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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.

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.

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.

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.

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.

Floating Drydock Module Replacement

Fisher Maritime assisted a shipyard in the resolution of a dispute over the value of repairs to their floating drydock which was severely damaged while lifting a vessel. The damage to the drydock was found to have been the result of lack of compliance with the dock pumping plan; the ship was not damaged.  Due to limits on a loss-of-use insurance policy, the shipyard’s survival was dependent on the drydock not being out of service for an extended period. Upon assessing the extent of damage to the floating drydock, the shipyard immediately arranged for and managed repairs by wholesale replacement of modules of the floating drydock. This was commenced before reaching an agreement with the underwriters as to the amount to be reimbursed by the Hull and Machinery insurance policy.

The shipyard’s method of repair seemed extreme to the underwriter but, in the end, was demonstrated by Fisher Maritime to have been technically-superior and far more economical than the underwriter’s suggested method. The full extent of the damage to the drydock was not known when the underwriters initially developed a cut -and-patch repair specification based largely on an external visual inspection only.

The anticipated cost of repair of the initially identified damage under this method already approached half the value of the policy.  However, there was a high probability that the drydock was damaged to a greater extent than visually noted at the outset, thereby making it beyond economical repair with the underwriter’s proposed cut-and-patch method. It was likely that there would be considerable growth work and the dry dock would be declared a constructive total loss sometime before completion of the proposed repair. This would leave the shipyard without a drydock for an uncertain amount of time. Instead the shipyard took action to obtain a more timely, successful repair.

Using less-expensive replacement modules obtained from an oversees shipyard having low steel work costs. the drydock was repaired for a cost below the total constructive loss threshold but above the underwriter’s initial estimate for a patchwork repair.  Those total costs were lower even though they included transportation of the entire floating drydock across the ocean on a heavy lift ship for replacement of the structural modules.

The shipyard and underwriter had disagreed as to the fair value of the repairs.  Without adequate reimbursement being offered, the shipyard sued the underwriter. The law firm representing the shipyard, being familiar with Fisher Maritime’s capabilities and successes from previous assignments, asked it to provide expert assistance. Fisher Maritime developed an analysis of the shortcomings in the underwriter’s repair specification and the associated repair estimate. The Fisher Maritime report then assessed the reasonableness and subsequent cost-effectiveness, as well as shorter schedule, of the shipyard’s repair method.  Following presentation of the Fisher Maritime analysis, the matter was resolved before trial to the satisfaction of the shipyard.

$340 Million Award-With Our Help

In two separate but concurrent contracts, a national oil company contracted with a shipyard in the same country to convert a supertanker into an FPSO and to convert a drilling rig into an offshore production platform.  The shipyard experienced significant liquidity problems and consequential delays, primarily due to underbidding, but also due to currency risks and local inflation.

To keep the conversions moving forward, the oil company pumped cash and management resources into the shipyard to ensure the work was completed.  When it became obvious that the budgets would be far exceeded, the shipyard’s surety was advised that the purchaser would look to the surety for repayment of the extra-contractual funds; but the surety refused to take action.  After the completion of the two conversion projects, with over $300 million of extra costs in dispute, the matter went to US federal court because the surety was an American entity.

When Fisher Maritime was engaged, three experts, previously engaged by the attorneys, had already produced their reports.  One was an experienced shipyard manager; the second was a naval architect experienced in the design of offshore production equipment and vessels; while the third was a forensic accountant who identified the extra-contractual costs for the completion of the conversions. While each of the reports answered the important questions that were addressed to the experts; they were not collectively suitable for a court presentation in such a high value case; they need to be integrated for a comprehensive and more pointed presentation in court.

Fisher Maritime was asked to evaluate whether the proposed expert testimony clearly supported all aspects of the oil company’s case to obtain the proceeds of the performance bond issued by the surety.  Fisher Maritime reviewed the work of the three experts, determined how to strengthen the presentations, how to tie together the work of the three other experts to convey the overall picture without giving up salient details, and how to cross examine the surety’s experts to exploit the weaknesses of the other party’s case.

Fisher Maritime met with each of the experts, reviewed their findings and the data and correspondence that led them to their conclusions.  The result was that Fisher Maritime worked to integrate the work of the three experts to provide a readily understood presentation to show that the owner, by working with the shipyard, had proceeded diligently and economically to complete the conversions.  It was established that there was no other, more economic alternative available to the owner than to provide the substantial financial assistance to the shipyard that had been done by the owner.

Fisher Maritime prepared a presentation utilizing and integrating the findings of the previously engaged experts for the attorneys’ opening statement. We also provided extensive lists of questions to be used in the cross examination of the sureties’ expert witnesses. The result was a court award of $340 million in favor of our client.

This was the second time that Fisher Maritime had been central to the successful outcome of a litigated matter valued at over $300 million, in addition to the many lesser matters in which Fisher Maritime has brought success to its clients’ challenges.

