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PROJECT MANAGEMENT
WITH REFERENCE TO THE
CAPITAL ACQUISITION
PROCESS

Copyright C. R. Cushing
2011
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Charles R. Cushing, Ph.D., P.E.
30 Vesey Street, 7
th
Floor
New York, NY 10007
Tel. (212) 964-1180
Fax (212) 285-1334
E-mail ccushing@crcco.com

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Typical Ship Prices
Ship Type $, Millions
Container Ship, 12,600 TEU 165
Tanker, Capesize 95
Tanker, VLCC 115
Container – Reefer, 7450 TEU / 3400 Reefer 143
Container Ship 70
Bulk Carrier, 92,500 DWT 70
Bulk Carrier, 34,000 DWT 37
Tanker, Chemical 4,300 DWT 20
Ore Carrier, VLOC 350,000 DWT 135
Cruise Ship, 6,400 Passenger 1,240
Log Carrier, 35,000 DWT 30
Multi-Purpose Cargo, 5,670 DWT 14
Bulk Carrier, 92,500 DWT 70
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World Population of Merchant
Ships, December 2010
Commercial Ships: No.(%) GRT x 1,000(%)
General Cargo 18,178(23.4) 63,525(6.8)
Container Ships 4,869(6.3) 158,112(16.9)
Ro Ro Ships 1,556(2.0) 41,704(4.5)
Bulk Carriers 8,920(11.5) 292,906(31.4)
Oil and Chem Tankers 12,014(15.4) 260,735(27.9)
Gas Tankers 1,552(2.0) 48,159(5.2)
Passenger Vessels 6,382(8.2) 34,100(3.7)
Offshore Vessels 6,283(8.1) 19,248(2.1)
Tugs 3,757(17.7) 3,879(0.4)
Other 4,257 (5.4) 10567(1.1)
Total 77,768(100) 932,935(100)
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Ships on Order
(December 2009)
No. 9,226*
GRT 300,500,000
CGT 152,000,000
* Of which 7,282 are cargo vessels
Source: Lloyds Fairplay Dec. 2009
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Process Applies To:

 Ships
 Ports
 Cranes
 Factories
 Refineries
 Other Capital Projects
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Capacity Acqusition Alternatives
 New Construction
 Conversion
 Purchase Second-hand Vessel
 Bareboat Charter
 Time Charter
 Contract of Affreightment
 Freight Service Agreement
 Consecutive Voyage Charter
 Spot Charter
 Vessel Pooling
 Slot Charter
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History of Project Management

 Dates back to early civilization

 Creative architects and engineers
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Capital Projects






 Egyptian Pyramids
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Capital Projects






 Great Wall of China
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History of Project Management

 Imhotep – Pyramids (2630 BC)
 Qin Shi Huang – Great Wall (221 BC)
 Vitrvius – Roman Aqueducts (100 BC)
 Christopher Wren – St. Paul’s
Cathedral (1632 – 1723 AD)
 Thomas Telford – Bridges & Canals
(1754 – 1834 AD)
 Isambard K. Brunel – Great Western
Railway (1806 – 1859)

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Recent Developments in Project
Management

 Fredrick Wilson Taylor – Pioneer in
theories of scientific management (WBS)
 Henry Gantt – Father of planning and
control techniques – (Gantt Chart)
 Dupont / Remington Rand – Critical Path
Method (CPM)
 Booz – Allen & Hamilton – Program
Evaluation and Review Technique (PERT)
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Capital Projects
 Ships
 Ports
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Project Management

 Planning
 Organizing
 Managing
 Resources to Achieve Specific
Goals
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Project

 Temporary Endeavor
 Defined Beginning
 Defined End
 Unique Goals and Objectives
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Traditional Project Management

 Initiation
 Planning
 Design
 Execution
 Commercial
 Production
 Completion

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Project Management Process

 Traditional PM
 Critical Chain PM
 Extreme PM
 Agile PM
 Event Chain PM
 Event Chain Methodology
 Prince2 (Prompt + Prince)
 Process-Based Management

