Fisher Maritime's Fairleads

'Lessons Learned' Strategies & Ideas for the Marine Industry


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.


LESSON LEARNED #34: Owner Furnished Equipment

Lesson LearnedA tanker owner’s plan to modernize a vessel resulted in the decision that the owner would supply a certain large item of new equipment to be installed by the US west coast shipyard. The owner selected a vendor based on low pricing, anticipating a savings of about $60,000 below what the shipyard’s charge would have been. After the project commenced, however, the owner’s team discovered that the selected vendor was unable to demonstrate that the component met the required testing and certification standards.

The vessel owner’s team then had to re-order the component from another manufacturer, paying a premium for rushed completion. Moreover, because the newly selected vendor was far from the shipyard, the vessel owner’s team had to charter an aircraft to rapidly transport the component from Texas to the US west coast. In the end, the anticipated savings of about $60,000 was replaced by extra costs in excess of $100,000 above what the shipyard’s charge would have been.

If instead the vessel owner’s staff had spent time to write a precise specification and had given the shipyard the responsibility to acquire the component in accordance with that specification, any and all those extra costs would have been for the shipyard’s account.

The lesson learned: Vessel owners should not use anticipated cost-savings as a basis for deciding to provide equipment as owner-furnished.


$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.


The Art (and Risks) of Managing Owner-Furnished Equipment – Part Three

Editor’s Note:  This is Part Three of a three-part series focusing on the management of Owner-Furnished Equipment.  This article addresses additional items of supporting owner-furnished information that needs to be considered when using Owner Furnished Equipment (“OFE”), which were originally introduced in Part Two.  For readers wishing to start at the beginning of this discussion pertaining to OFE, Part One can be found here.

Integration—General

Integration is the engineering and design process that confirms that each item of equipment will integrate perfectly into the vessel before purchasing the OFE. This means that the owner’s team has to ensure for each OFE item that an appropriate entity is charged with the responsibility to confirm the validity of each of the following applicable aspects:

  • deck area and dimensions
  • structural arrangement to support its weight and deal with possible vibration and noise concerns
  • compartment geometry to ensure there is sufficient space for installation and maintenance
  • installation geometry, determining the route by which the item of equipment will be rigged into its final position and checking in advance for interferences in that route
  • electrical power sources, cable requirements and location of connections
  • electronic controls, alarms and signals requirements (and associated cable requirements) and compatibility with console designs
  • liquids inflow and outflow requirements, location of piping connections, and sources and destinations for such flows
  • airflow and heat dissipation requirements

Some specialized OFE may create additional integration requirements.

Vertical Integration

Integration is divided into two categories, using the modifiers ‘vertical’ and ‘horizontal’ to assist in remembering the differentiation of their roles. Vertical integration is the application of the described integration functions to the interface between each item of OFE and the ship. Which party has that responsibility? It is not realistic to expect the shipyard to accomplish those engineering tasks for equipment being purchased by the owner unless the owner’s team provides the shipyard with everything there is to know about the OFE well in advance of the time it is to be installed. Alternatively, if this task is assigned to the shipyard, the owner has to give the shipyard the authority to modify other parts of the vessel to accomplish the physical integration as may be needed, or at least contractually address those possible requirements.

Horizontal Integration

Horizontal integration comes into effect when the owner provides two or more items of equipment that have to fit and work together or otherwise communicate with one another. The objective of horizontal integration is to ensure, long before installation commences, that the two or more items do, in fact, fit and work and communicate with one another. Are they compatible with one another in terms of geometry, electrical power, signals, controls, fluid flows and heat dissipation? Which party is responsible for providing connecting cables between them? These responsibilities automatically fall onto the shoulders of the owner’s team unless, as with the vertical integration, it is contractually assigned to the shipyard, in which case the owner’s team will have had to provide the shipyard with everything there is to know about the OFE well in advance of the time it is to be installed.

