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'Lessons Learned' Strategies & Ideas for the Marine Industry


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.