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'Lessons Learned' Strategies & Ideas for the Marine Industry

Equipment Integration and Interfaces

Contract Mismanagement by Assumptions

A multi-million dollar ship conversion project had gone considerably over budget and over schedule, with the shipyard and ship owner each alleging the other to be responsible. The project involved significant participation by several specialized subcontractors, who also provided key elements of new equipment, all working under the direction of a small contracting shipyard whose general manager was also the project manager.

The work that primarily caused cost and schedule overruns was the integration of the subcontractor-supplied equipment, as well as the last-minute development of electrical, electronic, and mechanical interfaces between the new items of equipment. The existence of the problem was realized late in the project when the subcontractors complained that they were being asked to perform greater workscopes than what was included in their bid proposals.

The shipyard originally issued purchase orders in response to the subcontractors’ bid proposals, which in turn were based on the prime contract specifications. The subcontractors’ bid proposals, adopted verbatim by purchase orders, did not adequately address the equipment integration process, including the supply of interfaces with other equipment. In other words, the sum of the parts (from the subcontractors) did not equal the whole requirement of the prime contract — but the shipyard did not otherwise plan for that shortfall.

Upon analysis it was observed that the fundamental cause of the problem was that, during the bidding stage, the shipyard assumed that the subcontractors were bidding on the entirety of the workscope related to the equipment they were to supply. Instead, the subcontractors’ bid proposals addressed only those elements that were independent of the work of other subcontractors.

Component and system integration, installation and testing are often found to be areas that have been partially overlooked or incompletely addressed, especially when subcontractors and vendors are involved. To avoid such problems, Fisher Maritime’s pre-contract reviews on behalf of shipyards ensures that the entirety of the prime contract’s workscope is addressed and bid by the shipyard itself or its subcontractors. If your organization is bidding on a complex contract requiring multiple subcontracts, a pre-bid review by Fisher Maritime can minimize the likelihood of errors in the bid due to such oversights.

Owner Furnished Equipment — Opportunities for Contract Risks

The provision of equipment by vessel owners for incorporation into ship construction or conversion projects creates multiple opportunities for contractual difficulties. The avoidance or those difficulties requires that each of the potential forms of those risks be adequately addressed in the contract package. The risks of owner-furnished equipment (OFE) arise in association with each of these topics:

  • time of OFE delivery
  • place of OFE delivery
  • exact content of the OFE
  • form of OFE at time of delivery
  • responsibility for vertical integration of OFE
  • responsibility for horizontal integration of OFE
  • requirements for testing, commissioning and grooming of OFE
  • warranty claims and warranty administration.

Integration addresses fit of the OFE in terms of the physical layout, structural adequacy, electrical service, mechanical connections, fluid services, electronic controls, monitoring, alarm systems and testing. Vertical integration specifically refers to ensuring the fit of the OFE into the existing ship or into the portions of the ship being provided by the shipbuilder. Horizontal integration specifically refers to ensuring the compatibility of multiple OFE components with one another. Because the contractor or shipyard is not automatically vested with integration responsibilities, the contracting party that has such integration responsibilities has to be clearly identified in the contract documents, and has to be given authority to seek necessary alterations if there is not a good fit in all those areas.

Fisher Maritime has often been called upon to assist in troubled contractual relationships when, the owner alleges, the shipyard is creating difficulties over the OFE. Sometimes our analyses result in the appreciation that the ship owner did not clearly nominate the shipyard to be the OFE integrator, thus causing the integration process to have been overlooked. Fisher Maritime then has developed recovery plans to minimize the impacts of the late-assignment of integrator responsibilities.
In one matter, the owner provided a complete propulsion system (diesel generators, motors, thrusters, power management system, etc.) for a dynamically-positioned vessel conversion project. The OFE vendor’s testing and commissioning requirements had not been communicated to the shipyard. Major schedule problems developed at the end of the conversion project when the owner’s vendor required far more time for testing and certification (several weeks) than the shipyard had been told to allow (several days).
Fisher Maritime was called in by the shipyard to help develop a revised schedule that minimized the total delay. Fisher Maritime then developed an assessment of the impacts on both cost and schedule that resulted from having overlooked the commissioning requirements for the OFE. That analysis was used to negotiate a resolution of the responsibilities for those costs and delays.
Organizations planning to incorporate major OFE items into a vessel construction or conversion project should consider having Fisher Maritime review the planned acquisitions and deliveries to ensure minimization of the risks associated with OFE, and to make certain that they are wholly compatible with the shipyard’s contractually-defined responsibilities.

