2/27/2023

Maritime System and Management

SHIPBUILDING TENDERING &

CONTRACTS
Course Teacher
Dr. N. M. Golam Zakaria
Professor
Dept. of Naval Architecture & Marine Engineering
BUET, Dhaka-1000

Tendering and Contract

• Ships and marine structures are large products involving large
financial investment; therefore, tendering and contract signing
must be done with adequate care.
• Tender documents consist of a preliminary general arrangement
drawing, brief specifications and the quoted price. The documents
are compared against internationally competitive bids. Therefore, it
is necessary that the feasibility study at the concept design stage
must be done carefully even if extrapolated from a basic design.
• Due to large investment, the client is very often interested in
confirming performance standards at this stage itself, which may
require numerical analysis, including computational fluid dynamics
and finite element analysis.
• The quoted price must be done with care so that it is not only
competitive but also satisfies the needs of the enterprise.

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Tendering and Contract contd..

• At the contract-signing stage, no change in the main parameters or
major equipment identified during the tender stage should be made.
The technical documents of the contract should include the basic
design drawings and detailed specification. Complete information on
hull form, structural design, hydrodynamic characteristics and details
of all systems and subsystems should be available at this stage,
specifying all performance standards confirming to statutory rules and
regulations.
• Changes in the contract or any additions/ deletions from the contract
should be discouraged after contract signing since the builder and the
client have to agree on these through mutual discussion, resulting in
delay and, in some cases, rework.

Types
The financial part of the contract can be
following types:
• Lump Sum Fixed Price (LSFP) contract
• The Cost Plus Incentive Fee (CPIF) contract
• the Cost Plus Fixed Fee (CPFF) contract

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Lump Sum Fixed Price (LSFP) contract

• Today most shipyards sign contracts with ship-owners using Lump
Sum Fixed Price contract in which the total price of the vessel paid
by the ship owner to the shipyard is defined along with payments.
• The obligation for completing the ship is the sole responsibility of
the shipyard given of course that the purchaser makes the milestone
payments on time and according to schedule.
• The shipyard needs to include all types of perceivable risk such as
unexpected costs that were not inherent in the calculation and
estimation of the vessel cost. For instance fluctuations in material
costs, and additional man-hours not planned in the contract estimate.
• Once the contract is signed, there are limited if any mechanisms for
price adjustment favorable to the shipyard.

Lump Sum Fixed Price (LSFP) contract contd..

• At the same time, if the shipyard adds too much risk leeway in its bidding
price, this may lead the owner to choose another shipyard with a lower
price for the new building instead. The estimation of the vessel cost
includes the cost of materials, man-hours, depreciation costs and the profit.
• Given that the cost of materials stays the same as predicted during contract
signing, and the production man-hours remain at the forecasted level, the
shipyard could expect to earn a profit. If however, which is frequently the
case for many shipyards, the cost of materials and production man-hours
exceed the predicted shipyard estimates, then the profit becomes smaller. If
the material costs and or production man-hours exceed the shipyard
estimation at even higher levels, then the profit translates to a loss, and the
shipyard will end up owning money instead of earning.
• Therefore it is necessary to analyze methods, which allow for realistic and
fair price adjustment. Especially since earning profit is the reason for
shipyards to operate, and not relying on state subventions as is the case
with many shipyards.

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Cost Plus Incentive Fee (CPIF) contract

• In this type of contract, the price is as per the actual building cost plus a
predetermined fee. In this case the accounts of the builder are to be
scrutinized by the client before any payment is made. This type of contract is
negotiated only when a product is of a new type where estimating building
cost could be difficult and erroneous.
• The advantages of a CPIF contract are that they make it the shipyard’s
prerogative to bring the costs to a minimum by enticing efficiency in
production and procurement of materials.
• The contract cost is known upon the completion of the vessel. If the actual
cost is less than the target cost of the vessel, then the sharing rate agreed
upon between the owner and the shipyard is between 0 and 1.
• The shipyard is guaranteed a profit that is the target profit given that the
shipyard meets certain minimal requirements. The owner takes over all of
the risk if the shipyard meets “performance criteria” such as quality, delivery
on time, and safety.
• There is a “cost performance incentive” for the shipyard if the actual cost is
less than the target cost CT.

Cost Plus Fixed Fee (CPFF) contract

• With the Cost Plus Fixed (CPFF) contract, the shipyard is guaranteed a profit
from the owner. The actual cost of building the ship has no effect on the
profit of the shipyard. In a CPFF contract the owner pays the shipyard a
fixed fee (profit). The owner reimburses the shipyard for all costs
associated with building of the ship.
• In this contract model the shipyard has the least risk, while the profit
negotiated with the owner is certain but usually limited.

• The contract cost or the cost of the owner to the shipyard is equal to the
profit which is constant plus the actual cost of building the ship determined
upon delivery.

• The contract between the owner and the shipyard relates effectively to the
delivery of services required in building a ship as opposed to delivering a
vessel.

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Some features of ship contract

• Since a marine product takes a long time to deliver, starting from
contract signing, the payment of contractual price is made in stages
so that the builder’s expenditure is compensated at the right time.
• The building stages are identified when a portion of the payment can
be made. The identified stages may be some or all of these: contract
signing, 50% steel erection, main engine installation, transfer to
water (launching), dock trials, sea trials and delivery or other
identified stages arrived at by mutual discussion.
• Guarantee items in a marine product include all performance
standards, including construction standards. During the sea trials,
performance characteristics are recorded and compared with
specified criteria. It must be ensured that the trial conditions are
clearly specified since the sea is not stationary at any time.

Some features of ship contract contd..

• Construction standards are ensured by (normally) the classification society
during design evaluation and construction. Regulatory performance is
ensured by design checks and presence of flag state control authorities
during the sea trials.
• The machinery and equipment, which are purchased items, are also
guaranteed by the builder through an agreement with the supplier of such
items.
• In any case, the builder provides a guarantee engineer on board for the
specified guarantee period. Failing any of these technical criteria or
default in construction time or default in stage payment, penalty is also
specified in the contract.

• In the case of excessive deviation from the specified standards, the client
has the right to reject the ship and claim refund of payment with penalty.
Similarly, if the client is unable to take delivery of the product, he has to
compensate the builder with adequate penalty.

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Some features of ship contract contd..

• The contract is also a legal document which specifies how the
client and the builder can resolve disputes.
• If a building schedule is disrupted and delivery is delayed, the
builder suffers heavily. The following are the reasons:
(1) the real value of contractual money received by the builder at
the delayed periods falls and there is a substantial loss,
(2) loss due to payment of penalty due to delayed delivery,
(3) disruption of build schedule of the shipbuilder due to delay in
one ship and consequent expenditure under ‘overheads’ and
(4) loss of goodwill of the shipbuilder in the market and loss of
contracts thereof.

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