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 Planning
 Design
 Commercial
 Production
The Process Consists Of:
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“Now here’s an advanced organism. You’ll
note the nucleus and cytoplasm development, along
with what appears to be the first draft of a strategic
plan.”
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Origins of Strategic Planning
 473 BC Sun Tzu’s The Art of War
 1645 Miayamoto Mushashi’s A Book
of Rings
 1800 Napoleon
 1850’s Industrial Revolution
 1860’s Policies and Procedures
 1900 Work Norms and Standings
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Origins of Strategic Planning (Cont’d.)
 1916 WWI Battle Strategy
 1920’s Financial Planning and Control
 1930’s Management by Objectives
 1940’s WWII O.S.S./C.I.A.
 1950’s Strategic Planning
 1970’s-80’s Global Spread of Strategic
Planning
 1990’s Strategic Management
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 Development of Planning
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Factors that Make Strategic Planning Essential in
the Marine Industry
 Cyclical market conditions
 Fluctuating currency exchange rates
 Uncertainty in fuel costs
 Uncertainty in interest rates
 Emergence of trading partners and trading
alliances
 Over tonnaging due (partially) to overly generous
subsidies
 Regulatory and governmental restraints
 Fast paced technology (leading to premature
technological obsolescence)
 More rapid response by Safety and Environmental
Regulatory Bodies to disasters
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Benefits of Using this Process
 Opportunity to optimize vessel characteristics
 Improved delivery time
 Better use of lead time
 Better financing and currency terms
 Better guarantees
 Control of extra costs and changes
 Improved quality
 Chance to introduce innovation
 Product is more “obsolescence – proof”
 Fewer disputes or litigation
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Strategic Planning Asks Four
Questions
 How did organization get to its present
position?
 Where does organization want to go?
 How will it get there?
 How will it function successfully when it
gets there?
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Strategic Planning Process
Appraisals
External Internal
Create Strategies
Evaluate and Choose Strategy
Implement Strategy
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 Strategic Planning Process (Cont’d)

 Strategic Planning Process

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The Company Environment
 The Industry
 The Company
 The Market
 The Competitors
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Other Aspects of the Company
Environment
 Legal
 Regulatory
 Suppliers
 Service
 Technology
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Internal Factors
 Company strengths
 Company weaknesses
 Areas of vulnerability
 Profitability
 Productivity
 Customer satisfaction
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Other Internal Environmental Factors

 Load factors
 Service levels
 Transit times
 Frequency of sailings
 Schedule reliability
 Cargo damage statistics
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The Competitive Environment
 Strength of competitors
 Weakness of competitors
 Market shares
 Technology
 Pricing
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Analysis of the Market
 Historical demand
 Current demand
 Forecast
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FORECASTING
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Sources of Data for Cargo Flow Studies
 Government report (National and U.N.)
 Custom revenue statistics
 Manifests
 Census data
 Government statistical abstracts
 Industry commodity trade data
 Trade association reports
 Newspaper/trade journal traffic reports
 Port authority statistics
 Trade Conference data
 Market research consultants
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Sources of Data for Competitor Analyses
 Advertising
 Sailing schedules
 Web sites
 Directories
 Classification society computer searches
 Shipping directories
 Ships-on-order publications
 Search services
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Pricing Studies
 Tariffs
 Charter fixture data
 Industry scales
 Periodical summaries
 Cost analyses
 National and international economic
indices
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Pricing Perturbations
 Government aid
 International conflicts and calamities
 “Cut Throat” competition
 Predatory pricing practices
 Price wars
 Technology breakthroughs
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Global Events Affecting
Shipping and Shipbuilding
Natural Disasters
 Major Earthquakes (i.e. Kobe)
 Tsunami
 El Nino Effects
 Drought in Panama
 Global Warming
 Pollution
 Epidemics, Plague, etc.
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Global Events Affecting
Shipping and Shipbuilding
Economic Conflict
 Subsidies
 Embargoes
 Protectionism
 Trade Wars
 Monopolies
 Etc.
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Global Events Affecting
Shipping and Shipbuilding
 Protectionism
 Nationalism
 Tariffs
 Subsidies
 Cabotage
 Preferential treatment
 Bi-lateral trade agreements
 Cargo sharing
 Restriction on flow of capital
 Barriers to investment
 Government aid
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Global Events Affecting
Shipping and Shipbuilding
Economy and Trade
 OPEC
 Shipbuilding Shifts: Europe to Japan to Korea to
China
 Availability of Capital for Investment
 World, Regional, and Local Economies
 Confidence of Investors
 Availability or Shortage of Workers
 Depressions and Recessions
 Inflation
 Market Volatility
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Global Events Affecting
Shipping and Shipbuilding
Technology
 Channel Tunnel
 Second Isthmus Canal
 Superconductivity
 Fuel Cell Propulsion
 Post-Panamax Containerships
 Double Stack Rail Cars
 Land Bridges
 Etc.
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Global Events Affecting
Shipping and Shipbuilding
Anti-Social Activities
 War
 Terrorism
 Piracy
 Drug Trade
 Government Corruption
 Commercial Corruption
 Etc.
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Global Events Affecting
Shipping and Shipbuilding
Legal Impact of Marine Disasters
 Torrey Canyon
 Amoco Cadiz
 Herald of Free Enterprise
 Estonia
 Braer
 Erika
 Prestige
 Etc.
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Global Events Affecting
Shipping and Shipbuilding
Shipping and Shipbuilding Conventions and
Legislations