OFE in a Design-Build Contract – Confusion All Around

A client ship owner needed four test-bed vessels for its specialized equipment. The general design of the vessels was not important, as long as certain vessel performance criteria were satisfied. More importantly, a pair of unusual OFE sets were also to be incorporated in a precisely-defined manner in each vessel.
Several contractors bid the job, and one received a contract. The ship owner accepted the shipyard’s proposed design. The shipyard had to complete the design, incorporating the OFE. Other design criteria had to be satisfied as well, including certain marine safety regulations. Almost predictably (especially after awarding the contract to the lowest bidder who left 20% of the contract price lying on the table) contract disputes arose. The shipyard claimed that more funds and time were needed to achieve the installations because the OFE installation requirements could not be fully appreciated from the bid package. Moreover, the shipyard contended, the eight sets of OFE arrived in varying forms – some sets required more preassembly than others. (The organization preparing the OFE worked to a different contract, and was not obligated to prepare and ship them identically.)
The lesson to be learned here is that the pre-contract OFE detail should be enough to ensure that bidders fully appreciate all the installation requirements. Also, varying delivery forms of identical OFE items indicates that the OFE acquisition is not well-controlled. This is a contractual weakness that can only harm the owner. Past contract disputes consistently reveal that whenever there is OFE there are likely to be major disputes over:
  • its form at arrival
  • the delivery schedule
  • the installation requirements
  • its integration into systems
  • the associated testing requirements.
For new ship construction, owners should approach the use of OFE with extreme caution. Any anticipated savings through direct acquisition may not be worth the risks of extra shipyard costs and litigation.

Sisters, Not Twins – A Source of Specification Errors

A common source of repair specification errors is the mistaken assumption that ships are identical twins. That is rarely correct. Sister ships are just that: sisters, but not identical twins.
When specifications and/or plans for a vessel’s modification are prepared for the owner, they are often based on the configuration of a sister vessel. During contract performance, the shipyard calls to the owner’s attention the fact that the specifications and/or plans do not match the ship, thereby leading to an unexpected extra cost.
In the construction of multiple ships under a single contract, the shipbuilder is obligated to ensure that the major features of the ships are the same. The contractor is given the right to determine all the lesser features as long as they are consistent with the contract documentsDue to production anomalies, design developments, and the passage of time, the secondary features of sister ships are often different from each other, but still consistent with the contract. For example:
  • the placement of auxiliary or minor components may be different
  • the brand name or model of equipment items may vary
  • the location of bulkhead penetrations for piping or cables may be altered
  • the routing of cabling, ducting, and/or piping may have been altered
  • secondary features of alarm, control and monitoring systems may not be consistent.
Consequently, to avoid unexpected extra costs, base your contract specifications only on the ship being modified, not on a sister ship for which such details probably are different.

Definitions vs. Controversy in Ship Repair and Construction – Which Do You Prefer? (Part 2 of 2)

If you haven’t done so, be sure to check out Part 1 of this article.  Here are some more examples and lessons learned in regards to definitions vs. controversy:

  • Generator Load Test: A specification called for the replacement of a SSDG, with testing after to confirm proper operation and controls. The means and extent of testing were not defined. After installation, the shipyard sought to test the SSDG using ship’s equipment for the electrical load. The vessel’s chief engineer as well as the port engineer would not allow that; they expected that the shipyard would use a test load bank instead. The shipyard pointed out that because the specification did not mention a load bank, the rental of one was not included in the bid. This problem involving both cost and delay would have been avoidable if the means of the test was defined. This was another opportunity for the ship owner to appreciate that the contractor would select a least-cost solution unless the specification clearly required otherwise.
  • What is New? A shipbuilder committed to constructing several new vessels, each of which was to include an item of special equipment. The vessels were produced, including the items of special equipment; but the vessel owner complained that those items were not new. The shipbuilder pointed out that the items were new, as evidenced by the fact that they had never been used, never installed on any other vessel, and had arrived at the shipyard in their original packing crates. The problem, as perceived by the owner, was that they were manufactured over 20 years earlier, but had never been sold by the supplier, only warehoused. To exclude the possibility of such event recurring, an owner can specify that all materials and equipment being usedshall be new and manufactured not more than [number] years prior to installation.”
  • Interpretation of Rules: Some ship owners want to benefit from having their new vessel constructed to the standards of a classification organization, but they do not wish to pay the organization’s fees that are incurred in granting the vessel classification status. In those instances, the construction specification states something like, All workmanship accomplished and all materials and equipment supplied and incorporated into the vessel shall conform to the classification rules of the [name of classification organization].”
    Without the direct involvement of the classification organization, the debate that ensues centers on whose interpretation of those rules will apply: the shipyard or the owner? This form of dispute is completely predictable when an owner attempts to get something for nothing. Even if the owner does not intend to maintain the vessel in class after delivery, there is nothing barring the construction and delivery of it in class, as determined by the classification organization. This assures a certain level of design, workmanship and material selection consistent with classification rules, but requires that the classification organization be duly involved during construction and delivery. Simply, there is no short cut to obtaining the benefits of classification.
  • Ambiguous Specifications (Oxymoron): Grammatically, the phrase “ambiguous specifications” is an oxymoron because the components of the phrase are inconsistent. Something that is specific cannot concurrently be ambiguous. Yet, numerous repair, conversion and construction specifications have been ambiguous, causing disputes, costly ‘fixes’ and substantial delays to completions of the projects. Some ship owner’s representatives express the attitude, “I know what that specification means because I wrote it.” This, of course, does not alter the fact that the specification as written is ambiguous; it simply confirms that it has to be interpreted. The shipyard already knew that and planned to achieve its interpretation of the specification using a least cost solution. The remedy at that point, if essential to the owner, is a costly and perhaps project-delaying change order.
  • Specification Quality Assurance: For major shipbuilding and offshore construction and conversion projects, significant contract price growth can be minimized by subjecting the proposed contract specifications and drawings to an independent quality assurance review process. A thorough review of proposed contract documents should be undertaken to identify ambiguities, incomplete items, and inconsistencies in order to assure a less-troublesome contractual relationship than may otherwise develop.

Definitions vs. Controversy in Ship Repair and Construction – Which Do You Prefer? (Part 1 of 2)

The question in the title of this article is, of course, almost nonsensical. Given an opportunity to choose between definitions or controversy, professionals in the marine industry would chose definitions over controversy. Examination of many ship repair, conversion and construction specifications leads to the observation that, perhaps inadvertently, controversy has been selected instead. Here are some examples and lessons learned.
  • Electronically Transmitted Drawings: A shipyard commenced construction of large vessel. It also arranged with the vessel purchaser’s staff to receive electronically the entire set of contract drawings. From these drawings, the shipyard would proceed to develop the design details as needed for construction. The drawings were received electronically, but not as a CAD files, which could be utilized by the shipyard. The drawings were PDF files, which are essentially just ‘pictures’, not files that can be altered. Those ‘electronic’ files were no more useful than if the shipyard had received paper printed drawings. Lesson learned: Define ‘electronic’ with greater precision so there is no misunderstanding about the form that the information will be transmitted and received.
  • Renew: Due to grounding in a channel, the rudder of a ship was damaged. The repair specification called for the shipyard to “renew” the rudder. What is meant by “renew”? The ship owner’s representative rejected the shipyard’s repair of the rudder, stating that “renew” meant to build a new one. In contrast, the shipyard said renew meant to make the old one like new by repairing it, making new only the damaged portions. Perhaps the ship owner’s idea would have been better expressed by stating that the shipyard was to “replace the rudder with one of all new materials.”
  • Pressure Test of Hydraulic Piping: The specifications called for a pressure test to confirm the integrity of joints in a hydraulic piping system. However, that specification did not define the nature and type of test. A dispute arose about what medium to use to create the pressure: air, water or hydraulic oil. A naïve owner’s representative argued that hydraulic oil should have been used. The shipyard pointed out that if there was any leak, it would be detected by seeing oil spray onto nearby fittings and equipment (hopefully without a resultant fire). If water was used for pressure tests, contamination of the subsequently-used hydraulic oil may result. Perhaps a combination of air test (with soap solution on the exterior of joints) followed by an oil pressure test may be the preferred solution. Other possibilities exist, too. More to the point, a specification requiring tests should state the testing mechanism. Otherwise it can be expected that a contractor will select the least-cost solution for the test.
  • Generator Load Test: A specification called for the replacement of a ships service diesel generator, with subsequent testing to confirm proper operation and controls. The means and extent of testing were not defined. After installation, the shipyard sought to test the SSDG using ship’s equipment for the electrical load. The vessel’s chief engineer as well as the port engineer would not allow that; they expected that the shipyard would use a test load bank instead. The shipyard pointed out that because the specification did not mention a load bank, the rental of one was not included in the bid. This problem involving both cost and delay would have been avoidable if the means of the test was defined. Again, this was an opportunity for the ship owner to appreciate that the contractor would select a least-cost solution unless the specification clearly required otherwise.

