Shipbuilding Costing and Contract Arrangements

Naval architects and engineers in structured organizations are frequently excluded from participating in the contracting and financing arrangements of vessel construction. This exclusion is most unfortunate and it is anticipated that this section will assist naval architects and engineers in contributing to these arrangements.

Far too often the approach to vessel selection and financing involves lawyers, accountants, financial planners, and ship construction people working independently of each other without the continuing interchange of ideas that is so essential during the planning stage.

The widest knowledge of any proposed vessel construction and the fullest participation in the mission aspects of new vessels provide the best climate for producing the most effective design and construction.

If continuing interaction of the interested parties is not feasible, the next best thing is to have those entering the field of vessel construction understand fully the various contributions of the lawyers, the accountants, the financial planners, and the operators to the design, and the documents and instruments developed over the years to ensure the continuum of events which must occur timely to produce the desired vessel within the desired time at an acceptable price. With the intellect considered to be the prerequisite of such understanding comes the patience to accept a less perfect alternative when it is more important to see the project move onward.

Accordingly, this section is proceeding on a format which is intended first as a narrative of a typical ship design genesis, its subsequent contracting and construction, and its delivery and operating inception. After this over-simplified case history approach, a more detailed discussion of the legal and financial aspects and impacts, including the documents usually involved in such transactions will be presented.

Where deemed appropriate, a sampling of alternative approaches will be included, all to show the reader that the kinds of agreements which can be made between a purchaser and a builder or between a financier and a purchaser/borrower are limited only by the law of the land and the ingenuity of the parties dealing in the matter - the assumption being in all cases that the objective is the best product at the least all-inclusive cost to the owner.

Also, where the narrative leads to identifiable problem areas, sufficient analysis will be outlined to permit understanding and insight into the course of these problems so that the naval architect or marine engineer might be better prepared to avoid controversial approaches in preparing ship construction documents for the clients or principals.

A significant number of naval architects, engineers and others are directly involved in United States shipbuilding and shipping business practices which differ in many respects from those in other shipbuilding countries. Although this chapter discusses international costing and contracting arrangements to some extent it is primarily concerned with U. S. practice.

To the extent considered necessary, reference is therefore frequently made to specific United States rules, organizations and operating procedures. At the same time, the general discussions apply equally to all international shipbuilding and shipping.

When dealing specifically with the United States government, those procurements made directly by the U.S. Navy and the U.S. Coast Guard are generally so identified; when the term government aid is used it generally means the government is not procuring the vessel but that the owner, buyer, or purchaser has arranged a construction differential subsidy (CDS) for the shipbuilder and/or obtained a government insured mortgage or other benefits available under the Merchant Marine Act.

In discussions of shipbuilding costing and contract arrangements, a number of terms are used that have specific connotations in this aspect of the shipbuilding process. The following definitions can be considered to apply.

Architect of Contract: A term borrowed from the legal profession to indicate the person or entity that authored the contract document.

Builder: In this text, builder, contractor, and shipyard are used synonymously. It is the entity that signs the construction contract and undertakes to physically build the vessel. The various forms are used as these terms are encountered in invitations, contracts and specifications.

Owner: This term is used to identify the buyer of a vessel to be constructed. In the parlance of MarAd contracts the term purchaser is usually substituted for buyer. Primarily, the intent is to name the party who selects the design and causes the initiation of the contract to build. It is recognized that in leveraged lease situations the owner of record of the constructed vessel may be someone or some group having only a financial interest. In such cases owner as used herein is the charterer.

Naval Architect: Anyone having decision authority over the design of the vessel to be constructed or reconstructed. ln-house naval architects are those on the wage payroll of the shipowner or entity contracting for a vessel. Outside or Contract naval architects are those persons whose business is the design and engineering of vessels, and who contract with owners or shipyards to perform their services for a fee.

Design Agent: A term used interchangeably with an outside or contract naval architect. It has come into use as shipyard designs have become prevalent. Shipyards are frequently design agents. They do employ naval architects, and those who work at design are usually in the engineering department or the planning department.

Reps: Abbreviation for representatives; as, for in¬stance, owner's reps are the inspectors and plan approvers working on-site during ship construction.

Lead Ship: The first vessel built to a new set of plans and specifications. It is not necessarily the first vessel delivered because under circumstances of the order being allotted to two or more yards, the first vessel in one of the other yards may be delivered first. This occurs because of better production methods, or because of unforeseen delays in the lead yard.

Following Ships: Ships built to the same plans and specifications whether in the same yard as the lead ship, or in other yards, are following ships.

Berth Term: This refers to dry cargo liner operations utilizing publicly issued schedules of port calls.

Cease and determine: A phrase used in Maritime contracts to indicate a full unconditional stop action plus an inventory of the financial position as of that moment.