Testing & Commissioning

Once the item of OFE has been installed, if it is anything more complex than a pump, it will be subjected to a series of tests to confirm that it has been properly installed and integrated into all of the ship’s systems with which it has to work seamlessly. Often, these confirming tests consume considerable resources, namely, skilled labor and schedule-critical time near the end of the project. In order to avoid surprises and last-minute impacts to the project’s cost and schedule, the shipyard has to know in advance––probably at the time of bidding the project––the entire set of requirements for the testing that is necessary to achieve commissioning deemed applicable by the vendor, classification and flag-state authorities. These requirements include:

  • identification of what other ship systems have to be up and running before these commissioning tests can be accomplished
  • description of the minimum status of the OFE’s compartment completion when the tests are conducted
  • specially purchased or rented equipment needed for the tests
  • number of craftsmen of each skill needed to support the vendor’s technical representative during the tests
  • expected duration of tests
  • identification of what other work can not be on-going at the time due to possible interferences with the tests
  • other requirements unique to the type of OFE (e.g., fluids for flushing hydraulic systems).

If the owner’s team cannot provide that information to the shipyard in advance of contracting, there will almost certainly be growth of the project in both schedule and cost. This will come about because the shipyard will not have been able to allow for such contingencies in its competitive bid unless all the bidders were told what contingencies to include in the bid price and schedule. On the other hand, if the equipment is provided by the shipyard, the owner is not bearing the risks of growth or delay due to those potential problems.

Warranty

When an item of equipment is provided by the owner, there are two sources of warranty: the manufacturer’s warranty on the item itself, and the shipyard’s warranty on the workmanship of installation. While not a major concern, the existence of two sources of warranty places a burden on the owner to figure out which party to call. If the wrong one is called, the owner could be facing an expensive service call invoice from that party, and incur a delay in getting a warranty visit from the correct party.

Summary

The use of owner-furnished equipment in a ship construction or conversion project effectively transfers to the vessel owner responsibility for the consequences of problems that arise from the risks associated with that procurement decision. When a vessel owner has decided to use OFE in the project, a careful and continuous monitoring of all the potential sources of problems, as described above, can effectively minimize, if not avoid, the consequences arising from such risks.

 

 

 

 


The Art (and Risks) of Managing Owner-Furnished Equipment – Part Two

Editor’s Note:  This is Part Two of a three-part series focusing on the management of Owner-Furnished Equipment.  Once posted, Part One can be found here, while Part Three can be found here.

Understanding the Content of the Owner Furnished Equipment (“OFE”)

As obvious as it may seem that the shipyard has to know what OFE will be delivered to it for installation, this is often a source of misunderstandings. The problems start with the fact that the owner’s staff is under the impression that the OFE vendor understands the shipyard’s perspective; but it doesn’t. The shipyard needs to know what hardware is being provided as OFE, because if some additional hardware will be needed for installation, then the shipyard has to know that in advance for pricing and ordering purposes. The physical interfaces are often the setting for the issues to develop. One way to avoid these problems is to first think of a large clear plastic sack around the OFE and ask: what is inside the sack; what is outside that connects to the OFE; and what penetrates the sack that connects to both the OFE and the ship? Then clearly identify the party that is supplying the hardware in each category.

If the item of OFE is going to be affixed to a foundation, which party supplies the foundation? Which party supplies the bolts that connect the OFE to the foundation? If control cables are needed to connect an OFE console to an OFE item, which party supplies those control cables? If power cables are needed to connect an electrical panel to the OFE, which party is supplying those electrical cables? Ask the same questions regarding piping as well as for the small transition pieces between shipboard piping and OFE piping. If the OFE item has to be re-painted after installation, which party is providing the paint? If the hydraulic piping within the OFE has to be flushed several times, which party is providing (and disposing of) the flushing fluids? For clarity and to avoid misunderstandings once the project is underway, it is essential to have the bid package and contract specifications indicate clearly the answers to these and similar questions regarding the content of the OFE and the supply of supporting hardware that will be needed to finalize the installation and testing.

OFI — Information

Usually the provision of OFE requires a supporting provision of owner-furnished information, “OFI”. An appreciation of the potential scope of this information stems from the fact that the installing shipyard may need to know:

  • foundation design and manufacturing requirements if the shipyard is to provide the foundation for the OFE
  • specific requirements for structural and arrangement modifications to the existing vessel
  • electrical power requirements so it can modify panels and install the cable as needed
  • fluids inflow and outflow requirements so it can prepare piping, valves and connections as needed
  • heat dissipation requirements so it can modify or add ducts and fans as needed
  • testing and trials procedures for which it will have to supply testing equipment and personnel, among other possible information requirements

The owner’s organization has to recognize that the shipyard will assume that it does not have to procure or provide any of that information unless the requirement to do is clearly identified in the contract workscope and specifications.

