chapter contracts and speciﬁcations · of such risk may be the need to negotiate a change order...

9.1 INTRODUCTION TO SHIPBUILDING CONTRACTS

9.1.1 Decisions Required for a Shipbuilding ContractA contract for the construction of one or more vessels is thelogical outcome of a decision by a shipowner to acquire thenew ship(s) to further the objecti ves of the or ganization.Possible objectives include: a favorable return on in vest-ment; a public service (ferries, search and rescue, etc.); acaptive transportation link as a component in a lar ger lo-gistics system; a military or security capability; en viron-mental monitoring and preservation; scientific research; anrecreation (cruise vessels and large yachts); among other ob-jectives of ship owning organizations.

Once the decision to acquire the new ship is made, mul-tiple follow-on decisions are necessary. Many of those de-cisions are reflected in the technical specifications and planor drawings, which define the physical ship that will satisfthe requirements of the shipowner. The development of thosetechnical requirements in the form of Contract Specifications and Contract Plans is discussed at length in Section 9.3.

However, many non-technical decisions are needed also(see Chapters 4 and 10). Some of the non-technical deci-sion involve selecting a naval architectural firm to d velopthe technical requirements; the extent to which the designwill be de veloped by the shipo wner; the identification oqualified shi yards that will be in vited to submit bids orproposals; the format of the request for proposals or in vi-tation to bid; the flag of rgistry for the completed ship; and

the classification o ganization that will be involved duringdesign development and construction. In addition to thosedecisions, the shipowner’s organization must select:

• the means of financing the construction of the ship• the means of financing the mortgage for the complete

ship,• the basis of comparison of of fers or bids from se veral

shipbuilders,• a shipbuilder from among the responsive bidders,• the format of the shipbuilding contract, and• other non-technical decisions that need to be made just

to initiate the acquisition process.

There are hazards associated with each such non-tech-nical decision, which hazards are in the form of risks asso-ciated with the rele vant experience of the na val architect,the locale of the shipb uilder, the applicable law, financiaguarantees, and the relevant experience of the shipowner’sstaff that is managing the ship acquisition process, amongother factors. The process of de veloping the contract forship construction and the letting of the contract by theshipowner is,accordingly, an orderly sequence of risk eval-uation at each step along the w ay, followed by action thatminimizes the relevant risks or considers other factors if aslightly greater risk is found acceptable.

For example, from a shipowner’s perspective, retaininga naval architectural firm that has designed and similar es-sels may present a lesser risk than utilizing the services ofone that has only designed other forms of v essels, thoughthe risk differential may be minimal. An adverse outcome

9-1

Chapter 9Contracts and Specifications

Kenneth W. Fisher

© Copyright 2001 by Kenneth W. Fisher and The Society of Naval Ar-chitects and Marine Engineers.

of such risk may be the need to ne gotiate a Change Orderto achieve a partial rearrangement of se veral items to en-hance operating efficien y, based on the operator’s experi-ence, which experience was not appreciated by the na valarchitects for whom this was their initial design of this shiptype. If the shipyard is accomplishing that level of design,the shipowner may be similarly concerned about the expe-rience of the shipyard’s design staff.

The decision as to ho w much of the design is to be de-veloped by the shipowner’s naval architects and design en-gineers, and how much design development responsibility isto be assigned to the shipyard, is an important one. For cer-tain vessel types,such as tankers and bulk carriers, shipyardsmay offer standard designs at attractive prices. Shipownersmust recognize that such standard designs are generally op-timized from the shipyard’s production perspective, and maynot result in the best operational,economic and maintenanceconsiderations from the shipowner’s perspective.

The considerations and process leading to those non-technical decisions are almost always unique to each shipowning organization, thus precluding the possibility of acomprehensive discussion of them. Consequently , whilethis chapter will occasionally refer to the outcome of mostof those non-technical decisions, with one exception, theyare not a point of focus within this chapter. The exceptionto those non-discussed, non-technical decisions is the lastone mentioned, the format of the shipbuilding contract. Thissubject is thoroughly discussed in Section 9. 2.

9.1.2 Learning from ExperienceA new ship for most ship owning organizations is just onemore in a series of vessels in its possession, but sometimesan acquisition of a ne w ship is a first for an organizationthat is just getting into ship owning. Initially, it would ap-pear that ship-o wning organizations that pre viously haveacquired ships possess the experience to undertake the ac-quisition process without difficulty due to that pr vious ex-perience. Conversely, it would appear that first-time shiowning organizations likely would encounter greater difficulties due to the lack of relevant experience. However, nei-ther of those statements is necessarily true.

The only e xperience a ship o wning organization canbring into a ship acquisition process is that of the indi-viduals involved on behalf of that or ganization. If therehave been a turno ver of personnel since the last se veralacquisitions, all of the learning that came into the organ-ization through those acquisitions was lost to that organi-zation if key personnel departed. In other words, there isno corporate memory unless there is no turno ver of keypersonnel or if that e xperience has been translated into

documentation that is used for each subsequent ship ac-quisition. However, such documentation is a rarity in themarine industry, with the notable exception of large gov-ernment agencies ha ving numerous documented proce-dures and sub-procedures. But e ven if acquisitionguidelines and procedures are documented,they still haveto be implemented by the Purchaser’s staff, which imple-mentation may result in ne w interpretations of the sameprocedural language.

Similarly, it can be appreciated that a first-time shipowner can, in fact, have the benefit of prior ship acquisition experience by using, as employees or consultants,persons having directly relevant experience. It is importantto stress the word relevant, since non-relevant experienceis often the basis of false confidence or misunderstandingsleading to difficulties in the ship acquisition process. Somship owning organizations have occasionally used personsfrom other industries to oversee a ship acquisition process,leading to difficulties arising from the significant disparties between procedures and expectations between the dif-ferent industries.

The same perspective is also valid for shipyards; the per-sons involved in the development and negotiation of ship-building contracts on behalf of the shipyard can unwittinglycreate situations, which are more likely to lead to contrac-tual difficulties if the xperience of past contracts is not ad-equately translated into the ne w contract de velopmentprocess. For example, a shipyard having considerable cata-maran-building experience contracted to construct a SWATH-type vessel using estimates based on its prior twin-hullexperience. However, due to width restrictions at the water-line, the SWATH construction was far more costly than com-parably sized catamaran vessels.

The Chief Executive of the Ro yal Institution of Na valArchitects in 1998-2000, Mr. Trevor Blakeley, introducedthat organization’s biannual courses on the management ofshipbuilding contracts by stating this:

“We have all heard of disasters involving ships, shipsthat have run aground, broken in half in severe storms, im-pacted vehicular bridges in fog, or even experienced fires.But there is another form of disaster involving ships; namely,contractual disasters, situations in which the shipyard andshipowner are both terribly harmed due to mismanagementof the shipbuilding contract.”

The primary basis of this chapter is past experience, nota theoretical approach to the development of contracts,agree-ments, specifications and plans.The avoidance of the secondtype of ship disasters, contractual disasters, is the educa-tional intent of this chapter. Thus, in a sense, it is a form ofdocumentation of lessons learned from prior e xperience inthe development and management of shipbuilding contracts.

9-2 Ship Design & Construction, Volume 1

9.1.3 Perspectives, Not StandardsIt is recognized that some persons reading this chapter mayinterpret it as establishing a standard for appropriate ship-building Agreements, Specifications Plans and contract man-agerial duties for ship construction. It is not intended thatthis chapter establish such standards. This chapter is for in-structional purposes only, intended for those persons whodo not yet possess e xperience sufficient to ma e the deci-sions that are needed in contract formation and management.The fact that in actual practice an organization may not ad-here to the ideas and perspectives set forth below is not nec-essarily an indication of inadequate contracting andmanagement. Rather, the ideas and perspectives presentedin this chapter are intended to bring to light v arious possi-bilities and lessons learned in both contract de velopmentand contract management. The relevant experience and qual-ifications of each party s contract management team, cou-pled with the specific nature of the project and influenceby market, financial regulatory and classification actors,may singularly or collecti vely be superior f actors, relativeto this chapter’s recommendations, for the establishment ofan appropriate contract and form of contract management.

9.1.4 Contract Development and ManagementThere are three aspects of shipbuilding contracts and spec-ifications that are rel vant to the conte xt of this book andwhich also are central to the interests of technically-ori-ented persons who are lik ely readers of this book: 1. for-mation of the agreement – the keystone of the contract; 2.formation of the specifications and plans – the ey techni-cal components; and 3. management of the Ccontract dur-ing ship construction.

Each of those three k ey areas is addressed as sections,below. Prior to considering them, however, some funda-mental understandings of shipb uilding contracts are re-viewed. It will be seen, the title of this chapter notwithstanding, that specifications are just one of sveral partsof a shipbuilding contract. The word “specifications is in-cluded in the title of this chapter to emphasize that this chap-ter is not a discourse on contracts that is suitable for the legalprofession; rather, it is specially intended for project per-sonnel other than attorneys.

Reference 1 is a treatise on shipb uilding contracts thataddresses legal issues. Per the Foreword of it, the purposeis to “present the law relating to shipbuilding contracts inas wide a perspective as possible.” It was initially compiledby a sub-committee of the Assembly of the Comité Mar-itime International, and subsequently edited into a uniformformat by Malcolm A. Clarke, Ph.D., Fellow of St. John’sCollege, Cambridge. The book addresses matters of finan

cial security, title, risks and insurance, default and termi-nation, among other non-technical subjects.

9.1.5 Contracts and Technical ManagersWhile this chapter focuses on new ship construction, nearlyall the elements of it are also applicable to major ship con-version projects, and many of its elements are also pertinentto ship repair. Agreements and Specifications for both shiconversion and ship repair will need to be supplemented byother elements not described in this chapter, and some of theelements described herein would have to be deleted. The rea-son for the inclusion of this chapter in an otherwise techni-cal book is that the contract is the mechanism that con veysthe technical, as well as non-technical, understandings, ob-ligations, rights and responsibilities between the shipowner(or Purchaser) and the constructing shipyard (or Contractor).

The contract is the instrument that allows the intangibleproduct of the designing naval architects and marine engi-neers to become a reality; without a contract, the designwould never be translated into a tangible object.

Some vessels have been constructed, it may be said byothers, without a contract. What is really meant, however,is that the vessel was constructed in accordance with an oralcontract, not a written one. While this is altogether possi-ble, it means that the risks associated with the v essel con-struction were not addressed, so both parties were takinggreat risks over financial and technical aspects hoping thatthe outcome would be satisfactory, but having no writtencommitment to that objecti ve from the other party . Thus,there is always a contract, but in some rare circumstancesit may have been an oral one, not a written one.

It is essential that technical project personnel have over-all responsibility for the development and implementationof a shipbuilding contract, rather than business managersor lawyers, since the ultimate purpose of a shipbuilding con-tract is to develop and deliver a technical object, not to de-velop temporary b usiness or le gal relationships. Each ofthose, temporary business and legal relationships, are a ne-cessity, but are not a sufficient mechanism for achi ving thedelivery of a new ship from Contractor to Purchaser. Fur-ther, in addition to the technical personnel and the lawyers,a wide range of professionals within both the shipowner’sand the ship yard’s organizations occasionally will be re-ferring to the contract, though not managing it on a dailybasis. These include persons in the areas of insurance, ac-counting and finance among other areas.

In the last section of this chapter , it will be shown thatthe on-site contract management team is responsible formanagement of the entire contract, including the Agree-ment as well as the technical requirements. Accordingly, it

Chapter 9: Contracts and Specifications 9-3

is important that those technical project personnel who willconstitute the contract management team be familiar, if notconversant, with the Agreement to the same extent they arewith the technical documents of the contract. Further , inorder to ensure that the Agreement gives those technicalpersonnel the rights and responsibilities the y need to ef-fectively manage the contract,and assigns to the other con-tracting party the balance of the responsibilities necessaryto achieve the final product (the ship and all its documentation), those technical personnel must participate in the de-velopment of the Agreement.

If the technical requirements and technical obligationsexpressed by the contract are not set forth in a comprehen-sive document that is entirely suitable for the objectives ofthe project (developing and delivering a ship),a risk is takenthat financial and/or l gal issues will control the project,rather than having those issues support but not control thetechnical project.

This chapter is not a substitute for more detailed educa-tion in the areas of contract formation and contract man-agement. It will,however, make the reader alert to the needto look into matters surrounding contract formation andcontract management, rather than merely leaving those mat-ters to persons who do not have the same project perspec-tives that are appropriate to the formation and managementof shipbuilding contracts.

9.1.6 Purpose of Shipbuilding ContractsA shipyard and a shipowner enter into a contract for mutu-ally-beneficial reasons; namel , the shipowner wishes toacquire a ship which is suitable for the shipowner’s needs,and the shipyard wishes to construct, for payment, a shipwithin its shipbuilding capabilities in order to earn a returnon its investment in shipbuilding facilities. The shipbuild-ing contract is the manifestation of those mutual intentions;that is, the purpose of a shipbuilding contract is to achievethe development and delivery of a ship from the ship yardto the shipowner. From the time the parties agree to that tech-nical objective until it is achieved, the parties establish a tem-porary b usiness relationship, shaped in part by le galobligations and constraints that are intended to produce asatisfactory technical outcome.

More formally, the purpose of a shipbuilding contract isto define the entirety of the temporary relationship betweethe Contractor and the Purchaser. Essentially, the contractin its entirety establishes the rights, responsibilities, rulesof conduct and assignment of risks between the two partiespertaining to all foreseeable technical, cost and schedulematters, questions or disputes that may arise between theparties.

The assignment of risks does not end, however, uponcontract execution; each Change Order that may be e xe-cuted later as an amendment to the contract also may carrywith it risks which must also be assigned. For the Contrac-tor, usually there are the risks of cost and/or schedule over-runs for fi ed price contracts or fi ed price Change Orders;for the Purchaser usually there are the risks of performanceof the basic or altered elements of the Contract Work Scope.The assignment of those risks, however, can be dif ferentfor each of the design and performance parameters and foreach subsequent Change Order, as the parties may agree.