The Impacts of Customer Inspectors on Shipbuilders

A shipyard had contracted to construct a naval vessel with the requirement that the shipyard provide facilities for a certain number of naval inspectors. Subsequent to the start of the project, the naval procurement staff (i.e., the customer) asked the contractor to provide a proposed contract modification to provide facilities for a certain number of additional naval inspectors who would be present for the remainder of the project (more than doubling the number of inspectors). The customer anticipated that the proposed amendment would cover only the rental of the additional office facilities and associated support for those additional inspectors. However, realizing that there would be additional impacts due the presence of the greater number of naval inspectors, the contractor asked Fisher Maritime to prepare an analysis of the expected impacts arising from the greater presence of naval inspectors. The following is a greatly consolidated synopsis of the analysis and evaluation.

Additional Inspectors Would Have More Than “Minimal” Impact

Fisher Maritime determined that the contractor could not accept the customer’s assumption that there would be only minimal other impacts. It was noted that as the additional naval inspectors fulfilled their intended roles, they would be reviewing the contractor’s detail drawings to a far greater extent than originally planned; they would be inspecting work in progress to a far greater extent; they would express numerous and more-diverse opinions on many more aspects of contractor’s work (both engineering and production); and they would be questioning the adequacy of quality assurance and testing to a greater extent, as well.

The consequence of this would be that contractor personnel would have to respond to many more inquiries, defend many other decisions that were within the contractor’s realm of responsibility, revise many more drawings, possibly modify already-completed work to accommodate the preferences of the inspectors, and likely have to retest many functional capabilities to demonstrate compliance with alternate interpretations of the testing protocols.

In the process of converting the contract-level design to the final product, numerous detail decisions have to be made by the contractor. Through the contract’s drawing-review clause, the customer has the right to review those decisions before the design details are ‘translated’ into tangible results in the form of a component, piece or element of the vessel.

When naval inspectors review and challenge or question a detail decision that has been initially made by the contractor, the contractor often has to expend additional resources to allay the concerns, questions or challenges expressed by the inspector’s review. It is those additional resource expenditures, among others, that translate into extra costs incurred by the contractor due to the presence of additional naval inspectors.

Engineering Impacts:

The contractor does not wish to merely ignore the inquiries of the customer’s inspectors, since that attitude may start deterioration of the contractual relationship, which should instead be one of mutual cooperation. Accordingly, when the inspection staff questions why certain detail decisions have been proposed by the contractor, or when the inspectors wish to have the contractor consider an alternative solution, the contractor has to investigate, analyze, consider and respond.  All of this effort by the contractor consumes professional man-hours in both engineering and project management. Allowance in the contractor’s budget and schedule for an appropriate number of professional man-hours was included for the initially nominated number of naval inspectors. Now, however, with additional inspectors the impact would be greater in both cost and schedule.

It was realized that the additional naval inspectors would generate inquiries that require a significant input from contractor personnel. Some of the responses may require less than one man-hour of the contractor’s efforts; some may require several man-days of effort; but most of them likely would require a major portion of a full man-day. It was assessed that, on average, there would be an additional five contractor professional hours needed for each eight additional naval inspector hours, to investigate, analyze,
consider and respond. That is, for each eight additional naval inspectors the shipbuilder would have to plan for the equivalent of five more full time persons on the engineering and project management staff.

Production Impacts:

In addition to those engineering impacts, there would be impacts on the production work of the project. Perhaps the most apparent impacts would arise in association with inspection/quality deficiency reports issued by naval inspectors. Accordingly, there was a certainty that contractor would have to respond to a far greater number of inspection/quality deficiency reports due to the presence of additional naval inspectors.

When an inspection/quality deficiency report is issued, the contractor has to decide how to respond to it. If use of the naval inspector’s alternate interpretation would be a significant cost or schedule burden on the contractor, the contractor’s engineering staff may set about to educate the naval inspectors as to why the already accomplished work does, in fact, meet the contract requirements. However, if it is not too big a burden, in the interest of wanting to accommodate the customer’s perspectives, the contractor may simply modify the already-accomplished work to satisfy the inspector’s interpretation. This is not an acknowledgement of error by the contractor; rather, it is a business accommodation made only for the benefit of promoting a good relationship. But additional naval inspectors lead to a lot more of such accommodations being made since there is every reason to expect that each naval inspector will go about his/her work diligently. This rapid growth of accommodating actions due to the increase in the number of naval inspectors should not become the financial burden of the contractor.

Testing Impacts:

In addition to the impacts on both engineering and production costs arising from the greater number of naval inspectors, there would be comparable impacts on tests and trials. Not only would the naval inspector’s interpretation of testing requirements vary from those of the contractor, but the greater number of naval inspectors would result in multiple customer-proposed interpretations of how the standards and testing requirements are to be applied to the project. This means that the contractor has to address not only a proposed alternative interpretation of the standard or testing requirement, but also has to sort out the differences and ramifications of each of the multiple customer-identified alternatives and work with the team of naval inspectors to resolve their internal differences of opinion, as well. This would undoubtedly lead to multiple reinspections and multiple re-tests to an extent far greater than if the number of naval inspectors was not significantly expanded. These production and testing impacts could easily exceed the engineering impacts if there is little control over the timing and/or extent of the interruptions that originate with the additional naval inspectors.