Form

Another commonly-incurred origin of problems associated with OFE is, from the shipyard’s perspective, a surprise to see the form in which the OFE arrives at the shipyard. The following are some of the form-related concerns that have been the source of problems:

  • Will the OFE arrive assembled or unassembled?
  • Will the OFE arrive in weather-proof covering, or does it have to be kept out of the weather by the shipyard until it is finally installed in the vessel?
  • Will the item of equipment have to be repainted by the shipyard or can it remain with the manufacturer’s paint on it?
  • Will the OFE require any special services prior to installation, such as dehumidification or power to heater bars to prevent condensation?
  • Will preservatives have to be removed and disposed by the shipyard as part of
    the installation process?
  • If the OFE is heavy, what lifting equipment will be needed?

Time of Delivery

When can the shipyard reasonably expect that the OFE will arrive at the shipyard? If this question cannot be answered by, “Read the contract,” then the issue is a candidate for differing interpretations by the parties. Sooner or later, the shipyard has to know when to expect the arrival of the OFE in order to plan and implement a timely and efficient installation. Best practice, of course, is to have a date-certain established in the contract documents, such as “April 3, 20—.” Second best is for the use of a target date-relative, such as “not later than 21 calendar days after vessel arrival at the shipyard.” When the contract appears silent about the date of OFE arrival at the shipyard, the reality is that a required date is being established by an indirect but binding mechanism, as described below.

Typically, the owner contractually requires the shipyard to develop a detailed vessel construction or conversion schedule, and to provide copies of it to the owner. At the moment the schedule is transmitted to the owner, the shipyard has thereby announced the date it is nominating to receive and start installing the OFE, as indicated by one or more activities on that schedule. If the owner’s team responds within a few days to the effect that the vendor’s delivery date will be later than nominated by the shipyard, then the shipyard has to revise its schedule to reflect the later date indicated by the owner. However, if the owner’s team is silent about the date the OFE is to arrive at the shipyard after receiving the requested copy of the shipyard’s schedule, then the owner is implicitly acknowledging the acceptability of that date. This means that the owner’s team has to be aware, in the absence of a contractual date-certain or date-relative for arrival of the OFE, that it has given the shipyard the right to nominate the date for arrival. If there is going to be a different arrival date, the owner’s team has a duty to advise the shipyard as promptly as possible of a more-realistic date in order to mitigate damages and minimize schedule disruptions. This is the fundamental reason why the owner’s team has to set up and maintain a delivery control system for each item of OFE and OFI.

Location of Delivery

Although it may, on first consideration, appear to be a trivial matter, the location for delivery of OFE can become a troublesome issue if the parties do not stick to the script, i.e., stay consistent with the contract. Even when the shipyard’s warehouse is the contractually-designated delivery location, sometimes a different location is orally arranged. For example, the owner arranges for the OFE to be flown in to the nearby airport in order to save time of overland transportation. The owner then asks the shipyard to send a truck to pick up the OFE at the airport freight depot. When the loaded truck rolls over due to an errant driver of another vehicle, the OFE is damaged and no longer suitable for installation on the vessel. Now there will be extra costs and delays while the OFE is repaired or replaced. Which party is responsible for those impacts?

The owner’s perspective will be that the shipyard is responsible because the OFE had been satisfactorily received by the shipyard’s employees at the airport. The shipyard’s perspective may be that the contract requirement to have the OFE be accepted at its warehouse has not yet been satisfied, so the continuing delay is the owner’s responsibility. The truck was sent to the airport, the shipyard may allege, under a separate oral transportation contract, unrelated to the ship construction or conversion contract. Unfortunately, there is no reliable means of predicting the winner of these arguments. Accordingly, to avoid this risk, the shipyard should insist that the owner accomplish delivery of the OFE to the shipyard in accordance with the written contract.

Additional OFI subjects will be presented in next month’s edition of Fairleads.