 Port State Control
 Erika I and II
 Basel I and II
 Ballast Regulations
 Air Pollution Regulations
 Etc.
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Strategy Development
 Corporate objectives
 Strategic objectives
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“Objectives are the fundamental strategy
of a business.”
- Drucker
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Corporate Objectives
 Profitability
 Return on Investment/Payback period
 Market share
 Growth
 Stability
 Product or service quality
 Meeting market needs
 Competition
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“No Smedley! I said we need more profits, not more
prophets!”
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Strategic Objectives – Fixed Elements
 Competitive environment
 Company resources
 Management values
 Societal expectations
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Strategic Objectives – Controllable Elements
 Corporate structure
 Marketing policies
 Finance policies
 Accounting policies
 Manufacturing or service policies
 Human resources policies
 Research and development policies
 Organizational policies
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Strategic Issues
 Volume of cargoes
 Actions of competitors
 Technological developments
 Governmental restraints
 Other external environmental factors
impacting the company’s ability to meet
its projections.
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Strategy Selection
 Develop a number of options
 Prepare pro forma financial projections
 Compare alternatives against corporate
objectives
 Compare alternatives against each other
 Select best alternative
 Optimize selected alternative
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Selection Process
 Pro forma financial projections
 Carry out simulations
 Perform sensitivity analyses
 Test options against financial criteria
 Minimize risk
 Optimal use of corporate resources
 Examine impact of unexpected changes in
forecasts
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Risk Analysis
 Risks we can afford to take
 Risks we cannot afford to take
 Risks we cannot afford not to take.
- Drucker
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Entry Plan
 Timing and scheduling
 Time table
 Coordination of corporate activities
 Coordination with external organizations
 Marshalling of resources
 Government actions, permits, licenses
 Political support
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Exit Plan - Actions
 Scrap the plan
 Sell
 Swap
 Merge
 Withdraw gradually
 Withdraw completely
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Alternatives to Exit
 Commit additional resources
 Shift priorities
 Reduce effort
 Merge
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Strategy Implementation
 Business plan
 Marketing plan
 Competitor plan
 Operations plan
 Financial plan
 Technology plan
 Organization plan
 Corporate development plan
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Business Plan
 Description of Company
 Company History
 Marketing Strategy
 Management Team
 Organization & Personnel
 Operations
 Funds Required & Their Use
 Financial Data
 Risks
 R & D Required
 Legal Issues
 Insurance Considerations
 Schedule
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Financing Plan
 Amount Requested
 Purpose of Financing
 Use of Funds
 Description of Collateral
 Source of Repayment
 Whether Seeking Other Debt Financing
 History of Company
 Description of Business
 Description of Market
 Financial History of Company
 Financial Projections
 Financial Assumptions
 Schedule of Assets & Liabilities
 Description of Management & Ownership
 Financial Status of Owners
 References
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“On second thought, maybe a periodic re-assessment of the
MISSION STATEMENT might not be such a bad thing”

NON SEQUITUR
-WILEY
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Mission Statement - Route
 Origin, destination and route
 Transit distance
 Transit time
 Frequency of service
 Delays in service, planned and unplanned
 Weather conditions
 Current
 Vessel traffic systems
 Canal characteristics
 Ice conditions
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Mission Statement - Cargo
 Quality of cargo
 Type of cargo
 Cargo characteristics
 Cargo stowage and securing requirements
 Cargo care requirements

