interpreted to substitute for approvals by other organizations. This is not the intent of owner’s approvals. The owner does not intend that its approvals are a substitute for any other approvals required by the contract.

Overall, then, it is realized that approvals are being obtained from the representatives of organizations that did not sign the contract with the shipyard, but whose approvals are a necessary part of the contract workscope. Thus, to avoid misunderstandings, the word approval should be associated only with those secondary organizations.

In order to avoid having any party improperly construe a ship owner’s approval to be in place of another organization’s approval, an alternate word is suggested: acceptance. That is, when (for example) the shipyard has to select an item of equipment, the specifications could state that it has to be ‘accepted’ by the ship owner. Similar word substitution of ‘acceptance’ for ‘approval’ could be made throughout the contract documents and specifications whenever it is originating with the ship owner. This word substitution eliminates the inadvertent substitution of actions by a ship owner for the actions of a secondary organization.

LESSON LEARNED #36: Two Owners Means Two Different Vessels

Lesson Learned

A shipyard, constructing an excursion vessel for an owner, was approached by a second owner that wished to contract for a second of the same vessel. Using the same contract drawings and specifications, the shipyard priced the second vessel assuming the benefit of a production learning curve and that nearly all the engineering for the first vessel would be directly applicable to the second vessel. This proved to be an erroneous and costly assumption. In the process of reviewing the construction details and testing/trials agendas, none of which were contractually defined with specificity, the second owner’s representatives were far more demanding than those of the first owner. These greater demands resulted in significant rework, excess engineering hours and more extensive tests and trials.

Lesson learned: even if the same drawings and specifications are being used for two or more vessels, the shipyard should consider each vessel to be the first of a series when it is being constructed for a different owner.


Conflicting Categories of Drawings in Contracts

Contracts for ship construction or conversion typically contain a series of “Contract Plans” or “Contract Drawings” that are listed and identified as essential elements of the contract.  However, often there is a second list of drawings categorized as ‘Contract Guidance Plans,’ ‘Guidance Plans,’ ‘Reference Plans,’ ‘Information Plans’ or some comparable categorization. Unless the intended use and purpose of the second list is clarified, the identification of two sets of plans or drawings within the contract is a starting point for significant problems. Let’s look at the fundamentals of this situation.

Multiple Plans Indicates Different Rights, Responsibilities, and Obligations

If the rights and obligations of both parties were the same for both lists, they would have been consolidated into a single list of Contract Plans. The presence of two lists of plans in the contract signifies that the contracting parties have different rights, responsibilities and obligations for each list. The problems associated with that second list of plans usually start to develop because the contractor (shipyard) has a different interpretation of those rights and responsibilities for the second list than does the purchaser (ship owner). The contractor cannot know what was in the mind of the owner’s technical team when it developed and/or provided the second list of plans unless the intended use of those plans — and how that is different from use of the Contract Plans — has been communicated in the contract documents.

Upon assisting in the resolution of numerous problems arising from the inclusion of two lists of plans within the contract, many different intended uses—or limitations on their use—have been realized. Unfortunately, in many instances this has occurred only after disputes had arisen. There are many possible interpretations of the intended use of such second categories of ‘guidance’, reference’ or ‘information’ plans that are listed in the contract documents.  The wide variation of possible intended uses of that category of plans raises questions that should have been explicitly addressed during contract formation.

  1. Is the Contractor is expected to achieve full compliance with the Guidance Plans unless there is an interference between a component shown on the Contract Plans and one shown on the second category plans?
  2. Can the Contractor rely on the accuracy and/or completeness of those second-category plans and use them without alteration for the construction or conversion?
  3. Can the Contractor rely on those second category plans being entirely consistent with the Contract Plans and Contract Specifications?
  4. If used for a ship conversion or repair, can the Contractor rely on those second category plans being consistent with the actual arrangement and condition of the vessel?
  5. Does the Contractor have to receive permission from the Owner to vary from the second category plans?…and if so, is a formal Change Order necessary?
  6. If it is necessary to vary from the second category plans in order to remain consistent with the Contract Plans and Contract Specifications, which party has responsibility to analyze, understand and take responsibility for the operational consequences of the necessary variations?

Those are some, but not all of the possible interpretations of the intended use of second category plans that are listed in the contract documents. The wide variation of the intended use of second category plans raises questions that need to be addressed when the intended use is not explicitly stated. These problems are generally avoidable if the contract documents describe, in plain and simple words, how the Contractor is to use the plans in that second list, and how that usage is different from the use of the Contract Plans.

LESSON LEARNED #35: Confirm With Vendors Before Specifying

Lesson Learned

A vessel owner’s team set out to increase the refrigeration capacity of the vessel. Among other new components, this required the installation of several additional 250-amp breakers identical to ones already on the vessel. The owner’s staff read the part number for the existing breakers, and directed the shipyard to order additional breakers using that part number to ensure commonality. What arrived, however, were only the casings for the breakers, not fitted with the internals. A separate part number was need for the internals, or an alternate part number for the combination of the internals plus casing. A last-minute contract amendment and extra installation costs were incurred.

The lesson learned: the owner’s specification writers should confirm from the vendor that the identified part number is the appropriate one and that the product is currently being manufactured.