 


The Art (and Risks) of Managing Owner-Furnished Equipment – Part One

Editor’s Note:  This is Part One of a three-part series focusing on the management of Owner-Furnished Equipment.  Once posted, Part Two can be found here, while Part Three can be found here.

Risk Avoidance by Vessel Owners and Shipyards

The provision of owner-furnished equipment (“OFE”) and owner-furnished information (“OFI”) after a ship construction or conversion contract has been signed introduces multiple risks into the contractual relationship between the vessel owner and the shipyard that has to use that OFI and/or install the OFE. If any of these risks transition from the ‘possible’ to the ‘actual’, the cost and schedule impacts can quickly escalate to disproportionate magnitudes.

Understanding this, there should be a tendency to a general reduction in the use of OFE and OFI, giving the shipyard the responsibility to obtain all that equipment and information and therefore bear the associated risks. However, vessel owner’s staffs recognize that shipyards rarely understand the particulars of the specialized equipment that is being integrated into ships with increasing frequency. Accordingly, owners sometimes cannot afford the risk of allowing shipyards to acquire such specialized equipment since the shipyard will be looking for low cost. Thus, the shipyard-selected equipment may not necessarily incorporate all the features and characteristics that owners look for when acquiring such equipment. Therefore, the use of OFE and OFI will continue.

In view of that fact—the continuing use of OFE and OFI—it appears desirable to identify the causes of problems that have arisen so that the owner’s participants in the OFE/OFI acquisition process can better understand these potential risks to avoid their onset. This also educates shipyard personnel in the identification of the early signs of OFE/OFI-related problems, thereby allowing them to prod their client owners to attend to the matters in order to avoid development of the risks, or at least to limit the cost and/or schedule impacts on the ship construction or conversion project.

Based on Fisher Maritime’s extensive experience (43 years) of assisting project management teams cope with the problems arising from mis-managed or un-managed OFE and OFI acquisitions, this article lists and describes the major aspects from which OFE/OFI problems tend to arise. With this information in mind, both the owner’s and the shipyard’s participants in projects involving OFE/OFI will be more likely to work from the outset to avoid such problems, or at least to identify the problems as they begin to emerge, rather than fail to understand the origin of such problems until the impacts have already become unmanageable or unacceptable.

The Motivation Behind the Use of OFE/OFI

Some owner’s are motivated to acquire the equipment because it necessitates a long lead-time for acquisition; the purchasing process for the equipment has to commence earlier than the awarding of a contract to a shipyard to install the equipment. This appears to be a reasonable basis for the use of OFE/OFI. Another equally valid reason is the specialized nature of the equipment, necessitating considerable dialogue between vendor and purchaser (the future user of it) to ensure that the precisely-needed product is acquired, instead of a less-costly, not-quite-adequate substitute selected by the shipyard. Some owners, however, are motivated by cost considerations and fantasies of savings; they think they can avoid the shipyard’s mark-up of eight-to-20 percent by providing the equipment to the shipyard. If cost considerations are the primary basis for the owner’s decision to acquire the equipment, this is realized to be faulty reasoning when the components of the shipyard’s mark-up are considered.

When an item of equipment comes to the shipyard, the shipyard has to receive it, warehouse it, track it, and possibly maintain it until installation. The costs of these services are part of the mark-up; but if the owner buys the equipment instead, the shipyard includes these costs elsewhere in the contract price because those costs will be incurred regardless of which party actually purchases the item. Later, the item of equipment has to be transported from warehouse to the ship, which transportation costs are routinely covered as part of the mark-up; but if the owner purchases the item, the shipyard will include that transportation cost elsewhere in the contract price. Once the item of equipment comes into the shipyard, the shipyard is responsible for its care and well-being until the ship sails away with the equipment installed.

The shipyard has insurance to cover repair or replacement costs of damaged equipment; and the shipyard has to maintain that coverage for all equipment coming through the shipyard regardless of whether it was purchased by the owner or the shipyard. Accordingly, the portion of the markup that contributes to the cost of the insurance policy is included in the contract price when there is OFE instead. A shipyard always gives a warranty on its workmanship for installation of the items of equipment; so the shipyard needs a contribution to its warranty reserve fund regardless of whether the equipment was purchased by owner or shipyard. Accordingly, that portion of the mark-up is also included in the contract price where there is OFE.