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Mission Statement - Infrastructure
 Port characteristics
 Terminal characteristics
 Physical restrictions
 Port costs
 Cargo handling methods and rates
 Turnaround time
 Inland transport considerations
 Weather conditions
 Docking assistance and mooring requirements
 Fuel availability and cost
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Mission Statement - Vessel
 Type of vessel
 New, converted or existing vessel
 Number of vessels
 Capacity, normal and maximum
 Speed, normal and maximum
 Type of machinery if known
 Type and source of fuel
 Chewing – nationality, unions, quarter
standards
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Mission Statement- Commercial
 Existing or projected freight rates
 Competitor characteristics
 Anticipated market share
 Conferences
 Trade restrictions
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Mission Statement - Economic
 Required international rate of return
 Prime and/or other rates
 Subsidies and/or grants
 Crew rates
 Insurance rates
 Fuel costs
 Tolls
 Port charges
 Vessel financing and interest rates
 Life of vessel
 Tax schedules
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Mission Statement - Government
 Vessel registry and classification
 Governmental restrictions
 Cabotage laws
 Environmental restrictions
 Safety restrictions
 Registry
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 Planning
 Design
 Commercial
 Production
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Engineering
The art of applying –
 Knowledge
 Scientific principles
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DESIGN is the essence of
ENGINEERING
- Buxton
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The CPCD Design Sequence
 Concept
 Preliminary
 Contract
 Detailed
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Design
 Drawings
 Sketches
 Artist renderings
 Diagrams/Schematics
 Computer imaging
 Calculations
 Models
 Model testing
 Research/Development
 Experimentation
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Design Includes
 Industry standards
 Classification society rules
 Governmental regulations
 Manufacturers’ specifications
 Shipbuilder’s design detail standards
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The Engineer Is Faced
With Conflicting Requirements
Example
 Physical – minimum weight
 Economic – minimum cost
 Social – maximum safety
 Environmental – minimum impact
 Commercial – maximum efficiency
 Esthetic – maximum stylishness
 Etc.
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The engineer resolves these
conflicts and searches for
“optimum” solutions.
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Design is solving a problem with
many VARIABLES.
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Design is an ITERATIVE process.
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Prior to 1970, designers used
The DESIGN SPIRAL.
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DESIGN SPIRAL
 Hull form
 Appropriate dimensions
 Hull prismatic coefficients
 Power estimates
 Weight estimates
- Hull
- Machinery
- Outfitting
 Deadweight capacity




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Computers permit multiple criteria –
multi variate search patterns.
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“Conservative pressures increase as
the design progresses.

Hence the early stages should be
biased towards the novel.”
- Brown
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“New ships should be
 25% novelty
 75% well proven practice.”
-
Baker
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CONCEPT DESIGN
Requires
 Innovation
 Creativity
 Judgment
 Technical perception
 Economic awareness
 Analytic log
 “Hands on” control of the synthesis process
 No computers
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Concept Design
 Synthesis takes place.
 Requirements evolve into form and
configuration.
 Some dimensions and principal
characteristics may evolve.
 Results in sketch or drawing.
 May include a written description.
 May include more than one alternative.
 10 to 80 man – days.
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Preliminary Design
Should also establish

 Ability of vessel to meet mission statement.
 Regulatory feasibility.
 Patent infringements (if any).
 Need for new technology.
 Model testing requirements.

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Preliminary Design
 The second iteration in the design process.
 Provides more detail.
 Provides more accurate dimensions.
 Focuses on essential features.
 Provides enough detail to verify.
- technical feasibility
- economic feasibility
 Provides outline specification.
 Provides enough information for
- Construction cost estimate
- Operating cost estimate
- Revenue generating estimate
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Contract Design
 The third iteration in the design process.
 Creates definitive description of the vessel.
 Can be used as contract documents.
 Permits total meeting of the minds between
designer and builder.
 Increase details and accuracy of the design.
 Increase accuracy of feasibility checks.
 Decreases risks.
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Typical Ship Design Package
 Plans
 Specifications

 Reference material
- Drawings
- Guidance calculations

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Contract Design
Should
 Avoid ambiguity
 Avoid excessive specifics.
 Be precise.
 Use legal terminology.
 Avoid use of guidance drawings.

