Insights & Lessons LearnedAvoiding Basic Misunderstandings in Refit Shipyard Contracts
Dr. Kenneth Fisher, President, Fisher Maritime Consulting Group
The following is excerpted from “Management of Shipyard Projects: Insights and Lessons Learned,” which appeared in Upright & Afloat, a newsletter published by Fisher Maritime Consulting Group. It is intended to highlight a few lessons learned by maritime industry professionals involved in shipyard projects. These lessons and cautions acquaint readers with a small sampling of ways to avoid the need to “re-learn” them. Further Resources at the end introduce the reader to some of the services of Fisher Maritime Consulting Group. – Eds.
Starting Point: Amateur Contracts are a Cause of Disaster
Ship construction, conversion, and repair contracts developed by persons who lack substantial experience with the marine industry are the ones most likely to result in contractual disasters, in which the owner and shipyard clash 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 require the assistance of “disaster-relief” professionals, in the form of consultants experienced in “stabilizing” the contractual performance of the parties to avoid post-delivery litigation. If contractual relations have deteriorated too severely, however, these amateur contracts may become the focus of post-delivery litigation, requiring 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.
Definitions vs. Controversy in Ship Repair and Construction: Which do you Prefer?
Given an opportunity to choose between definitions or controversy, professionals in the marine industry would (we would like to think) choose definitions over controversy. The 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.
1. Electronically Transmitted Drawings
A shipyard, commencing to construct a large vessel, arranged with the vessel purchaser’s staff to receive electronically the entire set of contract drawings, from which the shipyard would proceed to develop the design details as needed for construction. The drawings were duly received electronically. But the format of the drawings was not as a CAD file, 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 to be learned: Define “electronic” with greater precision, so there is no misunderstanding as to the form in which the information will be transmitted and received.
2. The Meaning of the Word “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; whereas the shipyard said renew meant to make the old one like new by repairing it, making new only the damaged portions. Perhaps the shipowner’s idea would have been better expressed by stating that the shipyard was to “replace the rudder with one of all new materials.”
3. Pressure Test of Hydraulic Piping
A hydraulic piping system was installed, with the specifications calling for a pressure test to confirm the integrity of the piping joints. However, that specification did not define the nature and type of test. A dispute arose as to what medium was to be used to create the pressure: air, water, or hydraulic oil. A naïve owner’s representative argued that hydraulic oil should have been used. But the shipyard pointed out that if there was any leak, it would be detected (unfortunately) by seeing oil spray onto nearby fittings and equipment (hopefully without a resultant fire). On the other hand, if water is 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, he specification requiring tests should indicate the testing mechanism. Otherwise it can be expected that a contractor will select the least-cost solution for the test.
4. Generator Load Test
A specification called for the replacement of a ship’s 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 S SDG 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 shipowner to appreciate that the contractor would select a least-cost solution unless the specification clearly required otherwise.
5. 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, and owner can specify that all materials and equipment being used “shall be new and manufactured not more than [number of] years prior to installation.”
6. Interpretation of Rules
Some shipowners want to obtain the benefit of having their new vessel constructed to the standards of a classification organization, but do not wish to pay the fees of the organization 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].” But without the direct involvement of the classification organization, the debate that inevitably ensues, of course, 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 shortcut to obtaining the benefits of classification.
7. Oxymoron: Ambiguous Specifications
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 shipowners’ representatives express the attitude, “I know what the specification means because I wrote it.” This, of course, does not alter the fact that the specification has 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.
8. 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. Fisher Maritime, having reviewed hundreds of specifications and having helped resolve many disputes arising from ambiguous specifications, provides a unique service to the marine industry. A thorough review of proposed contract documents is undertaken to identify ambiguities, incomplete items, and inconsistencies in order to assure a less-troublesome contractual relationship then may otherwise develop. Starting with the initially proposed contract documents, Fisher Maritime will return to its client had a marked-up set of documents, indicating suggested alterations and identifying areas needing more definition or selection of possible choices before the contract package is finalized. Contact Dr. Kenneth Fisher at Fisher Maritime for more details, cost estimates, and examples of this service: K Fisher@FisherMaritime.com.
9. Improving Shipbuilding Specifications
If your professional responsibilities involve specifications and projects for ship conversion or construction Fisher Maritime has three papers that can improve your capabilities and enhance your insights. Each of these papers have been approved and published by SN AME heart Are INA. They are: (A) Shipbuilding Specifications: Best Practice Guidelines; (B) And owner’s Management of Ship Construction Contracts; and (C) Responsibilities Pertaining to Drawing Approvals During Ship Construction and Modification. The three of them can be ordered at minimal cost from Fisher Maritime. Merely send an email with the subject line “Three Papers” to Fisher Maritime (e-mail@FisherMaritime.com) and we will send a two-page PDF file description and order form.
Prepared by Dr. K.W. Fisher of Fisher Maritime Consulting Group (www.fishermaritime.com). Dr. Fisher is an arbitrator of shipyard contract disputes and developer of the training program, ‘Contract Management for Ship Construction, Repair and Design.’ He can be contacted at email@example.com.