The form of a contract determines which party is ac-cepting, to some degree or other, the risk of cost overruns.In the fixed price form of contract, the contractor is obligedto complete the ship and the other deli verables all for thecontractually-defined f ed price, as may ha ve been sup-plemented by agreed-upon changes. However, when a newship type is being created, or when new technologies arebeing implemented, it may be impracticable for a shipyardto offer a competitive fi ed price since there are too manyunknowns. In such instances,potential contractors may notbe willing to accept the risks of offering a fi ed price con-tract within a range acceptable to the shi owner. In order toobtain the vessel, the shipowner may offer to use a cost-pluscontract, in which the shipowner will pay all costs incurredby the shipyard, and in which the plus payable to the ship-yard is determined according to either a formula or a fi edamount per the contract language. It is also possible for theparties to use a contract form,which leads to the sharing ofcost overruns. Other variants on contract form are also pos-sible, but infrequently used. The important point is that theform of contract determines ho w the parties allocate therisks of cost overruns.

9.1.7 Defining Contractual RelationshipsTypically, contracts are written documents, which addressall, or nearly all, of the potential elements of the contrac-tual relationship. Sometimes, however, the shipbuildingcontracts are oral to some extent, with certain elements ofthe contractual relationship having been established orally,while other components of the same contract may be inwriting. It is not uncommon for written contracts to be in-complete; that is, some of the components of the contrac-tual relationship remain undefined at the time the contracis initiated.

If the two contracting parties have mutually decided tonot reduce all of the potential components of their con-tractual relationship to writing, it indicates that the y areeach taking a risk if an un-addressed aspect of the contrac-tual relationship becomes important at a later time. For ex-


ample, if a contract requires that the Contractor ensures thatthe new ship achieve a speed of, say, 28.0 knots, but in factthe vessel can achieve only 26.2 knots,the parties will haveto look to the contract to understand what remedies areavailable to the Purchaser and what rights remain for theContractor. The Purchaser’s remedies may be financial damages or the right to reject the ship; b ut if the contract didnot address what remedies w ould be available to the Pur-chaser, neither party can be certain of what will be the out-come of the almost-inevitable litigation. This is addressedfurther in Section 9.2 in the part on Liquidated Damages(Performance, Design).

As another example, suppose the Purchaser is not forth-coming with several progress payments. If the matter is suf-ficiently s vere and creates a critical cash-fl w problem tothe Contractor, the Contractor may wish to tak e some ac-tion to minimize the consequences of the lack of contrac-tually defined progress payments. To the e xtent that thecontract addresses the rights of the Contractor under suchcircumstances, the Contractor has a clear understanding ofwhat can be done to deal with that lack of progress payments.If, however, the contract does not address that potential as-pect of the relationship, then there is no predictable out-come to the consequential dispute.

These limited examples are presented to illustrate thatmany potential aspects of a contract may never have to bedefined but by f ailing to define those components of thcontractual relationship in advance, the parties may have ac-cepted risks. Thus, it can be appreciated that it is preferableto have a contract anticipate and address reasonably poten-tial sources of dispute so that the parties have, in advance,a clear understanding of ho w they must act in the e vent apotential dispute arises, and to understand their contractu-ally defined choices in courses of action

9.1.8 Components of a ContractThe beginning of this chapter listed the three elements ofcontract support services that are considered herein: For-mation of the Agreement; Formation of the Contract Spec-ifications and Plans; and Management of the ContracDuring Performance. In order to put those three contract sup-port services into context, eight major components of a con-tract are illustrated in Figure 9.1.

Those components, and possibly some others, as dis-cussed below, constitute the contract. If any component ofthe contract refers to other standards or other re gulations,then those other standards and/or regulations are also partof the contract. The fact that a requirement may be includedin a contract by indirect reference does not give it any lessvalidity than a requirement, which is directly identifie

within, say, the Contract Specifications. or example, sup-pose a contract requires that the design of a ship achie vecompliance with a particular classification o ganization’srules. Suppose, further, that those rules refer to the ASTMstandards for ship construction,which ASTM standards in-clude minimum dimensions of handrails for inclined lad-ders. The ship, then, must comply with those minimumhandrail dimensions, even though none of the first-l velcontract documents e xpressly identify that particular re-quirement. In other words, all of the standards and regula-tions are equally binding upon the parties whether directlyor indirectly referenced.

9.1.9 AgreementThe Agreement is often miss-labeled as the contract,but asillustrated in Figure 1, the Agreement is only one of themajor components of a contract,though it is unique to eachparticular contract. Because the Agreement is the lar gelynon-technical heart of the set of documents comprising thecontract, its formation is addressed separately in Section9.2. The Agreement should clearly identify each of the othermajor components of the contract in a non-ambiguous man-ner, by using author, date of publication,a revision numberor other unique identifying number, if applicable.

The Agreement is also the primary document in the hi-


Figure 9.1 Major Components of a Commercial Shipbuilding Contract

erarchical list of the of components of the contract,with thehierarchy being stated within the Agreement to set an orderof precedence in the event of inconsistencies between thevarious components of the contract. An example table ofcontents of a commercial shipbuilding Agreement is illus-trated in Table 9.I.

Several organizations have standard forms of agreements,but they may refer to them as contracts. of them is addressedseparately in Section 9.3.

Those forms are the starting points of negotiations anddevelopment of the final form of the Agreement. The As-sociation of West European Shipb uilders (AWES), theShipowners Association of Japan (SAJ), and the Norwe-gian Shipowners Association (NSA) are among those or-ganizations that ha ve such standard form agreements. Inthe United States, due to significant g vernment involve-ment in many shipbuilding contracts, the U.S. Maritime Ad-ministration has had standard form agreements, too. Ofcourse, major government agencies also ha ve their o wnforms for acquisition of their own ships.

9.1.10 Contract Specifications and PlansTwo other major contract components are entirely unique toeach contract, the Contract Specifications and the ContractPlans, which may include schematics and diagrams. Becausethey are entirely unique, they are prepared in adv ance byone or both of the contracting parties. Often, the ContractPlans are considered to be a subpart of the Contract Speci-fications but that is not necessary. Further, if the parties in-tend that the Contract Plans be superior to the ContractSpecifications in l gal precedence (hierarchy) of contractcomponents, the Contract Plans cannot be a part of the lower-level Contract Specifications. Because these components othe contract constitute its technical focus, the formationWhen a shipyard offers a standard or semi-standard designto a shipowner, these two components of the contract are usu-ally well developed in advance by the ship yard. The ship-yard may attach to the specifications amaker’s list identifyingthe manufacturer and model number of the equipment itemsthat are to be installed. The shipowner may seek alterationsto the shipyard-prepared documents only in selected areas,which are of particular importance to the indi vidualshipowner, such as cargo handling or docking and mooringarrangements. The accommodations areas of otherwise stan-dard ships may also be subject to v ariation due to the dif-ferent nationalities of the operating cre w. Further , forpurposes of fleet standardization a shipowner may negoti-ate for particular brand names of equipment components,rather than allow the shipyard to select from among severalmanufacturers of that equipment.

When the ship is being designed by the shipowner, how-ever, the shipowner’s staff, or outside consultancy, devel-ops the Contract Specifications and Contract Plans iadvance. Extreme caution should be used by shipo wnerswho allow their staffs to continue developing those Speci-fications and Plans after the requests for proposals h vebeen issued to bidding shipyards, since subsequent modifications to the Specifications and/or Plans may h ve a signif-icant impact on the shipyard’s price and/or schedule.


TABLE 9.I Commercial Shipbuilding Agreement TypicalSection Headings

IntroductionEntire AgreementCoordination of Contract DocumentsDefinitions Abbreviations, Interpretation of TermsDelivery of VesselsOptions of Additional VesselsProject ScheduleScope of Work and RepresentationsIntellectual Property RightsMaterials and WorkmanshipRegulatory and ClassificatioIndustry StandardsContract priceUnit PriceDelivery of Vessel(s) to PurchaserLiquidated and Actual Damages (Delivery)Liquidated Damages (Performance, Design)Representatives of the PartiesExamination of PlansInspection of Workmanship and MaterialsChanges in Specifications Plans and ScheduleAdjustment of Contract Price and Schedule for Change OrdersExtension of TimeFinal As-built Drawings and CalculationsOperating and Technical ManualsTest and TrialsWarrant Deficiencies and RemedieProgress PaymentsContract RetainageSpecial Retainages

Caution should be used when Guidance Plans, or Con-tract Guidance Plans, are included in the contract docu-ments, as distinct from the Contract Plans themselves. Someshipowners’ naval architects add such Guidance Plans tothe contract packages because it is intended that those Guid-ance Plans have a different contractual significance than thContract Plans. Unless the difference in contractual signif-icance is clearly communicated within the contract pack-age, it is likely that the Purchaser and the Contractor willhave differing interpretations as to that significance.A fur-ther discussion of this issue, along with other drawing-re-lated issues, is presented in reference 2.

9.1.11 Non-Unique ComponentsFour of the components of the contract,as shown in Figure9.1, are not unique to each contract in any regard, and thusdo not require any pre-contractual preparation. They are theInternational Regulations, the Domestic Re gulations, theClassification Requirements and the Other ReferencedStandards. The exact editions, revisions or selections ofthose components must be unambiguously identified in thAgreement. The inclusion of non-applicable regulations orstandards in the contract can be as harmful to contract ful-fillment as can be the absence of otherwise necessary reg-ulations or standards in the contract. Periodically, personswho are assembling contract packages should review the ini-tially identified r gulations and standards to ensure that theyare all the latest versions and that they are applicable to theparticular ship, which is being acquired at this time.

When distributing copies of the contract package toprospective bidders, it is usually not necessary to copy anddistribute the non-unique components of the contract to oth-ers. However, bidding shipyards should not hesitate to askthe shipowners for copies of those components of the pro-posed contract documents that are not already in the pos-session of the ship yard; bidding a job without ha vingreviewed all of the requirements is a recipe for unexpectedcosts and schedule impacts. Equally , shipowners’ staffsshould not list any documents within the contract packageunless they have been obtained and reviewed by qualifiepersonnel for applicability , timeliness and general mean-ingfulness in the contract.

9.1.12 Terms and ConditionsThe Terms and Conditions of a contract,none of which areunique to a particular shipbuilding contract, are often stan-dardized by Purchasers,especially if the Purchaser is a gov-ernmental agency or commercial entity, which frequentlyacquires ships. If a term or condition has to be unique to a

particular contract, it would probably be best to include itin the Agreement, not in the Terms and Conditions

However, some governmental agencies must select spe-cific pr visions from a list of potentially applicable ones.In some contracts, the Terms and Conditions are integratedinto the Agreement. In any event, prior to finalizing the forof the contract in its entirety, the Terms and Conditions haveto be reviewed to ensure their rele vance and applicabilityto the project. An example table of contents of a commer-cial shipbuilding contract’s Terms and Conditions is illus-trated in Table 9.II. If the Terms and Conditions areintegrated into the Agreement, the consolidated table ofcontents of the Agreement would include all of the com-ponents of Tables 9.I and 9.II. When contract packages arebeing assembled,a review of recent,prior contracts may in-dicate that certain Terms and Conditions could be adjustedto achieve more-meaningful compliance or easier -to-un-derstand requirements.

9.1.13 Contractor’s Technical ProposalSome shipowners seek technical proposals from biddingshipyards, which proposals sho w the shipo wner how thebidding shipyard’s offered ship will satisfy operationaland/or performance requirements set forth in the shipowner’srequest for proposals. If such a procedure has been em-ployed by a shipowner in the process of contract develop-ment, the successful bidder”s technical proposal is usuallyincluded as a specifically identified component of the co


TABLE 9.II Commercial Shipbuilding Terms AndConditions

Typical Section Headings

Care of Vessel(s)Access to Vessel(s)Responsibility for Shipyard

Work and Risk of LossInsurance requirementsResponsibilities and

IndemnitiesContract Security

(Performance & PaymentBonds)

Termination of Work(Contractor Default)

Termination of Work

(Purchaser Default)Disputes and ClaimsConsequential DamagesAssignmentSuccessors in InterestLiensNoticesTitlePermits, Licenses and TaxesApplicability of LawNo Waiver of Legal RightsComputation of Time

tract. It is also listed in the hierarchy of contract documents,but below the other components.

The purpose of including the Contractor”s technical pro-posal as a component of the contract is to le gally bind theContractor to fulfilling its proposal but in such a manneras to ensure that the de veloped-developed Specificationand Plans are superior to the technical proposal in the eventof an inconsistency between them.

9.1.14 Integrated Contract PackageProject management team members should re view all thecomponents of a proposed contract package prior to execu-tion of the contract to ensure that they are applicable to theproject, that they are consistent with the project,and that allthe components are fully integrated with one another.

Often, organizations have allowed the Agreement to bedeveloped by their legal staffs, and have had the ContractSpecifications and Plans d veloped by their technical staffs.This is not an unreasonable utilization of special skills if itapplied only to the Terms and Conditions of the contract.

However, it creates certain risks for both Purchasers andContractors if that philosophy is applied to formation of theAgreement. It is not unusual to find after contract execu-tion, that there are inconsistencies between the Agreement,on one hand, and the General Section, or other sections, ofthe Contract Specifications on the other.

The hierarchy clause in the Agreement typically willdictate that the Agreement is superior to the Specificationin the event of such an inconsistenc y, so there is no con-tractual ambiguity. Thus, in the presence of an inconsis-tency, the full intent of the Specifications may not h ve tobe fulfilled by the Contracto , thereby leaving Purchaserwith a less than complete set of contract deliverables.

In addition to possibly missing out on otherwise antic-ipated contract deliverables, there is a more significant reason to have the Agreement drafted or controlled by projecttechnical personnel and later re viewed by the le gal staff.Namely, such personnel understand what can go wrong orbe overlooked during ship construction, and can thus buildinto the contract several mechanisms to significantly reducthe likelihood of such occurrences. This is discussed ingreater detail in Section 9.2 on F ormation of the Agree-ment.