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Classification Societies
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The Role of Classification Societies
 Construction Standards
- Rules
- Survey
 Maintenance and Repair Standards
- Rules
- Survey
 Certification
 Safety Auditing (ISM)
 Environmental Auditing (ISO)
 Technical Guidance
 Regulatory – Flag state
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THE IACS SOCIETIES
 ABS
 BV
 CCS
 DNV
 GL
 KR
 LR
 NK
 RINA
 RS
 CRS (Associate)
 IRS (Associate)
 PRS (Associate

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 Class is not a substitute to an effective project
management, inspection and survey program.

 An owner cannot delegate his responsibility to
assure that his vessel is seaworthy.

- Sundancer decision
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Model Basins
 Resistance and Propulsion
- Still water
- Waves
 Seakeeping
 Mooring forces
 Maneuverability
 Forces and motions
 Propeller performance
 Wake field
 Ice breaking
 Wind resistance (wind tunnels)
 Smoke flow (wind tunnels)
120
The Role of the Manufacturer
in High Tech Equipment
 Technical Information
 Quality Control During Manufacture
 Installation & Start-Up-Support
 Guarantees
 Service
 Stock of Spares
 Crew Training
 Documentation
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Consulting Naval Architects
and Marine Engineers
 Transportation planning
 Marine economic analyses
 Conceptual design
 Preliminary design
 Contract design and specifications
 Working (detailed) drawings
 Plan review
 Tests, sea trials, witness same
 Construction and repair inspection
 Contract management (owner’s representative)
 Guarantee engineering
122
Terms Used for Engineers
Working in Marine Field
 Naval Architect
 Marine Engineer
 Naval Engineer
 Naval Constructor
 Ocean Engineer
 Shipbuilding Engineer
 Marine Surveyor
 Licensed Marine Engineer
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 Planning
 Design
 Commercial
 Production
124
Commercial
 Selection of yards for invitation
 Request for expression of interest
 Invitation to bid
 Bid analysis invitation to bid
 Pro-forma contact invitation to bid
 Negotiations
 Financing
 Contracting
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Factors in Selecting Yards for Invitation
 Physical characteristics
 Technical capabilities
 Experience
 Order book
 Employment
 Location
 Ability to assist financing
 Reputation
 References
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121a
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Request for Expression of Interest
 Simple and brief inquiry.
 Sent by e-mail or fax.
 Saves time and effort.
 Permits assessment of number of yards
participating.
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Invitation to Bid (RFP)
 Best process.
 Make create legal obligations.
 Not to be used to develop price estimates.
 Use standard formats.
 Formality is required.
 Use bid form.
130
Information to be Sent in
Invitation to Bid

 Brief description of vessel.
 Name and address of person requesting
proposal.
 Number of vessels and options (if any).
 Documents
- Plans
- Specifications
- Pro-forma contract or Heads of Agreement
 Required delivery.
(cont’d.)
131
 Requirement for cash price
 Currency
 Financing terms
 Confidentiality of owner’s documents
 Performance bond (if any)
 Period of validity of bid
 Obligations on owner concerning bids
 Signature by authorized representative
(Cont’d.)
132
 Additional yard information
- Quality information
- Yard standard details
- Current order book
- Financial statement
- Bank reference
- Management plan
- Technical plan
- Major event schedule
 Complete bid form
133
Tips in Bidding
 Hold bidders’ conference.
 Use addenda, if necessary.
 Be firm on submittal date.
 Create short list.
 Be courteous and fair.
 Ensure ethical practices.
134
Bid Analysis
 Price for one vessel
 Price for a multiple vessel order
 Currency of payment
 Additional cost for financing
 Location of yard (and distance to where vessel or
vessels will be deployed)
 Cost of positioning vessel
 Reputation, experience and quality of yard
 Financial health of yard
 Proposed building schedule
 Owner’s costs as they relate to yard location (i.e.
inspectors’ housing, travel, taxes, etc.).
135
Negotiations
 Have primary bidder and two back-up bidders.
 Beware of driving bidder below level of
profitability.
 Be well informed and prepared.
 Be aware of legal obligations in negotiating stage.
 Have at total and complete meeting of the minds.
 Yard to take total responsibility for design.
 Avoid split responsibilities.
 Review, in detail, all documents and initial every
page and drawing.
- Contract
- Specifications
- Drawings
136
Tips in Negotiating
 Be fair.
 Be patient.
 Be firm, until it is absolutely necessary to
be flexible.
 Take enough time for the process.
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McCormack’s Rules for Negotiating
 Do not get stranded by “how much”. Money
issues are only one part of the transaction.
 Let the other party go first (with terms and
numbers).
 Play in majors.
 Do not deal in round numbers.
 Avoid showdowns.
 Negotiate backwards.
 Trade places.
 Mollify then modify.
 Deflect with a question.
 Question positions but do not ignore them.
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McCormack’s Rules for Negotiating
(Cont’d.)
 Improve the offer with other parties’ self
interest.
 Consider barter.
 Keep your time frame quiet.
 Step back and relax.
 See emotional outbursts as opportunities.
 Act in anger – never react in anger.
 Give the other parties side victories.
 Use candor.
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Silbiger’s Rules for Negotiating
 Know your opponent.
 Know yourself.
 Do your homework.
 Understand your strategy.
 Understand your limits.
 Review your negotiations, afterwards.
133a
Buyers’ Market
 Low prices
 Early delivery
 Attractive financing terms
 Proactive engineering
 Yard flexibility
 Buyers’ contract terms
133b
Sellers’ Market
 High prices
 Long delivery
 Little or no yard financing
 Sellers’ terms
 Inflexibility
142
Ship Finance