The shipyard does not need the part of its normal mark-up to help cover the costs of its purchasing department, since the purchasing of OFE is accomplished by the owner, not the shipyard. So, while the owner will save only this last portion of the shipyard’s normal mark-up, the acquisition of OFE places a burden on the owner’s purchasing staff which not only causes the owner to incur greater costs, but also – and this is very important – transfers to the owner all of the purchasing, content, form and integration risks that would otherwise have been the responsibility of the shipyard. These risks are discussed below.

However, having assisted many project management teams to cope with the results of improperly managed OFE acquisitions, Fisher Maritime has concluded that the almost inevitable development of these risks always outweighs the cost savings. That is, the owner’s cost considerations (not having to pay the shipyard’s mark-up) should never be the basis for introducing OFE into a project, since such savings are not actually realized.

Purchasing Risks

Regardless of which party purchases the item of equipment, risks start developing at the commencement of the purchasing process. If the owner is providing the equipment as OFE, the management of the risks becomes the duty of the owner, and the consequences of any problems are the responsibility of the owner. Thus, understanding the possible origin of these risks will assist the owner’s project team in the management of the process which is necessary to minimize, if not eradicate, the possible development of problems originating with purchasing risks.

The first component of the purchasing risks is ensuring that the requested item is actually purchased. The owner’s purchasing department sends out a request for quotation (“RFQ”). The vendor’s responding quotation is supposed to be consistent with the RFQ’s attached (requested) technical specifications and with the owner’s terms and conditions (“T&Cs”), also attached to the RFQ. However, many vendors do not provide the exact form of response that has been sought. Instead a vendor may offer one of its standard models, which is close to, but not exactly in conformance with, the requested technical specifications. Unless the owner’s purchasing department asks the project team to compare the vendor’s offered technical specifications to the owner’s requested ones, the owner’s purchasing department may end up acquiring something different from what was expected by the project team.

The second component of purchasing risks is timing. The owner’s project team may recognize that the OFE has to be delivered to the installing shipyard by a certain date, but the owner’s purchasing department may not have given this acquisition process sufficient priority. The result is that the purchasing department starts the process later than is compatible with the project schedule. It may be that the owner’s purchasing department kept shopping around to get lower prices or extended negotiations to get better pricing, which delay in actually issuing the purchase order (“P.O.”) resulted in late delivery of the OFE to the shipyard.

The third component of purchasing risks is the “battle of the forms” which focuses on payment terms and warranty issues, among other matters. The RFQ anticipated that the item of equipment would be purchased in accordance with the owner’s T&Cs that address, among other factors, the timing of payment as well as the commencement and duration of the warranty. However, the vendor’s response to the RFQ may not have been merely a quotation, but instead was an offer-to-sell in accordance with the vendor’s T&Cs. The likely differences are timing of payment (vendor wants it sooner) and warranty (commencement and duration are different from that sought by owner). Also, the vendor’s T&Cs may state that no warranty is given if prompt payment is not received.

When the owner issues the P.O. at a later date, it is thought to be issued in accordance with the owner’s T&Cs, thus appearing to re-establish control of the payment and warranty terms per the owner’s ideas of what is needed. However, the vendor may not be content to accept those limitations. The vendor ships the equipment to the owner or shipyard, and has the recipient execute a delivery receipt, which states that the delivery is accepted in accordance with the vendor’s T&Cs attached to the delivery receipt. Thus, if this battle of forms has occurred, it remains unclear whether the owner’s or vendor’s T&Cs will control the payment and warranty issues. Accordingly, the owner’s project management team and purchasing department have to jointly monitor the potential development of these purchasing risks involving technical content, delivery timing, warranty (commencement and duration) and payment timing. 


Proper Staffing for Conversion Projects

Success is dependent on having appropriate staff

When ship owners arrange for conversions and/or major refits to vessels already within their fleet, they typically expect that their usual contingent of ship superintendents can oversee the project. After all (so goes their thinking) it is just another project at another shipyard involving a vessel with which the superintendents are already quite familiar.  This belief is not well-founded. It often is, in fact, counter-productive. How do we know this? Fisher Maritime has been called in to act as project management support to “rescue” a number of ship conversion projects that were in dire straits (considerable cost and schedule overruns) due to the fact that the project was beyond the ability of the owner’s on-site staff to keep up with the project’s demands.