9.1.15 Decision-Making AuthorityThe contract documents, especially the Contract Specifications and Contract Plans, used in conjunction with theother components of the contract, define certain technicaaspects of the ship that will be developed and delivered to

the Purchaser by the Contractor. Numerous details, whichare not initially defined in the Contract Specifications aContract Plans,may have to be developed after the contractis executed. The contractual identification of applicable rg-ulations, classification rules and standards will lagely shapemany of the developmental micro-design decisions that needto be made to achieve the completed ship. However, therewill also be numerous de velopmental micro-design deci-sions that are not controlled by the contractually identifieregulations, classification rules and standards

When the parties executed the shipbuilding contract, theauthority to make those decisions was passed from the Pur-chaser to the Contractor, unless the contract gives the Pur-chaser some residual decision-making authority . This isunlikely, however; most contracts gi ve that authority e x-clusively to the Contractor, modified only by the necessitof allowing the Purchaser to re view detailed plans beforeactual ship construction (2). This matter can become a sourceof disputes; it is discussed in greater detail in the Section9.3 on Formation of Contract Specifications and Plans

9.1.16 Government ContractsThe form of contracts issued by go vernment agencies isoften different from commercial contracts, but the generalnature of the components of them is the same as the com-mercial contracts discussed herein. There are more formsof government contracts than there are go vernment agen-cies; many agencies utilize multiple forms of contracts forvarious reasons.

The form and content of contracts from go vernmentagencies must comply with the procurement regulations ap-plicable to each particular go vernment agency. Thus, it isexpectable to see differences between federal contracts,onone hand, and state or pro vincial contracts on the other .Some quasi-governmental agencies are also shipo wners,such as port and canal authorities; and they may have formsof contracts that are different again.

Even within a federal or national government, differentagencies have different procurement regulations applicableto them, and have evolved their o wn particular forms ofcontracts to suit those regulations. Within the U.S., for ex-ample, contracts for the Army’s supply/logistic support shipsare different from the contracts issued by the Army’s Corpsof Engineers,who maintain dredged waterways. The Navy’scontracts for combat ships are a dif ferent form than thoseused for auxiliary ships. The National Oceanographic andAtmospheric Administration’s contracts for its ships are dif-ferent from other federal agencies. Coast Guard contractsfor its front line cutters are dif ferent than for its supportships, such as small search-and-rescue craft.


Non-maritime regulations may affect the forms of con-tracts from government agencies, such as requirements forminority-owned or women-owned contractors,contracts setaside for small b usinesses, the need to comply with equalemployment opportunity laws, or contracts set aside for eco-nomically-depressed areas,among other possible constraints.

Most government contracts are awarded based on eitherlowest bid or best v alue bid that fully conforms to the re-quirements of the contract. The criteria to establish bestvalue vary among the agencies. In contrast, a commercialdeveloped has the fl xibility to award the contract on an ybasis it wishes, not necessarily lowest bid or best value.

The administration of go vernment contracts is usuallybifurcated; one part of the government agency has techni-cal oversight and responsibility, and another part of the sameagency has fiscal versight and responsibility. This bifur-cated contract management means that a contractor has tointeract with the government agency, as its customer, in amanner which is different than the way that same contrac-tor would interact with a commercial customer.

When government agencies send out requests for pro-posals, invitations to bid, or similarly named bid packages,the packages usually include the Agreement and the Termsand Conditions under which the contract will be awarded.The opportunities to negotiate the clauses of the Agreementor the sections of the Terms and Conditions are more lim-ited than for proposed commercial contracts. Pre-bid ques-tions posed to the go vernment agenc y may result in are-examination of parts of the proposed Agreement or Termsand Conditions,but usually the agency will not consider al-tering those components of the proposed contract due toprocurement regulations imposed on the agency.

The administration of a government contract by a com-mercial shipyard is inevitably more complex, and thus morecostly, than administration of a commercial contract. Thereare multiple reasons for this phenomenon,but experiencedshipyards take those extra costs into account when prepar-ing their bids for government contracts.

Despite all those differences between commercial con-tracts and government contracts, the fundamentals are thesame. Whether given different titles or other nomenclature,the components of a government contract are the same as il-lustrated in Figure 9.1. The purpose of a shipbuilding con-tract involving a go vernment agency remains the same asdescribed above for commercial contracts:defining the technical aspects of the products to be deli vered and establish-ing the rights, responsibilities, “rules of conduct” andassignment of risks between the two parties pertaining to allforeseeable technical, cost and schedule matters, questionsor disputes that may arise between the parties,all for the in-tended delivery of a ship and the associated documentation.

9.1.17 Government Role in Commercial ContractsThere are several reasons why there may be direct or indi-rect participation by a government agency in a contract in-volving a commercial developed and a commercial shipyard.One possibility is that the v essel is being constructed forlong-term charter to a go vernment agency, so the agenc ymay have technical representatives in the ship yard or ex-amining shipyard drawings in parallel with the commercialPurchaser’s representatives. In that situation, while theremay be no direct contractual relationship between the gov-ernment agency and the shipyard, but because it is hard toignore an elephant in your back yard, the management andadministration of the contract will be affected.

A more common possibility is that a government agencyis providing some form of financial support in order to encourage the domestic shipbuilding industry. That financiasupport may be in the form of a mortgage guarantee, per-haps predicated on the ship’s construction meeting certaincriteria.

Another form of governmental financial support may ba direct shipbuilding subsidy, where the agency pays for acertain percentage of each progress payment,again perhapspredicated on the ship’s construction meeting certain crite-ria. A third form of go vernment financial support may ban indirect subsidy, in which the government agency has arelationship with the shipyard in order to help offset someof the ship yard’s costs. These last tw o forms of financiasupport (subsidies) are,of course,hotly debated within bothdomestic and international political arenas.

Nevertheless, it should be appreciated that an y form ofgovernmental financial assistance direct or indirect,or othergovernment role in a commercial contract may affect someof the clauses of the Agreement and some of the Terms andConditions of the contract, and may impact the administra-tion and management of the contract as well. Shipyards mustbe willing to accept those additional burdens, however, if theywish to be eligible to secure the shipbuilding contract.

9.1.18 Charterer’s Role in ContractsIn the previous section, the possibility that a go vernmentagency may be the vessel’s charterer was included as a po-tential form of go vernment involvement in a commercialshipbuilding contract. Similarly, a commercial vessel char-terer may be involved in a shipbuilding contract in whichthe Purchaser is a separate corporation.

When a charterer, either commercial or governmental,is present at the ship yard, or otherwise looking o ver theshoulders of the Purchaser’s representatives, while the shipis being constructed,certain risks may arise. While the Pur-


chaser has willingly entered into back-to-back contracts,the Contractor’s performance under the shipbuilding con-tract may affect the viability of the charter contract. For ex-ample, if a charter requires the new ship to be available forfirst ca go no later than a certain date, a delay by the ship-builder may result in cancellation of the charter. This situ-ation has occurred several times, leaving the Contractor andPurchaser to figure out what becomes of the shipif that sit-uation was not already addressed by the contract.

Another possibility is that the Charterer will seek changesin particular items of equipment or in stateroom arrange-ments to suit the experience or nationality of the crew. Otherchanges may be needed to suit the specific ports and docking facilities that will be used.

These situations, and others that may arise due to the in-volvement of the vessel’s charterer during ship construction,usually result in change orders, with the Purchaser beingcaught in between the needs of both the charterer and theContractor. In man y of those instances, it may be best tohave those changes made after ship delivery from the Con-tractor by a separate, topside contractor instead of a full-service shipyard. A riding crew can accomplish some of thechanges so that the vessel is not delayed in its initial posi-tioning voyage. Other forms of solutions to the problemsthat arise due to the charterer’s involvement should also beexplored for minimum impact on cost and schedule.

9.2. FORMATION OF THE SHIPBUILDINGAGREEMENT

9.2.1 IntroductionMajor components of a shipbuilding contract have been il-lustrated in Figure 1 and discussed above in Section 91. Itwas pointed out that there might be additional componentsof a contract, such as the Contractor”s technical proposal.In this subchapter, the elements of the Agreement as listedin Table 9.I are discussed, including their purpose and, ifappropriate, special considerations that should be given tothem during formation of the Agreement.

The order or sequence of the components of the Agree-ment are not important, as long as they tie into each other,do not create variances with one another, and are supportedby the other components of the contract without inconsis-tencies or ambiguities. This presentation assumes that theTerms and Conditions as listed in Table 9.II, mostly legalissues, are a separate component of the contract, althoughthey need not be. Some drafters of contracts, especiallycommercial shipbuilding contracts, include the terms andconditions in the Agreement.

9.2.2 Contract Deliverables and CommunicationsDuring formation of the Agreement and other componentsof the contract, a fundamental principle of contract man-agement should be borne in mind:

“Contract management should commence the momenta contract is contemplated, not after it is signed.” (3)

The significance of that principle duringAgreement for-mation is that it reminds the parties that any contract rights,obligations, communications or inspections, among otherconsiderations, that either party may wish to be able to ex-ercise during contract performance,have to be built into thecontract documents from the outset. After the contract issigned, it is too late to ask the other party to give you con-tract rights that are not already spelled-out in the Agreementor other components of the contract.

Every contract has a set of contract deli verables, in ad-dition to the ship itself. Some of these deliverables may in-clude dra wings, correspondence, comments, inspectionreports, calculations, test results, and similar documenta-tion. Other deliverables may be spare parts,manuals, or otherhardware-related items, in addition to training of vessel op-erating personnel on the use of ship-specific equipment. Iis essential that the parties anticipate what the entire set ofcontract deliverables is to be prior to contract execution. Thecreation of each contract deli verable has a cost associatedwith it; and it is impractical, if not unreasonable, to expectone of the parties to agree to produce a deliverable that wasnot already included in the contract’ s work scope. Thus,every form of contract communication and deliverable thatwill be developed under each party’s contract managementstaff has to be identified in ad ance of contract execution.

9.2.3 Introduction of AgreementThis component of the Agreement first identifies the partietheir corporate names, the legal form of the or ganization(corporation, partnership, privately-held, non-profit state orfederal agency, etc.), the jurisdiction of their existence, forexample, incorporated in the State of______, and the natureof their business as it pertains to this particular contract.

This section of the Agreement goes on to describe thenature of the project which is guided and controlled by thisAgreement (new ship construction, ship conversion, etc.),and then describes the general role of each party. The prin-ciple location of the work is also included,but this does notnecessarily bind the Contractor to performing all w ork atthat location.

The role of the Purchaser is, of course, primarily financial, in addition to having certain rights of inspection,draw-ing review, etc., which rights are spelled out in other partsof the contract documents. The Contractor, of course, will


be described as capable of constructing, testing and deliv-ering the vessel. One element of this description, which isoften left out, but which is essential, is that the shipyard isobligated to complete the design of the vessel from the sta-tus of the design as represented by the other contract doc-uments. Ordinarily, a shipyard will understand that it mustproduce the detail plans and working drawings, which arenecessary to achie ve construction of the ship. But oftensome design development efforts are needed between theContract Plans and Contract Specifications on one hand,and the detail plans and w orking drawings, on the other .This part of the Agreement should mention that the Con-tractor has responsibility to complete the design, as neces-sary, thus implying that its engineering and draftingresponsibility is not limited only to producing detail plansand w orking dra wings, but be gins where the ContractSpecifications and Contract Plans le ve off.

9.2.4 Entire AgreementThis section of the Agreement reminds the parties that onlythis Agreement and the other documents to which it refersconstitute the binding contract; and that an y pre-contractagreements or understandings,whether written or oral,haveno standing with regard to this contract. However, it is notquite that simple and straightforward.

First, underlying all contract law are legal requirementsthat the parties cooperate with each other, and that the par-ties always take actions to mitigate damages in the face ofuntoward events, regardless of which party will incur thosedamages. These underlying legal requirements,among oth-ers in different jurisdictions, are binding, though unstatedin any commercial contract.

Second, it has to be appreciated that pre-contractualagreements or understandings may, in fact, serve to inter-pret, but not add to, the current contract, as long as thoseother agreements and understandings are not in conflict witthe current contract. Pre-bid correspondence between bid-ders and the Purchaser , as well as pre-bid meetings, mayform the basis for development of a common interpretationof an otherwise-ambiguous specification requirement. If thcontract documents contain an ambiguity that is not re-solvable by reference to a component of the contract listedin the hierarchy clause, it may already have been resolvedin advance of contract e xecution, in the form of an inter-pretation or an expression of the intent of the parties.

As an e xample, suppose the contract documents statethat the final hull color shall be selected by the shipwner’srepresentative; but during contract negotiations, the partieshave already agreed that the shipyard can paint it blue be-cause the shipyard has excess blue paint and is of fering a

lower price if the blue paint can be used instead of someother, as yet unidentified colo. If the parties agreed in writ-ing, in advance of contract e xecution, that the ne gotiatedprice would be reduced in exchange for acceptance of bluepaint, then that pre-contract understanding constitutes abinding interpretation of the contract language,because thecontract language does not preclude the color selection beingaccomplished prior to contract execution. Both parties arebenefiting from that pre-contract agreement and it is notinconsistent with the contract,but rather serves to interpretthe otherwise-ambiguous contract language.

Clearly, however, if any pre-contract agreement or un-derstanding, whether written or oral, is in distinct contrastto a contractual requirement, that pre-contract agreementor understanding is of no consequence and has no value incontract interpretation.

9.2.5 Coordination of Contract DocumentsThis section of the Agreement primarily identifies all of thother components of the contract with the greatest speci-ficity vailable. Do not state,for example, that the ContractSpecifications are the most-recently revised edition; rather,identify the authors and give the exact date of that revisionbecause there may be later revisions that are not widely dis-seminated.

Persons who prepare this section of the Agreement mustensure that all of the identified components of the contracare applicable, current, up-to-date, and easily available tothe other party.

Another facet of this section of the Agreement is the hi-erarchy clause, which states in essence that in the event ofan error or inconsistency between different components ofthe contract, certain identified components shall be superior to the others. The Agreement has to address the possi-bility that the Contract Specifications may require less thais required by the identified r gulations or classificatiorules. To cover such situations, it is best to state that it doesnot constitute an inconsistency, but that the Contractor mustcomply with both of them; the ship shall include the greaterof the two sets of requirements.