An example of multiple interpretations of a testing standard was for the examination of welds in the gas turbine anti-icing devices for the fleet of US Navy FFGs. The government interpreted the contractually-defined pipe weld inspection standard for steam plants, that now had to be applied to a gas turbine plant, to require radiographic examination of certain welds. The vendor interpreted the same inspection standard to require only dye-penetrant examination of the welds.

Under protest and claiming the extra costs, the considerably more expensive radiographic processes were applied to all 240 devices for 60 ships. The government’s subsequent independent revision of the standard, extending it to apply to gas turbine plants, as well as the subsequent award by an arbitration panel, found the government interpretation to be invalid. The vendor was compensated accordingly.

The ‘Attractiveness’ of Project Mismanagement

Erroneously disguised as a problem-solving opportunity

Project mismanagement is not the same as poor project management. Poor project management means that the project will eventually be achieved but at greater cost and longer schedule than otherwise accomplish-able. Project mismanagement takes the project in the wrong direction, introducing seriously flawed decision-making which later necessitates either a reversal of direction or far greater cost and schedule corrections. It masks itself as a decision to help resolve a project’s problem. But in reality it is not a decision; it is only an expression of hope, such as, “This should work out satisfactorily, I think.”

Re-Assigning the Problem Does NOT Simply Make it Go Away

Project mismanagement usually starts when an entity involved for certain purposes in a project offers a very attractive solution to a problem that has arisen in an area beyond its original purview. It appears that the problem will be resolved if the project managers simply re-assign responsibility for resolving the problem to a different entity than originally had that responsibility. This usually is a very attractive proposition––it is thought that the problem simply will go away if the project managers assign responsibility to the entity that is volunteering to resolve the problem, albeit at some additional cost. When project management is already stressed-out by multiple problems, the opportunity to see one of those problems be easily resolved is welcome relief. It is offered as a clean, efficient, effortless means of resolving the problem that has arisen in the project. But often it doesn’t work out that well.

Here’s an example. A dredge owner wanted to purchase a new, large split-hull hopper dredge to have it available within 24 months, in time to commence a long-term project. But the bidding shipyards all stated that the desired delivery date could not be achieved because the extremely large hydraulic cylinders to open and close the hull were long-lead items, controlling the vessel’s delivery to over 28 months. This later-than-acceptable delivery date was the project’s main problem.

At that point, the owner-retained naval architectural consultancy offered to procure those components faster than the shipyard, provided the owner would designate the consultancy as an equipment provider and tell the shipyard that the equipment would become owner-furnished. This appealed to the owner; at the stroke of a pen (it seemed) the schedule problem would be resolved. The consultancy would obtain the equipment (for an additional fee) and arrange to have it timely delivered to the shipyard so the 24-month vessel delivery requirement could be achieved.

Of course the end of the story is predictable. The consultancy had no special powers that could eliminate the long lead time. The ship was completed late. Moreover, the owner had to pay extra to the shipyard due to the multiple critical-path impacts of the late-delivered owner furnished equipment.

The assignment of equipment procurement to the consultancy essentially was an expression of hope, but not of promise. It was hoped that action would result in avoidance of the long-lead time problem. The appealing result offered by the consultancy vastly overshadowed the need to analyze why the switch from shipyard-provided equipment to owner-furnished equipment would have such a dramatically different result. In making that assignment, the owner hoped––but did not analyze. This is but one of many examples of project mismanagement that Fisher Maritime has observed over the 43 years of its existence.

The lesson learned from this example, among many others, is this: When an entity offers a solution to a vexing problem, but before project management makes a decision about that potential problem, analyze whether the pending decision will definitely resolve the problem, or if it is only an expression of hope that by trying something different the problem will be resolved.


An Ounce of Prevention

Just as a hurricane begins as small disturbances in the atmosphere, a shipyard claim may start forming without the owner being aware of it. Although curtailing the formation of a hurricane isn’t possible yet, curtailing a full blown shipyard claim can be. Since hurricanes are not controllable, avoidance of its disastrous effects can only be achieved through early forecasting and positive action to brace for the storm. Sometimes shipyard claims may also seem inevitable. In fact, however, with appropriate management techniques, they are avoidable.

The principles of claim avoidance are mainly the same as when dealing with a hurricane — early detection of the conditions which breed them, and positive action right from the get-go. It is in the interest of both the owner and the shipyard to avoid claims. Such claims typically result from a lapse in effective contract management by either or both parties.

Fisher Maritime routinely provides, to both owners and shipyards, management consulting efforts to monitor the conditions which might breed a claim, and to recommend actions which can lead to the avoidance of one. If you are concerned about the possibility of a claim developing and appreciate the benefits of avoiding it, call on Fisher Maritime to begin claim-avoidance procedures. This is what Fisher Maritime does best — its primary mission is to develop and help manage ship conversion, repair and newbuilding contracts to avoid claims.