The Responsibilities May Go Beyond the Scope of the On-Site Staff

The problems start with a failure by ship owning organizations to recognize that a major refit or conversion requires firstly the development of a contract and specification that adequately describe all of the work necessary to complete the vessel to the owner’s satisfaction. Too often, the staff that oversees routine maintenance is called upon to develop specifications for a much different type and extent of work. Then, once the work commences, owner’s staff must respond to each and every communication from the shipyard; and each such response has to be well founded, complete and based on the contract terms, not simply an informal or offhand reply. This places a burden on the owner’s on-site staff that goes far beyond the responsibilities that have to be satisfied during smaller-scope ship repairs.

Thus, the ship owner’s use of the normal complement of ship repair superintendents for major refits and conversions effectively constitutes an understaffing by the ship owner that will almost certainly lead to an unsatisfactory outcome.

A Real Example of a Refit/Conversion Project Gone Awry

Here is an example. A ship owning organization was acquiring a laid-up vessel for conversion to its own needs. The ship repair superintendents that had overseen the operation and maintenance of the predecessor ship were placed in charge of this project. Problems began almost immediately as they failed to appreciate that there were really two projects being applied to the same vessel at the same time. Namely, reactivation of a laid-up vessel is, by itself, a major refit. Then, the conversion of the ship to be able to accomplish its new mission profile was a second major project, albeit concurrent with the reactivation.

The owner’s project team went into the project with only a small on-site supplemental staff—the repair superintendent, his small staff and a few of the crew members as inspectors. When design modification questions arose due to incomplete conversion design and specifications, the owner’s team too often gave off-hand oral responses. By itself, that was a recipe for overruns and disputes. But also, the reactivation requirements had been underestimated by the owner’s design agent; so numerous growth work items arose at the shipyard.

The members of the team who were initially on-site were competent, but overwhelmed. Missing from the on-site project team was sufficient professional resources. This deficiency began with the initial planning of the reactivation/conversion, resulting in an inadequate contract and specification. Even very competent persons too few in number are just not sufficient for conversions and major refits, particularly when the contract documents are flawed.

Further aggravating the situation at the shipyard, the ship’s crew was independently undertaking work on the vessel without having integrated their schedule and resource requirements with the shipyard’s. The two parties were often in each other’s way, leading to a loss of productivity and sometimes to the necessity of rework.

The use of ship’s crew to act as inspectors, overseeing the shipyard’s work, initially seems
to make sense, since the crew is familiar with the vessel and is already on the payroll. However, without strong guidance from project management, the crew (when acting as inspectors) almost always expects the shipyard to accomplish what is needed to make the vessel essentially 100% functional in a manner that the crew members wish for, instead of limiting their criticism of the shipyard’s work only to ensuring compliance with the written contract specifications.

When the rapidly increasing budget requirements challenged the coffers of the owner, and when the anticipated delays meant cancellation of near-term revenue-earning charters, the owner’s team finally appreciated that it needed professional project management support (and turned to Fisher Maritime for that rescue mission).

In summary, going into a conversion or major refit, the owner’s team has to assemble all of the necessary resources. Those necessary resources include:

  1. well-developed specifications and plans based on a lengthy and careful comparison of them to the ship
  2. use of designers who have experience in ship conversion projects (not just in newbuilding projects)
  3. onsite availability of a sufficient number of professionals to develop considered and well-thought-out responses to the shipyard’s need for additional information
  4. integration of the crew’s workscope with the shipyard’s workscope
  5. training of the ship’s crew on how to act as true project inspectors instead of merely as critics of the shipyard’s work.

Fisher Maritime’s experienced personnel have the ability to analyze the contract and separate the work that is clearly described in the contract from unforeseen tasks that were not envisioned by the contract. It is then a matter of negotiating with shipyard representatives a reasonable addition to the contract price and the added time needed for the unforeseen work. Too often Fisher Maritime has only been called after the fact to assist in litigation with the other party after everything has gone wrong. At this stage the solutions are more difficult as an adversarial relationship has developed between the parties to the contract.