This section of the Agreement should also state that theinclusion of information in one component of the contractand its absence in another component does not,in fact, con-stitute an inconsistenc y or error; rather , it shall be inter-preted to be equally present in all components of the contract.

9.2.6 Definitions, Abbreviations, Interpretation of TermsIn order to ensure that there are no misunderstandings ofhow certain terms or w ords are intended to be used, it is


common to have a section of the Agreement which statesthe interpretations and definitions that are contractuallbinding. Typical definitions interpretations and abbrevia-tions are listed in Table 9.III. Some of the technical definitions may appear in the Contract Specifications insteaof the Agreement, which does not present a problem aslong as there are, no inconsistencies between the two listsof definitions

As an e xample, the word Install can be defined to include the requirement that the item of equipment also befurnished or provided by the Contractor , even if such in-clusion may not be apparent in non-contractual language.

Install or Installation—When the Contract Documentsstate that the Contractor is to install an item, the Contrac-tor shall be responsible to Furnish the item and for providingall labor, tools, equipment, and material necessary to per-form such installation, and for which the Contractor shallat no additional cost to Purchaser:

• provide all appropriate structural or other foundations,electrical power, water service, piping, lubrication, light-ing, ventilation, operating fluids and other facilities ormeans required for the installation,

• shall effect any and all connections to electrical serv-ice, water supply, drains, ventilation, and structural orother foundations, and

• shall deliver to Purchaser complete, tested and opera-ble machinery, equipment or systems, including operat-ing fluids.

Other interpretations, definitions and abbr viationsshould be considered to ensure that there is no opportunityfor misunderstandings between the contracting parties.

9.2.7 Delivery of Vessels, Options for AdditionalVesselsThis section of the Agreement establishes the Delivery Dateof the Vessel and the place of delivery. Sometimes the placeof delivery is other than at the shipyard in order to addresstaxes, operational limitations,costs of delivery to the regionof intended use, or other factors. In the event a single con-tract covers the construction and delivery of more than onevessel, it must be clearly addressed within the Agreement.If the number of vessels is fi ed but more than one,the con-struction starting date and the Delivery Date for each willhave to be defined. (The price for each additional esselmust also be defined in the section on Contract Price.

Whether or not the Contractor has to submit separatedrawings for the Purchaser’s approval for each vessel mustbe considered and addressed. Sometimes details for sisterships are not the same (the y are not identical twins, only

sister ships). The parties must agree as to how much vari-ance can exist without calling such variance to the particu-lar attention of the Purchaser , and if there are some areasfor which no variance is acceptable.

If there is a minimum number of v essels, with optionsfor additional vessels, the appropriate dates for those op-tion vessels also need to be defined.These other dates wouldinclude the dates by which successive options must be ex-ercised by the Purchaser , the official start of constructiofor each option vessel (as it affects progress payments), thenumber of days allowed for construction of each option ves-sel, and the Delivery Date for each option vessel.

9.2.8 Scope of Work and RepresentationsUsually there are two major aspects to the statement of theScope of Work, and several lesser ones. The first major s g-


TABLE 9.III Typical Subjects for Definitions,Interpretations and Abreviations

FCC Furnish Good Commercial

Shipbuilding PracticeGuidance PlansIEEEInstall, InstallationOr equalOwnerOwner-furnished

Equipment (0FE)Owner-furnished

Information (OFI)Progress PaymentsProvideRegulation(s)Regulatory Body

Requirements Regulatory Bodies SOLASSpecial RetainageSSPCSuretyThe Vessel DesignULUSCGUSPHSWarranty DeficiencieWorking Plans, Working

Drawings

According toANSI ApprovalASHRAEASMEASTMAWSBuilderBuyerCFR Classification O ganization,

Agency or SocietyCompliance withContractContract Change, ChangeContract DocumentsContract Drawings,Contract PlansContract PriceContract RetainageContract SpecificationContract Time, or Contract

PeriodContract Work, Work

ContractorDate of Delivery, Delivery DateDay(s)DocumentationExcessive Vibration, NoiseExcessive temperature levels

ment focuses on the creation of the “hardware” aspects ofthe ship construction project. It assigns certain responsibil-ities solely to the Contractor, with Purchaser having no con-current responsibilities. These include the provision of allengineering, labor, equipment, materials, fuel, lubricants,electricity, energy, machinery, facilities, services andsupervision necessary for the completion of the design,theconstruction, outfitting completion, testing, delivery anddocumentation of the Vessel in accordance with the re-quirements of the Contract Documents. It should be clearlystated that Purchaser has no responsibility to pro vide anyengineering, labor, equipment, materials, electricity, energy,machinery, facilities, services or supervision, unless thereis some well-defined ship wner-furnished informationand/or equipment. Further, it can be stated that Contractorshall be responsible for fuel and lubricants needed for tests,trials and filling of all operating systems and piping upoDelivery, but not for filling of reser e and supply tanks.

The second major se gment of the Scope of Work ad-dresses the non-hardware, or documentation,aspects, whichare a vital part of the completed ship. This part addressesthe necessary and/or requested certifications documents,booklets, letters, drawings, calculations and other contractdata deliverables that are to be pro vided both during con-struction and upon Delivery of the Vessel by the Contrac-tor, again at no additional cost to the Purchaser . It isimportant for shipyards to appreciate that the developmentand acquisition of this documentation must be carefullybudgeted, because it can account for a measurable portionof the total contract price. A list of typical Contractor-pro-vided certifications to be pr vided with the Vessel is shownin Table 9.IV. Other contract data deli verables are not in-cluded in that list (see Figure 9.10 in Section 9.3,Specifications, for a suggested list of such documentation).

The secondary aspects of this section of the Agreementcan include supplementary requirements for fulfillment othe work scope, such as that all engineering, labor, equip-ment, materials, fuel, lubricants, electricity, energy, ma-chinery, facilities, services and supervision that may bereasonably inferred from the Contract Documents by pro-fessional ship builders/repairers as being required to pro-duce the intended result as contemplated by the ContractDocuments shall be supplied by the Contractor, whether ornot specifically called for in the Contract Documents andPurchaser shall not be liable for an y increase in ContractPrice or Contract Time as a result there from. Further, thissection of the Agreement can state that any items of design,engineering, purchasing, manufacturing, installing and test-ing that are necessary to satisfy the Re gulatory Body re-quirements, the Classification requirements and/or theperformance and design criteria shall be incorporated into

the Contract Work at no additional cost to Purchaser whetheror not they are otherwise indicated in the Contract Specifications and/or Contract Plans. Some Purchasers seek a spe-cific arranty from Contractor, to the effect that Contractorwarrants that it has reviewed all of the Contract Documentsand all other documents and materials which it deems nec-essary or advisable to determine the nature and scope of theContract Work and has determined that the Contractor cancomplete the Contract Work by the Delivery Date, all at noadditional cost to the Purchaser. However, this may not beappropriate if the regulatory or classification requirementexceed those of the express language of the Contract Spec-ifications and Contract Plans

9.2.9 Intellectual Property RightsA sometimes overlooked aspect of contracting is the mat-ter of ownership of the vessel’s design or selected aspects


TABLE 9.IV Typical Certifications Provided By Contractor

International Load Line CertificateUSCG certification adocumentation

ABS Certificate of Classificatio Maltese Cross, Full OceanService

Safety of Life at Sea Convention Certificate (SOLASUSCG Stability LetterABS Stability Booklet and Loading ManualUSCG Approval of ABS Stability BookletABS Certification of all pressurized tankUSCG Safety Equipment CertificatFCC Certificate of RadiotelephonUSPHS Certificate of DeratizatioUSPHS Certificate of Sanitary ConstructioABS Certificate of US R gulatory TonnageABS Certificate of International TonnageABS Certificate of Suez Canal TonnageABS Certificate of anama Canal TonnageBuilder’s Certificate in customary forSafety Construction Certificate (SOLASSafety Equipment Certificate (SOLASMARPOL Annex 1 (SOLAS)Stability Certificate (IMOEquipment Certificates (engine gensets, pressure tanks and the

like as required by Regulatory Bodies

of the v essel’s design that are not already controlled bycopyright laws and/or patents. Some aspects may be as gen-eral as the basic ship design or the hull form, or may be asspecific as the design of the computer hard are and soft-ware for either the propulsion control system or the dy-namic positioning system. Many other aspects of the ship’sdesign may also have been initially developed for this par-ticular vessel, but could be used for other vessels as well.

The Purchaser may expect that it has sole ownership of thoseintellectual property rights because the Purchaser paid for theirdevelopment through the contract price. On the other hand,theContractor may expect that it has sole ownership because it hasinvested more than the design portion of the contract price intothe development of those features. The parties should ensurethat these matters are addressed in the Agreement.

Some commercial agreements ha ve stated that the Pur-chaser owns the title to the Vessel Design,but Contractor canuse it for other purchasers pro vided a royalty fee is paid tothe Purchaser for each additional vessel constructed for otherpurchasers, thus recovering, in part, the portion of the Con-tract Price for the initial design costs. If a ship yard’s sub-contractor is involved, this matter may be more complex anddifficult to resol e, but it is best addressed in the Agreement,rather than allowing it to become the subject of litigation.

9.2.10 Materials and WorkmanshipThis section of the Agreement typically sets forth the re-quirement that all materials, machinery and equipment fur-nished by the Contractor and incorporated into the vessel shallbe new, of current production and currently supported byspare parts available in a designated geographic region. Addi-tionally, the Contractor warrants that all design engineers,workmen, subcontractors and others, engaged by the Con-tractor in the performance of the Contract Work possess suit-able professional skills and are appropriately certificated

This section usually addresses se veral other aspects ofthe materials and workmanship, including, among others,the Purchaser’s right to reject, and the Contractor’s obliga-tion to correct,at no additional cost,any materials or work-manship whenever found to be defective, or otherwise notin accordance with the requirements of the Contract Doc-uments. If no specific aspects of the Contract Documentprovide such a basis for rejection, published industry stan-dards sometimes may be used as a basis for rejection. Note,however, that if Purchaser cannot point to a documented re-quirement as the basis for such rejection, the materials orworkmanship cannot be summarily rejected.

Broad requirements pertaining to the materials and equip-ment can also be addressed in this section of the Agree-ment. Some of these may be:

• the flushing of all piping• the provision of all working fluids in systems• the provision of all fuel for testing,• the installation of safety guards around rotating and slid-

ing equipment,• the use of only materials and equipment approved by the

designated regulatory or classification o ganization, and• the use only of certified welders; among other possibil

ities.

This section of the Agreement could also state that thefailure of the Purchaser to disco ver any non-conformingmaterials or workmanship does not constitute a w aiver ofany contractual rights or requirements.

9.2.11 Regulatory and ClassificationThe Agreement should state with which particular sets ofregulations the design and construction of the ship mustcomply. These regulations will usually include both do-mestic and international requirements; domestic becausethe ship will fly the flag of a particular natio and interna-tional because the ship will be trading with other countries,for which port entry is keyed to compliance with certain in-ternational regulations. The Agreement generally does notaddress, however, matters of financial responsibility for potential environmental damage, training of watch standingcrew, or other similar matters which are solely the domainof the ship operator, charterer or shipowner.

The Agreement also should clearly identify under whichclassification o ganization the ship is to be classified; anif that classification o ganization has more than one set ofrules, identify the particular rules with which complianceis to be achieved by the Contractor.

These two segments often are then supplemented by therequirement, if it is not an unusual contract, that all engi-neering, all arrangements for plan appro val, all arrange-ments for inspections and an y other requirements of theregulatory agencies and the classification o ganization areto be carried out by the Contractor, again, at no additionalcost to the Purchaser.

If the ship is a newly developed form or will contain in-novative technology that has not been previously approvedby either or both regulatory agencies and classification organizations, the Purchaser’s designers may have to remaininvolved in the plan approval stage. This serves to compli-cate matters of schedule,payment of fees,and perhaps evenwarranties.

Some regulatory agencies have agreements with one ortwo classification o ganizations to the effect that the clas-sification o ganization can perform some of the regulatory


approvals. The intent is to streamline the re gulatory ap-proval process as well as reduce the workload of the regu-latory agency. Purchasers should be aware that sometimesthe relevant regulatory agency may not have a regular, work-ing relationship with the nominated classification o gani-zation; this may create delays in appro vals, likely requireadditional submittals, at extra cost, and may result in un-expected adjustments to the Contract Plans or ContractSpecifications.The Purchaser should investigate and, if nec-essary, resolve these matters prior to contracting.

As regulatory and classification requirements are often incorporated by reference,the Agreement should address the po-tential for conflict between the xpress language of the contractdocuments, on one hand,and the referenced requirements,onthe other. For bidding purposes, the Contractor is allowed torely on the e xpress language of the contract documents asbeing consistent with the nominated regulations and classification rules. If,however, the Contractor finds that it has to incorporate a greater content in order to comply with theregulations or classification rules those extra costs are usu-ally for the Purchaser’s account. However, if the express lan-guage of the contract documents is silent about certain matters,and the Contractor makes an erroneous assumption for bid-ding purposes, the Contractor will ha ve to absorb the costconsequences of that erroneous assumption.

These two matters, regulatory and classification are x-amples of why the Agreement should be developed prima-rily by the project technical personnel, not the attorne ys.Knowledge of classification rules relevant regulatory agen-cies, procedures for obtaining their approvals, the existenceof working relationships between them,and similar matters,all are essential in the development of the Agreement. If thosematters are not addressed with adequate precision,there is astrong likelihood of misunderstandings at a later time.

9.2.12 Industry StandardsAny standards with which compliance is to be achieved inthe design and construction of the ship,other than those in-cluded within the regulatory requirements and classificatiorules should be clearly identified in theAgreement or in theGeneral Section of the Contract Specifications. It is not toimportant as to whether they are listed in the Agreement orthe Contract Specifications but it is important that they ap-pear only once,since listing them twice will likely result insome inconsistencies; and then misunderstandings will arise.

The types of standards,which could be invoked, are, forexample, IEEE 45, a recommended industry standard formarine electrical installations. Note, however, that unlessotherwise mentioned in the contract documents, it is onlya recommended standard. If it is to be binding on the Con-

tractor, the Agreement should state that the identified standard should be treated as obligatory for this contract.