Sources
 Equity
 Debt
 Grants
143


World wide need for
Ship Financing

$250,000,000,000 per year
144
What form of financing to use?
FRICT approach
 Flexibility
 Risk
 Income
 Control
 Timing
145
Factors to Consider in Financing
 Unused tax depreciation - Leasing
 Excess debt - Equity
 Potential business risk - Equity
 Buyer’s market - Shipyard Credit
 Large earning power - Debt
 Strong, predictable cash flow - Debt
 Low stock price low expectation – Hybrid
 Long term, fixed rate - Bonds
146
Debt Financing
 Least expensive
 Most restrictive
 Commercial or government loans
 Loans secured or collateralized
 Mortgages
 Possible pledge of:
- earnings
- insurance
- corporate guarantees
- pledge of shares
- personal guarantees
 Seldom 100%
147
148
Sources of Debt Financing
 Commercial banks
 Ship finance banks
 Investment banks
 Government banks
 Commercial finance companies
 Saving and loan associations
 Pension funds
 Insurance companies
 Commercial credit companies
 Account receivable factors
 Manufacturers and vendors
149
Debt – Commercial Finance Cos.
 GE Capital
 Greyhound
 CIT
 Kleinwart Benson
 Henry Ansbacher
 Samuel Montagu
 Others
150
Debt – Commercial Banks
 Norwegian owners - Norwegian banks
 Chinese owners - Hong Kong banks
 Japanese owners - Japanese banks
 Greek owners - Non-Greek banks
151
Debt – Mezzanine Financing
 Used when bank unwilling to loan owner
sufficient money.
 High yield corporate debt, i.e. Junk Bonds.
 Closes gap.
 Provides high return.
 Compensates for high risk.
 Usually arranged by investment banks.
152
Debt - Bonds
 Issued by shipowner
 Certificates of indebtedness
 Specific purposes
 Specific rates and period

153
Debt – Ship Mortgages
Purposes:
 Public record of lien
 Priority of the lien
 Sequence of prior liens
 Agreement between lender and owner:
- Operation
- Insurance
- Maintenance
- Trading areas
154
Debt – Factors Considered in
Granting Loans
 Age of business
 Type of operation
 Method of payment
 Currency of loan and repayment
 Collateral
 Character of management
 Credit history
 National economic factors
 Industry
 Mortgage and loan terms
155
156
Quality of Borrower
 Liner Co.
- Ability to Market it’s Service
 Bulk Carrier Owner
- Ability to Service Debt
- Cash Flow
- Quality of Charters
157
Debt - Rates
 Floating (variable)
- usually tied to LIBOR
 Fixed
- Rare from commercial banks.
 “Swap”
- Swaps are more costly
- Lender and third party who have excess
variable and fixed rate funds arrange
swap.
 “Cap”
- Protects against rising rates.
- Lender pays interest over an agreed level.
 “Collar”
- Reduces extra costs for a cap.
- A combination of a cap and “floor”.
158
Spread
 Difference between cost of funds to the
lender and the borrower.
 Based on:
- Credit worthiness of owner
- Risk in shipping operation
- Size of loan
- Period of loan
- Type and amount of security
- General supply and demand for loans
159
Leases
 Operating
 Finance
160
Leveraged Leases
Most ship leases are leveraged leases.