To read more, see Part 2 of this article.

Amateur Contracts a Cause of Disaster

Ship construction, conversion and repair contracts developed by persons who lack experience with the marine industry are the ones most likely to result in contractual disasters. These typically result in the owner and shipyard clashing over responsibilities, costs, schedule and vessel performance.
The shipbuilding industry has encountered such contracts on a much-more frequent basis than might be imagined. These situations need the help of “disaster relief” professionals experienced in “stabilizing” the parties’ contractual performance to avoid litigation.
If contractual relations have deteriorated too severely, these amateur contracts may become the focus of litigation. These situations need both the specialized consultants as well as attorneys.
It would have been far more cost-effective to use professionals skilled in shipbuilding contracts to develop the contract, rather than saving some costs at the commencement of the project and paying many times over for that mistake later.

Design Completion Responsibility – Whose Naval Architect?

Naval architects and marine engineers sometimes develop contract plans and specifications for vessel owners. Typically, the shipyard then completes the design process to a point adequate for regulatory approvals and vessel construction using its own design staff once the agreement is signed. The owner’s naval architect continues to advise the owner and even review the contractor’s detail plans on behalf of the owner.
Sometimes, the yard wants to use the owner’s naval architect to finish the design in an attempt to achieve a more efficient design completion process . The yard promises the owner that it will work out smoothly. The owner’s naval architect, wanting to see the project develop as envisioned, agrees to also work for the yard.
Our advice: Don’t let the owner’s naval architect also work for the yard unless you are anxious to see litigation develop involving the owner, the yard and the naval architect.
When a naval architect tries to serve two masters on the same project – the owner and the yard – a contractual disaster awaits all the parties. The yard will say that extra work developed because the naval architect was assisting the owner. The owner will say that it wasn’t extra work, but was always required by the basic contract workscope. The naval architect won’t get a chance to say anything, because he doesn’t know which master to serve at that time. So the parties call in their attorneys. The smarter or quicker-acting party will also call in third-party expert consultants.
From the yard’s point of view, the savings gained by using the same naval architect for the detail design that prepared the contract design may be attractive. There are significant risks of extra costs creeping into the project because the naval architect – who is now supposedly working for the yard – inadvertently may be trying to perfect the project, not appreciating which party is supposed to pay the cost of achieving perfection. The inevitable confusion and the extra outlays by the yard could be avoided if the yard stuck with its plan of action to hire its own naval architects, not the owner’s.
The lesson learned is this: Avoid creating a basis for litigation. Owners and their naval architects should stick with their plan of action, that is, work together as a team until the project is completed. The idea of the naval architect also working for the yard may be couched in technical terminology and promises of design efficiency. But in reality, the naval architect is changing allegiances in the middle of what may be a skirmish. This is provocative action that both the yard and the owner may exploit if there is any hint of a dispute between them once the contract work is underway.

Remaining Responsible – General Disclaimers Don’t Work

A 2007 US District Court decision reminds contracting parties to keep focused on their responsibilities.  For many participants in the marine industry, it can be a firm reminder that broad disclaimers cannot be used to transfer responsibility. Ship owners and their design consultancies often attempt to have the shipyard be responsible for many aspects of the the ship’s design. This is despite the fact that the owner’s team has put together a lot of design information pre‐contract.

A US ship repairer took on a conversion contract for a vessel owned and operated by a federal agency.  The shipyard filed suit against the agency after completion alleging that extra costs were incurred because the government‐provided drawings were inaccurate and not coordinated with one another.  Regarding these drawing issues, the court focused on part of the contract.

The court’s decision first cited this wording from part of the ship conversion contract:

The Government does not guarantee the correctness of the dimensions, sizes, and shapes given in any sketches, drawings, plans or specifications prepared or furnished by the Government. The Contractor shall be responsible for the correctness of the shapes, sizes and dimensions of the parts to be furnished hereunder, other than those furnished by the Government.

The court then stated:

The Court finds that this provision does not affect the disposition of the case because it is a general disclaimer and does not relieve the Government of its obligation to provide adequate drawings and specifications.

This is not a new interpretation by the Court; it is a reminder of a well‐established principle. Simply stated, when an owner puts into writing information that will be used by shipyards for bidding purposes, that information has to be consistent will all other contract requirements. The correctness and reliability of that information cannot be disavowed by a broadly‐worded disclaimer.

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.