Other standards may address aspects of design, selec-tion of materials, or quality of w orkmanship. Some otherexamples are: welding and brazing; electromagnetic inter-ference; coatings; lighting and illumination; audio noiselevels at various locations on the ship; vibration levels; aircirculation in selected spaces; labeling of cables and pip-ing; means of inspecting or testing components; and re-silient mountings for machinery components,among others.

Often, shipyards will be familiar with particular standardsin some of those e xample areas, in which case it probablywould be reasonable to ne gotiate to accept that standard inplace of a comparable one otherwise selected by the Purchaser.

The selection of which standards for detail design, ma-terial selection and workmanship should be made from thisperspective: if an aspect of the Contractor’ s detail design,the quality of Contractor -selected materials or the w ork-manship of installation is going to be challenged by a Pur-chaser’s inspector, there must be a documented standardwhich supports the challenge. There can be no dispute as towhether a standard applies if it is specifically named in thAgreement. As mentioned previously, however, including anon-applicable standard will only serve to confuse issues.

9.2.13 Contract PriceUnder fi ed-price contracts, the price for the Vessel has tobe established, and the currency in which it is payable hasto be stated as well. Working under a fi ed-price contract,the Contractor has accepted considerable risk; b ut as dis-cussed below, there are other alternatives. Some contractswill include additional protection for one party or the otherin the event of large currency fluctuations; that is there maybe some mechanism to share the risks of currency fluctuations if the Contract Price is payable in a currency not nor-mally used by one of the parties. The payment of theContract Price is separately co vered by the Agreement’ssection on progress payments, as discussed below.

If the form of the contract is other than fied-price, suchas cost-plus-fi ed-fee, the exact mechanisms or proceduresto determine the total of all payments must be described withspecificity to void later disputes. Whether or not the Pur-chaser has the right to audit the Contractor’s books to con-firm such final pricing should be stated as well The use ofa form of contract other than fi ed-price essentially altersthe assignment of risks to suit the needs and acceptances ofthe parties. When the ship incorporates experimental or newtechnology about which the Purchaser has kno wledge su-perior to that of the Contractor, it may be reasonable for theContractor to a void specific risks associated with imple


menting that technology; but in such cases, the Purchasermay also wish to e xercise greater oversight in the imple-mentation of that technology.

It is not uncommon for the Contract Price to be subjectto automatic adjustment, without formal change orders.There is no risk associated with this pro vided the mecha-nism for the automatic adjustment is clearly stated. For ex-ample, if the quantity of a special material is not kno wnwith precision at the time of contracting,because the detaildrawings have not been completed,the Contract Price maybe automatically adjusted upon a material tak e-off aftercompletion of the detail design.

The Contract Price includes allowance for the acquisi-tion and installation into the Vessel of [W] thousand poundsof [material name], and shall be adjusted at the rate of [X]dollars and [Y] cents per pound in excess of that estimatedweight, or eighty-percent of that rate of adjustment perpound if less than that estimated weight, upon completionby Contractor of detailed, as-installed, material take-off,subject to approval by Purchaser, which adjustment includesboth material and labor costs.

The provision of spare parts may also lead to automaticadjustment of the Contract Price,if the quantity of spare partswhich Purchaser wants is not known at the time of contractexecution. Often, a Contractor will provide a list of recom-mended spares, and Purchaser will then determine whichones and how many are to be acquired. Because the Con-tractor did not know that quantity in advance, the price ofthe spare parts is added to the Contract Price, but the costof acquisition and loading them aboard the ship are alreadyincluded in the basic Contract Price.

Some Purchasers may wish to ha ve the Contract Pricestated in several components, but for new ship constructionthat is best addressed in the progress payments section ofthe Agreement, as discussed later in this section. F or shipconversion or repair, line item pricing is often used,so thatif the entire item is canceled, the adjustment of the Con-tract Price is known.

If the number of vessels is fi ed but more than one, theContract Price for each additional vessel must also be de-fined in this section. When the construction of a series ofvessels being purchased under a single contract will extendfor several years, the parties may agree to an escalationclause. Typically, after agreeing to the portion of the totalprice, which is labor-based, material-based and subcontract-based, the cost of labor can escalate over time in accordancewith an appropriate inde x, and the cost of materials andsubcontracts can similarly escalate in accordance with per-haps a separate index. Usually the indices on which the es-calation clauses are based are government-determined andwidely published.

Of course, the Contract Price will also be subject to ad-justment as the result of Change Orders, as discussed laterin this subchapter.

9.2.14 Unit PricesIn anticipation of possible gro wth of the Contract WorkScope, negotiated through Change Orders, the Purchaserwill have to utilize additional materials, subcontractor ef-forts, engineering and production labor. Further, extensionsof the project schedule may necessitate the provision by theContractor of additional days of shipyard services. If therewill be significant ship wner-furnished equipment, the ne-cessity of such additional items is more likely.

The cost impact of a Change Order may require negoti-ation of at least nine elements:

1. material costs,2. subcontractor costs,3. additional engineering hours,4. production labor hours,5. mark-up of material costs,6. mark-up of subcontractor costs,7. hourly rate for engineering,8. hourly rate for production labor at straight time and over-

time, and9. daily cost of ship yard services. (Indirect ef fects of

Change Orders, expressed as additional labor hours orother cost allowances may also have to be negotiated.)

The first four items will depend on the details of thChange Order itself. Ho wever, items 5–9 should be uni-form for all agreed-upon Change Orders. Since those fi eitems will have to be either competitively bid or negotiated,it is best to include their specific alues in the Agreement.This avoids the necessity of negotiating them repeatedly orof negotiating them when other variables have to be nego-tiated as well.

In ship conversion and repair contracts, there may be agreater array of unit prices, such as for steel work, for pip-ing, for blasting and coating, due to the increased lik eli-hood that such changes will arise in those types of contracts.

9.2.15 Delivery of the Vessel(s) to PurchaserThe place and condition of delivery of the completed shipshould be identified in theAgreement. Usually, the place ofdelivery is alongside the ship yard’s dock; b ut sometimesfor tax or financial reasons the place of delivery may be atanother location. If the vessel is not designed for open oceanservice, it may require some temporary, contractor-installedmodifications to sail to the place of delvery. Also, some gov-


ernment agencies, in seeking competiti ve bids from geo-graphically diverse shipyards, will require deli very fromthe successful bidder, wherever located, to be at the agency’sservice dock.

The condition of delivery is usually that of a warm ship;that is, one that is not cold with none of the auxiliaries run-ning and no heat or other services already in operation onthe ship. For smaller vessels, such as tugs or other servicecraft, this differentiation is minor; but for larger ships, es-pecially if steam powered, it may be more significant

9.2.16 Project ScheduleThe purpose of a shipb uilding project schedule is to gi vethe shipyard a project monitoring and control mechanism.If properly developed and maintained (updated), it will en-able the shipyard to see where it needs to redeplo y its re-sources in order to k eep the time-critical acti vities onschedule, and not inadvertently give priority of resourcesto non-critical activities.

The Agreement usually requires that the Contractor de-velop a detailed project schedule within a certain period oftime after contract award, and that the Contractor providecopies of it to the Purchaser . Thereafter, the Contractor isusually obligated to update the schedule both periodicallyand if there are significant impacts due to Change Ordersand to timely provide copies of the updated schedules to thePurchaser. This requirement in the Agreement is sometimessupplemented by some technical details in the ContractSpecifications. The maintenance of a project schedule canbecome quite important if the Purchaser is going to allegeContractor default as e videnced by comparing the actualstatus to a planned schedule.

Whether or not this clause is within the Agreement, theContractor always has a duty to complete the ship by the De-livery Date stated in the Agreement. There are several reasons,however, to include this requirement within the Agreement.

First, by putting into the Agreement some minimumscheduling and updating requirements,the Purchaser is as-sured that the Contractor has allocated within its budget theresources for those actions.

Second, this assures the Purchaser that it will be entitledto see copies of the schedule and all updates.

Third, this enables the Purchaser to identify the Con-tractor’s interpretation of latest requested dates for the ar-rival of shipowner-furnished equipment or materials or forother shipowner-responsible actions. The dates in the Con-tractor’s schedule for shipowner-responsible actions may notbe contractually binding if the y have not been separatelyagreed upon at a prior time. However, the Purchaser shouldnot ignore those dates when advised by receipt of a copy of

the schedule, but rather should confer with the Contractorto establish dates that can be agreed upon, after which theContractor may have to further revise its schedule.

Fourth, this allows the Purchaser to plan any necessaryvariations in the staf fing of its inspection sta f and, ulti-mately, the ship’s crew.

Some agreements call for a Key Event Schedule. Keyevents could be the start of engineering,start of fabrication,start of hull erection, launching, sea trials and delivery

Some agreements authored by government agencies pro-vide detailed requirements for the content and form of theproject schedule, while some commercial shipo wners areintentionally vague about the schedule’s content and form.The choice of Gantt charts or the use of a critical path net-work (CPN) is one of the possible elements of this section.However, it may not be productive to require a shipyard todevelop a CPN for a simple project, especially if the ship-yard is not used to developing and using a CPN. Whethera Gantt chart or CPN is used,there should be four separategroups of activities indicated on the schedule:engineering,purchasing, production and testing. Any blending of thoseseparate types of activities leads to risks of loss of projectcontrol.

9.2.17 Liquidated and Actual Damages (Delivery)The purpose of this section of the Agreement is to set forthan acknowledgment by the Contractor that if the ship is de-livered later than either the original Deli very Date or an yagreed upon contract extensions, the Purchaser will incurfinancial damages; and the parties agree in adance that thedamages are approximated by a certain sum per day of delay,payable by the Contractor. For legal reasons, this is not nec-essarily a penalty clause, although it may gi ve the Con-tractor similar incenti ve to achie ve timely deli very. If,however, it is phrased as a penalty clause for late delivery,then there should be a bonus clause for early delivery. If itis phrased as a liquidated damages clause, a bonus clauseis unnecessary. Some contracts may include a clear state-ment that the Contractor is not entitled to an y bonus forearly delivery.

Another way of looking at this same clause is that it pro-tects the shipyard in two ways. First, the shipyard knows inadvance that its liabilities for delay in delivery are limitedto the liquidated damages; and that the Purchaser cannot sud-denly claim significantly-greater damages if the delvery islate, provided it is within the cap on liquidated damages,as discussed below. Second, the shipyard can view the dailyamount of liquidated damages as the cost of buying a dayof contract extension when it is not otherwise entitled to acontract extension. In some instances,that daily cost is less


than the cost of accelerating the work to complete the shipon time.

Some shipbuilding contracts include se veral levels ofliquidated damages. One form is to have a lower daily rateif the delay is identified to the Purchaser s veral months inadvance, so the Purchaser will not incur costs of prema-turely preparing the ship and its crew, or committing the shipfor a charter or voyages. In that instance, the higher dailyrate would apply if the delay is not identified until the lasseveral months of the contract period.

Another form of multi-level liquidated damages is to useprogressively higher daily rates for each successive groupsof days. For example, each of the first ten days of delay mabe at a specified rate; each of the second ten days of delamay be at,say, 125% of that rate; with similar progressionsfor several other groups of days, until the maximum num-ber of days for which liquidated damages accrue is reached.This is illustrated for other percentages in Figure 9.2.

The liquidated damages may accrue for a stated maxi-mum number of days, thus placing a cap on the liquidateddamages. The existence of a cap on liquidated damagesdoes not, by itself, limit the damages that a Purchaser mayclaim from the Contractor if the delay extends beyond thenumber of days used to achieve the cap.

Unless further provisions are stated, the cap means thatthe Contractor is exposed to additional, provable damagesthat the Purchaser incurs after the cap is reached. The con-tracting parties may wish to negotiate on this matter, pos-sibly eliminating such consequential damages for thePurchaser if the Contractor is similarly prohibited fromseeking consequential damages due to the actions of thePurchaser.

Occasionally, shipbuilding contracts will allow the Pur-chaser to not take delivery of the ship if the delivery date is

unilaterally extended by the Contractor, without Purchaser’sagreement, beyond a stated number of days; in which casethe Contractor refunds to Purchaser all progress payments.

9.2.18 Liquidated Damages (Performance, Design)The Contract Specifications and Contract Plans may provide target quantities, amounts, or dimensions for variousaspects of the ship. Man y of them will undoubtedly beachieved because of the design process. Some of them,how-ever, may not be exactly achieved, such as maximum trialspeed, minimum continuous operating speed, fuel con-sumption rate at design speed and draft, maximum dead-weight, draft at maximum deadweight, or liquid capacityin certain tanks, among other possibilities. These possibil-ities are more likely to arise if the ship incorporates a newhull form, new technology or significantly greater p wer-ing than routinely installed in a similar ship, or if the ship-yard has not previously constructed a similar vessel.

The essential point is that while the process of ship de-sign and construction continues to advance, in some tech-nical areas there are still no absolute assurances as to thenet result or outcome that is b uilt upon numerous engi-neering and design decisions. This matter is discussed morethoroughly in (4).

When the completed v essel does not achie ve all of itsintended design or performance parameters for which theContractor was responsible, the Contractor and Purchaserhave to negotiate a resolution to the discrepancies becausethe requirements of the contract strictly have not been ful-filled and the Purchaser is not getting all that as bargainedfor. Absent a harmonious negotiation, litigation is a distinctlikelihood.

To avoid litigation, the Agreement can identify liqui-dated damages that would be payable by Contractor to Pur-chaser if the specific design or performance parameters arnot achieved. For example, a certain sum of damages couldbe payable for each one-tenth knot less than the intendedtrial speed for up to a half knot deficien y. Then twice thatamount per tenth of a knot for a speed deficien y betweena half-knot and a full knot. Similar progressi ve liquidateddamages could be stated for greater deficien y.