Owner Lessor
■ Provides equity portion of funding ■ Provides debt portion
■ Retains ownership ■ Holds mortgage
■ Make lease payments ■ Receives assignment of lease
payments.
■ Tax benefits
■ Residual at end of lease
(sometimes).

161
Off-Balance Sheet Financing
 Indebtedness does not show on balance
sheet.
 Usually done through chartering
 Not legal in U.S. nor GAAP.
162
Sources of Equity Funds
 Retained earnings
 Cash Flow
 Sale of Assets
 Sale of stock
- common
- preferred
 Limited partnerships
163
Sale of Stock
 Public Offering
- Strict government controls
- Rigorous accounting
- Expensive
- Time consuming
 Private Placement
- Insurance Cos. (casualty and property)
- Mutual funds
- Finance cos.
164
Hybrid Financing Schemes
 Convertible debt
 Debt with warrants
 DIFKO (Danish)
 K/G System (German)
 Blocked currency schemes
 Barter deals
165
Government Grants
 Loans
 Loan guarantees
 Subsidized interest rates
 Cash grants (owner or builder)
 Cash or credit to allied industries
 Operating subsidies
 Favorable tax treatment
 Moratoria on debt repayment
 Training funds
 R & D
 Scrapping subsidies
166
The Shipbuilding Contract
167
Contracting
Why It Can Be Complicated
 International transaction
 Different laws:
- construction/building
- provision of services
- sale of goods
 More than 2 parties
 Much money
 Obligation may occur early, during
- bidding phase
- negotiations
 Constantly changing
- laws
- interpretations of law
- tax regulations
168
Contracting
 Written (usually)
 Involves legal advice and assistance
 Often starts with “Heads of Agreement”
and a “pro forma” contract
 Sometimes letter of understanding
169
Shipbuilding Is
Governed By Many Laws
 Contract law
 Other laws:
- tort
- fraud
- negligence
- employment
- environmental
- etc.
170
Contract
 A promise enforceable by law.
 “A contract is a promise or set of promises
for the breach of which the law gives a
remedy, or the performance of which the
law in some way recognizes as a duty.”
 Pact Sund Serventa (Promises made must be
kept)

171
Conditions for a Contract
 An offer
 An acceptance
 Consideration
 Intent to create a legal relationship
 In writing (sometimes oral)
 Parties are competent
 Form required by law
 Not impossible of performance
 Not contravene law or public policy
172
An Offer
 Complete
 Free of ambiguities
 Properly communicated
 Fixed time of acceptance (or kept open for a
reasonable time)
 May be revoked
- before acceptance
- providing offer provides for notice of
revocation.

173
An Acceptance
 Creates the binding contract
 Must be absolute and complete
 Qualified or conditional is NOT an
acceptance (it is a counter offer).
 Silence is NOT an acceptance.
174
A Contract May Be Voided
 Material misrepresentations
 Fraud
 Duress
 Improper conduct
175
Shipbuilding Contracts

 Specially drafted
 Owner or builder’s standard form
 Industry standard
- SAJ form
- AWES form
- MARAD form
- Norwegian form
-BIMCO
PRINCIPAL ELEMENTS OF A
SHIPBUILDING CONTRACT

166a
177
 A Comparison of Standard Form Shipbuilding Contracts

178

179
Basic Elements of a
Shipbuilding Contract
 The parties
 What is to be done
 Price
 Delivery
 Guarantees
 Tests
 Change procedures
 Right to reject
 Default
 Title
 Jurisdiction
170
Escaping Contracts
 Walk Away
 Delay
 Renegotiate Delivery
 Frustrate Greenfield Yards
171
 Planning
 Design
 Commercial
 Production
182
Production Management
 Specialized Management Techniques
 To Plan and Control Projects
 To Complete Defined Work
 On Schedule
 Within Budget
 Meet Quality Constraints
183
Purposes of Production Management
 Fulfill original objectives
 Keep project within budget
 Keep project on schedule
 Coordinate project team
 Detect need for and take corrective action
 Communicate progress to management
184
Define Project

 State objectives and goals
 Prepare mission statement
 Develop work plan
 Create Work Breakdown Structure
Document (WBSD)
185
Establish Schedule