The Purchaser may insist,however, that if the trial speeddeficien y exceeds a stated amount, the Purchaser has theright to not tak e delivery of the ship and to be repaid allprogress payments. The Contractor can be offered a bonusfor achieving a higher speed, but the bonus may be limitedto a modest amount,regardless of the extra speed achieved,because the operator cannot use that speed or cannot affordthe fuel to achieve it. A graphical illustration of this formof performance-based liquidated damages is shown in Fig-


Figure 9.2 Daily Liquidated Damages (adjust days and $$$ as appropriate)

ure 9.3. Similar progressive, or linear, liquidated damagesand bonuses can be assigned to other k ey design or per-formance parameters, which are the net result or outcomeof numerous engineering and design decisions.

9.2.19 Representatives of the PartiesThe matter of identifying in the Agreement the person whoconstitutes the official representation of each party for contract purposes appears to be a fairly straightforward matter.However, during the completion of the design by theContractor and during construction of the ship, numerouscommunications between the parties will be necessary (seeSection 9.4 for identification of the types and managemenof those communications).

Each of the parties may wish to designate a single per-son to be the recipient of legal notices and other higher-levelcommunications; but may also wish to designate other per-sons to be the recipient or authority for technical matters.

For example, one person may have the decision-makingauthority pertaining to engineering and design de velop-ments; another may ha ve authority to accept or reject theContractor’s material and equipment selections and its work-manship; and another may ha ve authority to appro ve ornegotiate progress payment invoices. There are additionalfunctions, which can be assigned to other decision-makingauthorities for each party.

Perhaps the most important authority to designate is the

one who can negotiate and accept amendments to the con-tract in the form of Change Orders. Each Change Ordermay modify the contractual statement of w ork, the Con-tract Price and the Deli very Date. Of comparable impor-tance, the Agreement can also state that no persons otherthan the indicated representatives have any authority to mod-ify the work scope, price or schedule, or accept design de-cisions or the workmanship of the Contractor.

9.2.20 Examination of PlansIt is customary to arrange for the Contractor to give to thePurchaser copies of its detail plans and w orking drawingsin advance of their need for production. This allows the Pur-chaser to examine the drawings and inform the Contractorof any comments or suggestions that may be appropriate,prior to the use of those dra wings by the production de-partment. As simple as that may sound, there are a significant number of issues that will ha ve to be addressed,preferably within the Agreement, although some contractsaddress such matters in the general section of the ContractSpecifications. The following discussion is a distillation ofa thorough discussion of this subject in (1).

The purpose of the Purchaser’s examination of the work-ing drawings or detail plans should not be miss-stated; it isimportant to not give more responsibility to the Purchaserthan is appropriate, nor to relie ve the Contractor of itsresponsibilities through that drawing examination process.Some words used in contracts to describe this function ofthe Purchaser ha ve been: audit; examine; review; or ap-prove. The use of the word approve should be avoided be-cause such approval of a w orking dra wing could beinterpreted to relie ve the Contractor of responsibility forany errors in the dra wing or any inconsistencies with theContract Work Scope as already defined by the ContracPlans, Contract Specifications and other components of thecontract. If the Purchaser has appro ved the dra wing, theContractor may assume, among other possibilities, that thePurchaser has compared the drawing to classification rulesregulatory requirements, the Contract Specifications or theContract Plans, and that the Purchaser found that the draw-ing is in full compliance with all those requirements. TheContractor has already been assigned that responsibility inthe Agreement; so the Purchaser should not relieve the Con-tractor of it through an approval of working drawings.

Agreements typically state a maximum number of daysfor the Purchaser to examine a working drawing before is-suing any comments or suggestions to the Contractor per-taining to that dra wing. The inclusion of that particularmaximum duration in the Agreement ensures that the Con-tractor either will not start the related production work until


Figure 9.3 Trial Speed Bonus or Penalty

Penalty

taking into account the comments and suggestions as ap-propriate, or may start the production work but at the riskof having to revise it to accommodate the comments andsuggestions. The Contractor also must allow sufficient timfor regulatory and classification r views of its drawings.

The Contractor usually is required, per the Agreement,to provide to the Purchaser in advance a drawing schedule,listing the drawings that will be de veloped and passed tothe Purchaser for examination, as well the approximate datesby which those drawings will be completed. The schedul-ing of the completion of those drawings must be consistentwith both the periods of time for examinations by the Pur-chaser, classification and r gulatory bodies, as well as thetimeliness requirements of the physical production depart-ment of the shipyard.

As discussed previously, the Contractor may have the au-thority to de velop interpretations, design and details thatare not already spelled out by any of the Contract Specifications, Contract Plans, applicable regulations, the nomi-nated classification rules or identified standards ThePurchaser must avoid using the drawing examination processto second-guess the Contractor’s decisions that have beenexercised within its authority. Any attempt by the Purchaser,whether intentional or not,to micro-manage the design de-velopment process in areas for which the Contractor hasthat sole authority likely will result in extra costs, delays ordisputes. Perhaps the Contractor will accept an occasionalpreference by the Purchaser, but more extensive impositionby the Purchaser will be b urden that the Contractor neednot accept. The drawing review process is not intended tobe a mechanism for the Purchaser to direct the remainingdevelopment of the detail design.

This brings out a significant lesson that Purchasers hvelearned. The authority for design details that are not spelledout in the contract documents is typically given to the Con-tractor. When multiple solutions to a detail design re-quirement are available, there is no basis to expect that theContractor will choose a solution that is exactly the sameas desired or anticipated by the Purchaser. Accordingly, ifa particular aspect of the v essel’s detail design is impor-tant to the Purchaser, it should be completely addressed inthe Contract Specifications and/or Contract Plans. It is norealistic to expect the Contractor’s engineers and design-ers to be able to read the minds of the Purchaser’s operat-ing staff as to what those details are to be if the y are notdefined in the contract documents. Clearl , the process ofexamining or reviewing the Contractor’s detail plans is notthe mechanism the Purchaser should use to impose on theContractor details that are not already defined in the contract documents.

During development of the detail design by the Con-

tractor, the Contractor may wish to implement work whichappears to achie ve the intent of the contract design b utwhich, in fact, strictly requires a change to the ContractSpecifications or Contract Plans.Agreements usually statethat a Change Order or waiver affecting the Contract Spec-ifications or Contract Plans cannot be authorized by Purchaser’s acceptance of a detail plan or w orking drawing,which incorporates such a change. This ensures that a changein the Contract Specifications or Contract Plans is not effected through the drawing review process,but only throughthe formal Change Order procedure.

9.2.21 Inspection of Workmanship and MaterialsWhen the Contractor is selecting major items of equipmentto satisfy the Contract Specifications the Purchaser maywish to include in the Agreement the creation of a reviewprocess that occurs before the purchase is executed by theContractor. In that case, the Purchaser would have an op-portunity to examine in advance the technical aspects of theContractor’s purchase order, but not the pricing. The Pur-chaser should ha ve to return an y appropriate commentswithin a specified time so the Contractor s purchasing ofthe equipment will not be delayed.

One issue that often arises is the Contractor’s selection ofequipment, which is identified in the Contract Specificatiowith the notation that the Contractor can select that partic-ular item of equipment or its equivalent, or its equal. That se-lection is subject to re view by the Purchaser in the samegeneral manner as other equipment acquisition,which is sub-ject to advance review by the Purchaser. However, there areseveral often-disputed aspects of the use of the or equal word-ing, which are discussed in greater detail in Section 9.3,For-mation of Specifications and in particular in the section onReview of the Contractor’s Equipment Selections.

The right of the Purchaser to inspect w ork in progress,not just completed work should be clearly stated in the Agree-ment. In further support of that concept, either the Agree-ment or the General Section of the Specifications caestablish a mechanism for inspection,or quality, deficien yreports being issued by Purchaser to Contractor. The Agree-ment or Specification may require that once such a report iissued by the Purchaser, the Contractor must respond withina defined period of time as to h w and when the Contractorwill correct that deficien y. Related to this is the matter ofSpecial Retainages, discussed in a later part of this section.

An important aspect of the Purchaser’ s inspection andpossible rejection using an inspection deficieny report is es-tablishing, in the contract documents,the basis for such pos-sible rejection. This is discussed in greater detail in Section9.3, Formation of Specifications and in particular in the sec-


tion on Inspection of Contractor’s Workmanship. The ne-cessity of understanding all the possible problems associ-ated with equipment selection and review and with inspectionof the Contractor’s workmanship presents another exampleof why technical personnel, not lawyers, should be the pri-mary developers of this aspect of contract documents.

9.2.22 Changes in Specifications, Plans and ScheduleA Change Order is a formal amendment to the contract,which may incorporate changes in any of the Contract WorkScope, the Contract Price,the Delivery Date, the Terms andConditions, or procedures set forth in the an y of the con-tract documents. The area of greatest concern is that ofchanges to the Contract Work Scope, along with the asso-ciated cost and/or schedule impact.

When dealing with a government contract, it is more dif-ficult to amend or change aything but the work scope,priceand schedule, since many of the other f acets of the con-tractually defined relationship are controlled by procurement regulations with which the government agency mustcomply in its contracting procedures.

This section of the Agreement is intended to define thprocedures and mechanisms by which the parties can im-plement a change to any of the Contract SpecificationsCon-tract Plans and/or Deli very Date. The three parts of theprocess are the request by the Purchaser , the proposal bythe Contractor, and the bilateral Change Order , which ei-ther accepts the proposal or results from negotiations overthat proposal.

Sometimes, but rarely, work scope changes come about dueto requests by the Contractor , usually on the basis of beingable to reduce costs if the ship yard is allowed to alter someaspect of the Contract Specifications and/or Contract Plans

Primarily, work scope changes come about because thePurchaser has requested them. That request is usually basedon the Purchaser, after the contract was executed, either chang-ing its mind about some features on the vessel or having con-tracted before finalizing decisions about what it anted. Somechanges come about due to errors or inconsistencies in theContract Specifications and/or Contract Plans. A separatetextbook could be written about Change Orders; but the in-tention of this section is to describe only what aspects needto be addressed by the Contract Agreement.

It should be noted,too, that some Change Orders have noimpact on work scope, but may require additional shipyardengineering, which is accomplished through a Change Order.For example, assume the Contract Plans show that a pair ofgenerators is to be transversely mounted,but before the workbegins the Purchaser requests they be longitudinally mounted.There may have to be additional engineering to alter the de-

sign of the foundations,supporting structures and connections;but the actual production costs essentially will be the samefor the transversely mounted generators as for longitudinallymounted. Thus, if accomplished in a timely manner, an en-gineering Change Order would be appropriate with no pro-duction cost or schedule impact.

The Agreement establishes the mechanisms needed toformally achieve the Change Orders. First it has to addressthe matter of the request by the Purchaser for a change pro-posal from the Contractor . The Agreement must considerwhether or not the Contractor has a duty to make a changeproposal in response to a change request from the Purchaser,or if it can decline to make a change proposal. The Agree-ment must then indicate the normal period of time allowedfor the Contractor to prepare the change proposal after re-ceipt of the change request.

The period of time during which the Purchaser has toaccept, cancel or ne gotiate the proposal after the changeproposal is given to the Purchaser should be defined by thAgreement. If this is not a defined period of timea risk de-velops that the Purchaser may accept the proposal muchlater than the Contractor anticipated when de veloping theprice and schedule impact of the proposed change.

The Agreement should also provide that the Contractorcan also make an unsolicited change proposal. Thereafter,the same procedures and mechanisms would be utilized toconvert that change proposal into a Change Order.

9.2.23 Adjustment of Contract Price and Schedule forChange OrdersAgreements almost al ways require that the Contractornot proceed with the changed work until there is a bilat-erally signed Change Order authorizing the change tothe work scope. Thus, both parties will have had to con-sent, in writing, to the revised Work Scope, the impact,if any, on Contract Price, and the impact, if any, on De-livery Date. This section of the Agreement defines theprocess of achie ving mutually agreed Change Orders.This sounds simple in theory, but is often difficult to im-plement. This section of the Agreement may also definethat if the Contractor proceeds without such agreement,it is at the Contractor’s risk.

There may be circumstances in which it appears to makegood sense from a ship production perspective to begin im-plementing the change to the w ork scope prior to formalauthorization of a mutually agreed upon Change Order. Pro-ceeding in good faith with the change work, assuming theparties will eventually agree upon price and schedule im-pact, may create significant risk for either or both parties

Some government contracts define the g vernment’s


right, as Purchaser, to direct the Contractor to proceed withchange work even when there is no agreement as to priceand schedule impacts. The idea behind this is to ensure thatthe government will not be abused by a Contractor that maybe perceived as trying to take advantage of the necessity ofthe change work. The intent,as may be defined by theAgree-ment, is that at some later time the parties will negotiate theprice and schedule impacts; and if that ne gotiation is notsuccessful, the Contractor can resort to other mechanismsto seek compensation for the work. Other mechanisms maybe a Request for Equitable Adjustment or the use of the Dis-putes Clause within the Terms and Conditions. In some gov-ernment contracts, if the parties cannot agree as to priceand schedule impact, the government agency will unilater-ally assign a price and schedule impact in order to ha ve abasis for making progress payments for that work; but theunilaterally determined price and schedule impacts are in-evitably less than those sought by the Contractor.

Some commercial contracts, especially in time-sensitiveprojects, include a similar right of the Purchaser’s represen-tative to direct the Contractor to achieve some previously un-defined ork before agreeing on price and schedule impact.

If a Purchaser , whether it be a go vernment agency orcommercial entity, directs a Contractor to proceed withoutprior agreement,even if the contract gives the Purchaser theright to direct the Contractor to undertake the change work,the risks associated with costs and schedule impact have tobe considered. If the Agreement does not otherwise clarifywhich party is assuming which risks when there is a di-rected change, most likely the risk is being assumed by theparty doing the directing,namely, the Purchaser. In view ofthat, the inclusion in an Agreement of the Purchaser ha v-ing the right to direct changes should be carefully consid-ered, and probably rejected, from the outset.

Changes, which come about due to regulatory, or classification requirements that must be achieved but which becameenacted after the contract was first xecuted are considered abasis for a price and/or schedule adjustment. This section ofthe Agreement defines the conditions under which such adjustments may come about. In actual practice,the interpreta-tion of such re gulatory or classification requirements machange, causing the Contractor to incur e xtra costs, but thewritten requirements may not have been altered,in which casethe Agreement usually states or implies that the Contractor isnot entitled to an adjustment of price or schedule.

9.2.24 Extension of TimeThis section of the Agreement addresses e xtensions to theContract Delivery Date due to events beyond the control ofthe Contractor. These are sometimes known as force majeure

events, such as unusually se vere weather, acts of the go v-ernment, riot, strikes and labor disputes, among other possi-bilities. Some Agreements do not allow supplier failures orsubcontractor defaults to be the basis of such excused delays,while others may allow such a basis for excused delays if theContractor can demonstrate a direct impact on v essel com-pletion schedule. This section of the Agreement also identi-fies the communications which must be accomplished bythe Contractor if a force majeure delay is appropriate.

Some Agreements also address possible schedule im-pacts resulting from interpretations to the applicable re gu-latory and classification requirements. This is likely to be afocal point for disputes, because these problems may notarise from changes or alterations in the applicable re gula-tory or classification requirements. The problem may be inthe third-party inspector’ s interpretation of those require-ments. It is recommended that impacts arising from inter-pretations, but not from changed regulatory and classificatiorequirements should not be a basis for e xtensions of time,since the Purchaser has not defined a y specific interpretation in advance. In such instances, any interpretation by thethird party, whether expected by the Contractor or not, isstill consistent with the Contract Specifications the Con-tract Plans and the referenced documents.

9.2.25 Final As-Built Drawings and CalculationsThe as-built, or as-fitted drawings and the final calculations and test data form an engineering database for theship. Most Purchasers’ require, through this section of theAgreement, that the Contractor is to provide such informa-tion as to form that engineering database.

These deliverables from Contractor to Purchaser ha veto be defined to ensure that the Contractor all ws for theirdevelopment in the project’ s budget and schedule. Thesemay be defined as a combination of

• various certificates to be issued by r gulatory or classi-fication o ganizations,

• standard calculations in formats defined by professionasocieties such as SNAME, and

• documentation that is unique in format or content to theparticular contract or ship. The Agreement should alsodefine whether each element of the documentation is tbe transmitted only in hard copy (on paper) or if it alsois to be transmitted electronically in computer-readableformat. The Agreement may refer to a particular sectionof the Contract Specifications for the detailed format othose calculations and drawings.

The timeliness of delivery of those documents from Con-tractor to Purchaser should be defined within the Agree-


ment; otherwise the Contractor has little motivation to ac-complish them promptly if its engineering resources aretemporarily needed for other projects. Part of that motiva-tion may be generated through the progress payments sec-tion, as discussed below.

Some Agreements provide a schedule for deli very of thedocumentation in draft form to the Purchaser, and then deliv-ery in final form after the Contractors correction of the docu-mentation in accordance with comments from the Purchaser.

It is not uncommon for disagreements to develop overthe quality and/or accuracy of the as-built drawings. Inorder for those dra wing to be accurate, personnel fromthe shipyard’s drafting department must go on the com-pleted ship to ascertain how the production departmenthad to vary from the production plans in order to rem-edy interferences between structure and the various dis-tributive systems, if composite drawings were not used.Typically, not wishing to incur those e xtra costs, ship-yards will pro vide as-built drawings that the ship yarddeems as adequate and of sufficient accuracy. If the Pur-chaser expects to receive accurate as-built drawings, ap-propriate controls over the process have to be includedin the contract documents, including use of the progresspayments clause.

9.2.26 Operating and Technical ManualsThe Contractor must also know the extent of operating andtechnical manuals that are to be pro vided with the ship.Some Purchaser’s are content to accept the manuals that areprovided by the equipment manufacturers only. Other Pur-chaser’s, however, require system manuals, that is, manu-als for the concurrent and inter -dependent operation ofgroups of components that form a system. Whatever thepreference of the Purchaser, it must be defined in either thAgreement or, by reference, in an appropriate section of theContract Specifications

Absent such a requirement in the Agreement, the Con-tractor may perceive that it is not required to provide suchtechnical documentation. If system manuals are required,they usually have to be de veloped by the Contractor or aspecialist subcontractor, either of which may represent asignificant cost to the Contracto .

Government contracts, especially for Na vy and CoastGuard vessels, may require e ven greater logistic supporttechnical documentation for which the cost of developmentmay be a measurable percentage of the cost of the physicalvessel. If these requirements are not defined within thAgreement or, by reference, within the Contract Specifications, it may become impracticable for the Purchaser to ob-tain them at a later date.

9.2.27 Tests and TrialsThere are a significant number of tests and trials to whicthe vessel must be subjected in order to pro ve the w ork-manship and the operational capability of each component,and then each system, and then finally the entirety of thvessel. Many of these tests and trials are needed to obtainregulatory and classification appr vals, but others are neededto give the Purchaser assurance as to the satisfactory com-pletion of the work by the Contractor.

Each test and trial has cost and possibly schedule im-pacts. In order to include each of them in the Contractor’sprice and schedule, they have to be defined in the Agree-ment or, by reference, in the Contract Specifications. If special instrumentation or equipment is needed to accomplishthe tests, it should be stated that Contractor is to pro videthose items,such as water bags or test weights for crane loadtests and load banks for generator electrical load tests.

For some of the more complex trials, a definit ve, drafttrial agenda should be developed by the Contractor in ad-vance, provided to the Purchaser for review and comments,and then finalized prior to those trials.The Agreement shouldestablish the schedule and mechanisms for such de velop-ments. Several organizations, including SNAME and ASTMas well as the Navy and Coast Guard,have standard test andtrial agendas which may be the basis of the specific agendas developed for the new ship’s trials.

The details of an y tests and trials, as well as the stan-dards to be used for test and trial agendas,should be in theContract Specifications but the necessity of them, espe-cially those in excess of regulatory and classification requirements should be identified in the Agreement.

9.2.28 Warranty Deficiencies and RemediesThe warranty clause of the Agreement must address se v-eral specific issues but the order in which the issues are ad-dressed is not significant. It should be understoodhowever,that a warranty claim can apply only to an item,which wasworking or completed at the time of Vessel Delivery, andsubsequently broke or ceased to work sometime during theWarranty Period. An item which w as not w orking or notcompleted at the time of Vessel Delivery may be correctedor completed during the Warranty Period,but it is financialltreated in a different manner, as described below in the sec-tion on Special Retainages.

The duration of the warranty period should be definedRelated to that, the warranty clause should address how, ifat all, the warranty period pertaining to some equipment,or perhaps the entire ship,is extended if that item or the en-tire ship is out of service due to a warranty defect.

The warranty clause must also define what is subject t


the warranty: the Contractor’s workmanship, the materialsand equipment supplied by the Contractor, or both. Further,the warranty clause must define which entity is g ving thewarranty on each particular aspect of the ship. The clausemay allow the Contractor to pass through any manufactur-ing warranties from vendors, such as pump manufacturersor coating suppliers, and provide that the Contractor doesnot otherwise warrant that item; however, the Contractor al-ways warrants the workmanship of installing or applyingthose items. This may present some risk to the Purchaser ifthe manufacturer’s warranty expires before the balance ofthe contractual warranty is to expire.

If an item of equipment is subject to the manufacturer’swarranty, the Purchaser may find subsequent to a break-age, that the manufacturer identifies the cause as one of improper installation. That is, for the Contractor to remedy ,and the Contractor identifies it as a manu acturing defect.That is, for the manufacturer to remedy. This will create forthe Purchaser a potentially unsatisfactory situation, whichis best addressed by a contract retainage, as, discussed inSub-section 9.2.30.

The matter of which party is to expend resources to cor-rect a warranty item must also be defined.This can be com-plex since it must allow for:

• emergency repairs,• possible remote location of the ship relative to the ship-

yard,• timing of notification by the Purchaser to the Contrac

tor of the existence of a warranty defect, and• location at which it is possible to effect the warranty cor-

rection.

Subsection 9.2.30, Contract Retainages, addresses pos-sible use of those retained funds to effect warranty repairs.

9.2.29 Progress PaymentsA shipyard needs progress payments to co ver the significant cash-fl w requirements that are incurred by the ship-yard during ship construction project. The cash fl w relatesto the regular payroll for all those working on the vessel’sconstruction, the subcontractors, the vendors and suppli-ers, as well as for a portion of the o verhead costs for thefacility and organization. The shipyard’s need for progresspayments is not eliminated if the Purchaser decides to finance the construction by a mechanism,which is separatefrom the final essel mortgage financing. Either the Purchaser or the institution providing the construction financing will allo w the Contractor to dra w down against thearranged funds on a progress basis, which is pre-estab-lished in the Agreement.

It is in the best interest of the Purchaser to ensure thatprogress payments are made only for work already com-pleted or materials and equipment already recei ved bythe Contractor. In some instances, all progress paymentshave been linked to purely physical construction,but thatis not recommended due to the risks it creates. The engi-neering, the component tests, the system tests, the docktrials, the sea trials, and the certificates and documentation to be provided with the ship all require expendituresby the Contractor. If progress payments are made on thebasis of physical progress only , the Contractor has re-duced incentive to fully and timely complete all of thosetasks, which are not direct production work. Thus, an ap-propriate part of progress payments can be linked to thoseaspects of the Work Scope, which are not physical pro-duction of the ship.

Consistent with Mr. Blakeley’s words cited in the intro-duction to this chapter , there have been major contractualdisasters brought about due to premature physical con-struction of ships, in the extreme, some resulted in scrap-ping of the ship after construction but before ever being putinto service. The construction was premature due to incon-clusive or incomplete models tests, research, engineeringcalculations or other activities affecting design development.

Progress payments can be used as a mechanism to dis-courage premature physical construction,which might oth-erwise be undertaken prior to completion of activities, whichare best, completed prior to the start of physical construc-tion. For example, the Agreement can state that no progresspayments associated with physical construction will be madeuntil the delivery to the Purchaser of a satisfactory, detailed-but-preliminary trim,weight and stability booklet. On somevessels, damage stability may be more relevant. Similarly,progress payments against any electrical production workcan be subject to completion of satisfactory electrical loadand fault-current analyses. Other linkages between non-production work and progress payments may be appropri-ate, depending on the specifics of the project

Non-production work items that do not have to precedeproduction work, such as completion of as-built drawings,tests and trials, among other functions, can have their ownprogress payments associated with them. Simply, if the Con-tractor has received all the progress payments prior to de-livery of the as-built drawings, for example, the Contractorhas reduced incentive to apply its resources to proper up dat-ing and completion of those drawings once the ship has de-parted the shipyard.

The amount of the progress payments is based on con-tractually defined mechanisms. Some contracts break-dwnthe total w ork into small percentages for each structuralmodule, major components, mechanical or electrical sys-


tem, and for each major part of the distrib utive systems(supply piping,return or drain piping,HVAC, electrical dis-tribution). The parties then periodically agree as to the per-centage that each of those systems has been completed,anda progress payment against that percentage completion ispaid. This methodology for quantifying progress paymentsmay not be accurate near the start of the project, but typi-cally becomes fairly accurate near the end of it, as long asthe non-production activities are being paid separately bytheir own progress payments.

Other contracts use well-defined milestones as the basifor progress payments. Depending on the nature of the shipconstruction project, a total of thirty to one hundred sepa-rate milestones may be defined each having a particularpercentage of the total Contract Price associated with itscompletion. At the end of every month, each of those mile-stones, which are 100% completed within that month be-come eligible for the associated progress payment. Thenon-production activities have their o wn set of progresspayment milestones associated with them, too. For exam-ple, a particular progress payment may be for the structuralmachinery space module; another may be for receipt of allthe tonnage and classification certificate

The developers of the Agreement must have a clear un-derstanding of the ship construction process,both productionand non-production work, in order to develop an appropri-ate set of progress payment criteria. This is another basis fortechnical personnel to be controlling contract formation.Sometimes is appears that the Contractor wishes to ne goti-ate into the Agreement earlier payment than the Purchaser iswilling to allow. Although the cash fl w requirement for theshipyard may be essential to its financial ability to timely fiish the project, there is more risk to the success of the proj-ect if payment for not yet completed work is allowed.

9.2.30 Contract RetainageMany Agreements provide for the Purchaser to retain a de-fined percentage of each progress payment. Thus, at thetime of vessel delivery to the Purchaser , assuming all thedeliverables other than the ship have also been completed,the situation is this: the Purchaser recei ves the ship and100% of the other deliverables, but the Contractor has re-ceived a lesser percentage of the total contract price.

The purpose of the contract retainage is to pro vide forthe circumstance in which the Purchaser may ha ve to payfor a warranty correction when the Contractor is not ableto timely accomplish it or when the Contractor allo ws thePurchaser to effect that correction. Another purpose of thecontract retainage may be to protect the Purchaser in theevent of a lien or claim by a supplier , vendor, subcontrac-

tor or other party, which has contributed to the constructionof the ship but has not been fully paid by the Contractor. Tominimize the likelihood of such liens or claims, the Termsand Conditions usually require that the Contractor certifythat the Vessel is being delivered free and clear of all liens,claims and encumbrances,and certify that all suppliers,ven-dors, and subcontractors have been fully paid.

For commercial contracts, the amount of the retainage,as a percent of the Contract Price,is negotiated during con-tract formation. On new commercial construction,it is usu-ally no higher than ten percent, often fi e percent. SomePurchasers do not require an y contract retainage. The ab-sence of any contract retainage creates a risk,however minorit may be, that the Purchaser will have to disburse moneyfor warranty corrections that properly should have been ex-pended by the Contractor, with no cost-effective recourseto recovering that outlay.

For government contracts, the amount of the retainageis established in the request for proposals, or solicitations.Some government agencies require more significant retainages, which, in practice, may only serve to cause bid-ders to seek higher prices in order to deal with the impacton cash fl w that such large retainages may have. From agovernment agency’s perspective, a larger contract retainageallows longer payout for the ship; b ut in fact it may onlyserve to increase the cost of the ship.

The Agreement defines when the Contractor will recevethe balance of the Contract Price, provided the Purchaserhas not spent part of it in a manner allo wed by the Agree-ment. The Contract defines a temporary business and legalrelationship. From the outset, it is intended that the rela-tionship will terminate upon the end of the warranty or guar-anty period. Thus, all contract retainage should be finallpaid to the Contractor no later than the end of the warrantyperiod.