 Define Tasks
 Select milestones
 Define interrelationships
 Establish timing and deadlines
186
Prepare Budget

 Identify or estimate all costs
 Allow for margins/contingencies
 Establish timing of expenses
 Adopt financial controls
 Obtain approvals

187
Team Budget Elements
 Wages
 Benefits
 Local taxes – if any
 Global taxes – if any
 Travel expenses
 Supplies and equipment
 Communication costs
188
Owner’s Expense Budget
 Owner furnished equipment
 Crew costs
 Professional costs
 Legal
 Accounting
 Technical
 Stores and supplies
 Fuel and lube
 Entertainment and ceremonies



189
Team
 Select and recruit team leader
 Develop team position/tasks
 Establish timing for each
 Recruit members
 Indoctrinate
 Delegate
190
Managing Your Team
 Staying in control
 Evaluating your team
 Identifying and dealing with different
personality types
 Motivating your team
 Managing clients
 Effective team organization
191
Control Project
 Communicate
 Coordinate
 Meetings – scheduled and unscheduled
 Review and audit
 Make adjustments/corrections as necessary
 Document
192
Production Control Techniques
 Full wall scale charts
 Gantt charts
 PERT
 CPM
 Programs
193
Gantt Chart
194
PERT Chart
195
Monitor Critical Elements
 Require production statistics
 Monitor milestones
 Watch critical paths
 Identify choke points/bottlenecks
 Make projections/extrapolations
 Anticipate problems
196
When Things Go Wrong
 Identify real problems
 Get input from team
 Investigate thoroughly
 Analyze possible solutions
 Take timely corrective action
 Meet with yard
 Communicate with stakeholders
197
Tips
 Delegate effectively
 Be a good listener
 Be fair with everyone
 Use good time management
 Avoid bureaucracy
 Be decisive and clear
 Communicate thoroughly
 Insist on ethical behavior
198
Production Activities
 Owner’s representative
 Contract management
 Project management
 Plan approval
 Inspection
 Quality control
 Testing
 Crewing, storing, fueling
 Delivery and acceptance
 Post production activities
 Warranty and guaranty
 Closing the project
199
Detailed Design Materials
 Working plans
 Finished drawings
 Posted plans
 Vendor drawings
 Field sketches
 Shop drawings
 Schematics
 Drawing changes
 Operating manuals
 Safety manuals
 Maintenance, repair and trouble shooting manuals
 Test agendae, protocols and results
 Tech specs for equipment procurement
200
Inspectors
 Hull
 Machinery
 Outfitting
 Electrical
 Coatings
 Welding
201
Delivery and Acceptance
 Title passes when
- physically delivered
- at another time, if both parties
contractually agree
- vessel registered
- execution of bill of sale
- when both parties so declare
- when ship is in a “deliverable” state
- bill is paid
- builder completes his performance
progressively
202
Post Production Activities
 Deficiencies
 Unfinished work
 Temporary and permanent documents
 Warranty and guaranty
203
Management Science Techniques
 Linear programming
 Integer linear programming (simplex method)
 Network flow models
 PERT/CPM
 Queuing models
 Inventory models
 Computer simulation
 Decision analysis
 Goal programming
 Analytic hierarchy process (AHP)
 Forecasting process models
 Dynamic programming
192a
Innovative Techniques
 Clarification of aims
 Abstract reformulation
 Morphological synthesis
 Inductive reasoning
 Deductive reasoning
 Value analysis
 Brain storming
 Brain writing
 Heuristic programming
192b
Innovative Techniques (Cont’d.)
 Idea combinations
 Negative brain storming
 Re-thinking through questioning
 Lateral thinking
 Independent review
 S Curve strategy
 The in-and-out strategy
 The 5-15 idea generating


206
Problem
Solving
Decision
Making
Define the Problem
Identify the Alternatives
Determine the Criteria
Evaluate the Alternatives
Choose an Alternative
Implement the Decision
Evaluate the Results
193b
Innovative Techniques (Cont’d.)
 Synetics process
 Attribute listing
 PMI evaluation
 Matrix thinking
 Forced relationships
 Force field analysis
 The angel’s advocate
 Extrapolation and interpolation
194
Comparing
Technologies
Feasibility
Studies
Ideal Design
In one
Technology
Optimization
Studies
195
Economic Analysis
210
198
199