Some contracts provide that half or some other portionof the contract retainage be paid prior to the end of the war-ranty period,and the balance paid at the end of the warrantyperiod.

9.2.31 Special RetainagesIt is not uncommon that some items on the ship are in-complete or not fully functional at the time the ship is oth-erwise ready for Vessel Delivery. If those items do not affectship safety, the ability of the ship to achieve its mission orperform its service,and if the correction or completion doesnot require the presence of the ship at a full-service ship-yard, the parties may agree that the deli very of the Vesselwill not be delayed by those deficiencies

However, this creates a situation that is inconsistent with


the intent of the contract, which intent w as stated abo ve,namely, at the time of Vessel Delivery the Purchaser re-ceives the ship and 100% of the other deliverables, but theContractor will have received a lesser percentage of the totalcontract price per the contract retainage. In other words, theContractor is implicitly seeking a waiver of the requirementto deliver the ship in a complete and fully functional con-dition. In that case,the Contractor should not receive all thefunds that otherwise w ould have been paid at the time ofVessel Delivery.

The Purchaser may grant that implicitly requested waiverif the contract retainage is ample to cover all of:

• the correction of those deficiencies• all warranty corrections, and• any possible liens or claims by subcontractors and ven-

dors. However, such granting of a w aiver creates risksif the Contractor does not correct the outstanding deficiencies. Under other clauses, the Purchaser may nothave the right to use the contract retainage to rectifyitems, which clearly were not warranty items, becausethey didn’t break during the warranty period.

It is recommended that the Agreement allow the Pur-chaser to create a special retainage for each such uncorrectedpre-delivery deficien y in order to gi ve the Contractor in-centive to have that deficien y corrected during the first halof the warranty period. At the end of the first half of the ar-ranty period,any such special retainages are paid to the Con-tractor if the corresponding deficien y has been corrected.If it is not corrected by that time,the Purchaser can use thosefunds to have it corrected during the second half of the war-ranty period. The reason for that time limit on the expendi-ture by the Purchaser is, again, that the temporary businessand legal relationship is expected to conclude at that time.

9.2.32 Technical Project as Basis of AgreementThe previous sub-sections of this section on Formation of theShipbuilding Agreement have discussed the purpose and con-cerns of a number of the clauses of a typical commercial ship-building agreement. Other clauses may also be appropriateif they are not already included in the Terms and Conditionsof the contract documents. Government contract forms willvary considerably among the man y possible go vernmentagencies (federal,state, local, educational institutions,quasi-governmental agencies, etc.), but will all contain the equiv-alent of the clauses discussed above, as well as possibly othersthat are required by the agency’s procurement regulations.

When a set of contract documents is being de veloped,the Agreement and Terms and Conditions are usually builtup from a previous set of similar documents. If, however,

the nature of the v essel acquisition is going to be significantly different, then the use of the prior documents as astarting point has to be addressed more carefully . For ex-ample, if the prior acquisition w as for a ship of the Con-tractor’s standard design, and the new acquisition is for aunique design, there are man y aspects of the Agreementthat will have to be modified. If the contractor has nver con-structed a ship of the type being acquired,a more-rigorousset of checkpoints may ha ve to be incorporated into theAgreement and the supporting Specifications

Essentially, besides establishing a temporary b usinessand legal relationship between the Contractor and Purchaser,the Agreement and the supporting documents should iden-tify potential risks (technical, financial and schedule) as-sign responsibility for avoiding those risks,and address theconsequences if those risks are not satisf actorily avoided.Thus, the nature of the technical project and the risks as-sociated with its achievement are the most important f ac-tors in the creation of the contract documents. The entireset of contract documents must be inte grated and consis-tent with each other, but primarily must be appropriate tothe technical aspects of the project.

9.3. FORMATION OF CONTRACT SPECIFICATIONSAND PLANS

9.3.1 IntroductionThe Contract Specifications and the Contract Plans are technical documents, which are non-ambiguously identified ithe Agreement by those titles. The purpose of those docu-ments is to define the technical products or del verables,which the Contractor is to pro vide to the Purchaser . TheAgreement, or perhaps,but not preferably, the General Sec-tion of the Specifications identifies the r gulatory require-ments and classification rules that are to be satisfied incorporation of certain design and construction featuresinto the vessel. Those design and construction features aris-ing from regulatory requirements and classification ruleshowever, essentially are generic, not unique to the v esselbeing acquired under a specific contract. Ma y of the de-sign and construction features identified by the ContracSpecifications and Contract Plans are unique to the essel,making it dif ferent from other v essels. These documentsmay also define other features that are not necessarily uniqufor this v essel, but are not included in the re gulatory re-quirements and classification rules

Thus, the Contract Specifications and the Contract Plansas components of the contract documents, define the hearof the project and possibly make it different from other shipconstruction projects to the appropriate extent. This section


first addresses the intent and limitations of those documentsand then generally addresses the components within thosedocuments as well as special concerns associated with sev-eral of those components. This subchapter, however, is nota substitute for a course of study neither on specificatiopreparation nor on the development of plans.

9.3.2 Non-Included FeaturesThe Contract Specifications and Contract Plans define tunique features of the vessel and other non-unique featuresthat are not already addressed by the appropriate regulatoryrequirements and classification rules. It as pointed out inthe first section under the topic of Decision-Making Au-thority, that numerous details, which are not already de-fined in the Contract Specifications and Contract Plan willhave to be developed by the Contractor after the contract isexecuted. Except for unusual cases, when the parties exe-cuted the shipbuilding contract, the authority to make thoseadditional decisions as to the form of the numerous detailswas passed from the Purchaser to the Contractor. The Pur-chaser’s naval architects and marine engineers who are de-veloping the Contract Specifications and Contract Planmust keep in mind that they will have yielded to the Con-tractor the right to make those decisions.

Thus, if the exact form of any lesser details is importantto the Purchaser, the Contract Specifications and ContracPlans should describe them to an appropriate le vel of de-tail. If such details are not already incorporated into theContract Specifications and Contract Plans generally thePurchaser will have to accept the Contractor’ s solution tothose details. The Purchaser’s staff should bear in mind thatit is most likely the Contractor will be seeking minimum-cost solutions to those technical details when working undera fi ed-price contract.

The Purchaser’s naval architects and marine engineersshould not use the drawing review process as a mechanismto impose on the Contractor a more-expensive solution if theContractor’s solution is in all re gards consistent with thecontract documents. For example, if the form of mountingan item of equipment on a deck is important to the Purchaserfor reduced noise transmission, that form of mounting can-not be announced after the Contractor has prepared dra w-ings or e ven after the contract has been e xecuted. Rather,because the form of mounting to minimize noise transmis-sion likely will cost more than another form of mounting,the Contractor should ha ve been gi ven the opportunity toconsider it before developing its bid price for the work.

9.3.3 Identifying the Required Type of SpecificationIn general, there are three types of specifications1. design or end product specifications2. performance specifications; an3. procedural specifications

Each of these three types of specifications leads to a different assignment of responsibilities between the Purchaserand the Contractor. A typical Contract Specification will include, for all the different aspects of the ship,more than onetype of specification and may even include all three types.The type of specification used for the hull form for exam-ple, can be entirely different from the type of specificatioused for the ballast pumps.

A design or end product specification is a representationby either drawings or verbal descriptions or both, of whatthat aspect of the ship should look lik e upon completion.The use of a Contract Plan for the hull lines serv es to de-fine the form of the hull from which the Contractor cannovary. The hull form may be subject to variance if confirming model tests are to be conducted by the Contractor. An-other example of a design or end-product specification mabe for hull coatings. The Contract Specification may defithe type, composition and color of the coatings, as well asperhaps the manufacturer, and then go on to define the thicnesses of each of the primer , undercoat and topcoat. Thatis, the final configuration of the coating layer-by-layer,has been defined by the Contract Specifications An asso-ciated procedural specification as discussed below, estab-lishes the criteria for appropriate surf ace preparation andmaterial application.

A performance specification on the other hand,does notin any way describe what the object will look like, but in-stead will describe how it is to perform. A specification fothe ballast pumps on a ship, for example, could state thatthe two ballast pumps shall each separately be capable ofpumping into and out of the ship’ s ballast tanks a certainnumber of tons of ballast water per hour. Thus, the shape,material content, and weight, among other parameters, foreach of those pumps will be selected by the Contractor pro-vided that each can pump the required number of tons ofballast water per hour . Note, too, that a loosely writtenspecification for t o ballast pumps of equal capacity mayeven result in two different brand names; it is all at the dis-cretion of the Contractor under a performance specification. The Purchaser can write a tighter specification to voidthat two-brand possibility. See the sub-section, below, onBrand Names or Equal to supplement this discussion.

A procedural specification usually supplements one othe two other forms of specification by defining part of tprocedure that is to be followed in achieving the other part


of the specification either in the design process or the con-struction stage. An example of a construction proceduralspecification pertains to coatings the design specificatiofor the coatings, as described above, may be supplementedby a procedural specification that requires the Contractoto apply the coatings in accordance with the practices rec-ommended by the coating manufacturer pertaining to sur-face preparation,air temperature,steel temperature, relativehumidity, direct sunlight, wind speed, etc.

An example of a design procedural specification marelate to power and signal cables. The design of the cabletrays may be solely at the discretion of the Contractor, otherthan regulatory requirements and classification rules. Thatis, the cable trays are defined by a performance specifiction. However, that performance specification may be supplemented by an applicable design procedural specificatiowhich may state that when designing the cable trays, theContractor shall also comply with the requirements of anidentified electro-magnetic interference (EMI) standard tensure that the EM emissions of po wer cables do not in-terfere with the signals within the control, alarm and mon-itoring cables.

The naval architects and marine engineers who developthe Contract Specifications and Contract Plans for the Purchaser can select whichever form of specification best suitthe needs of the project for each item and each aspect of theship. However, it is their responsibility to ensure that all ofthose specifications are compatible with one anothe . Forexample, if the EMI procedural specification requires t olevels of cable tray to avoid the interference,the ship’s basicdesign by the Purchaser’s staff will have to provide amplespace for those two levels; otherwise the requirements im-posed on the Contractor may be impossible to achieve.

9.3.4 Standard Forms of SpecificationsThe technical Contract Specifications can be arranged inearly any sequence; but there are standard sequences thathave been used by industry in v arious countries. In theUnited States, for example, the U.S. Maritime Commissionin the 1930s and 1940s,followed by the U.S. Maritime Ad-ministration in more recent years,have developed and useda standard set and sequence of section headings,as indicatedin Table 9.V. Each of those section headings includes mul-tiple standard sub-headings (not shown herein due to sizeand number).

The value of using a standard group of headings and astandard sequence is that both shipo wners and ship yardshave become accustomed to using those standards. Ofcourse, many of the section headings in Table 9.V may notbe applicable to every project, and thus those section num-

bers should not be used. Other widely used standard spec-ification headings can be used as well. A major benefit ostarting with a standard is that is reduces the likelihood ofinadvertently omitting some specification items.Additionalsections for special shipboard features can be added byselecting section numbers that are not already used.

As to the actual content of the sections,distinct from theheadings, it is noted that generic guideline,example or stan-dard specifications also h ve been developed and publishedby many organizations worldwide. Sometimes those pub-lished specifications are quite helpful to persons dvelopingspecifications for a particular aspect of a ship for the firtime. A review of such publications by specification writerwill help assure that salient points will be addressed in thenew specification though it is not necessarily as suggestedby the guidelines. When the ship type, or the system withinthe ship, is innovative or represents a new application of ex-isting technology, the final specification may ve only faintresemblance to the previously published specifications

The U.S. Na vy, for example, has used its Gen Specs,being general or standard specificationsfor its use in defining particular aspects of the intended product in naval con-struction. With rapidly developing materials technology andinnovative design concepts, however, those Gen Specs donot appear to be relevant to each new class of vessel as theyonce had been. Since the mid-1990s, the U.S. Na vy hasbeen relying less on these Gen Specs and more on specifications developed for the particular vessel design, materi-als technology and application concepts being employed inthe development of its newest ships. That Gen Spec shouldnot be confused with the section of general specificationcontained within most contracts.

The U.S. Maritime Administration has published Guide-line Specifications for Merchant Ship Construction. Themost recent edition (1995) is intended as a helpful genericpackage for ship operators and shipb uilders who will de-sign specific commercial ships. That publication states,“These specifications can be used as starting points for thepreparation of construction specifications for any type ofship. …. [They] are intended to provide guidance to themaritime industry for the preparation of specifications. ….They cover all aspects of potential contract work, but mayrequire modifications, as appropriate, to the ship designbeing contemplated.”

Recognizing that the value of such specifications has diminished due to numerous de velopments, the U.S. Mar-itime Administration no longer intends to update itspublished specifications

Because published specifications from any source, areonly generic, guideline, example or standard, the contractspecification has to be more supportve of the exact ship type


and the newest materials technology to achieve the intendedresult. Also, because published specifications try to be applicable to multiple ship types and multiple situations, it islikely that the contract specifications could be briefer thathe published ones. Specification writers should be cautioushowever, regarding the goal of achieving brevity in their work.It sometimes appears that due to the absence of informationdeleted for the sake of brevity, such shortened, and thus pos-sibly ambiguous, specifications may lead to disputes

9.3.5 Contract DeliverablesAt the beginning of this section it w as stated that the pur-pose of the Contract Specifications and Contract Plans is tdefine the technical products or delverables which the Con-tractor is to provide to the Purchaser. Note the use of the plu-ral of “technical products or deliverables.” The Purchaser is

paying the Contractor not only for the ship itself, but alsofor numerous other deliverables. Without many of those otherdeliverables, the ship by itself is not completely usable ormaintainable by the shipowner. Some of those deliverablesare defined by the applicable r gulatory requirements andclassification rules.The rest have to be defined by theAgree-ment, primarily the financial del verables, or the ContractSpecifications primarily the technical deliverables.

The contract deliverables, other than the hardware of theship and spare parts,will take many forms. Some of the de-liverables will be engineering calculations,trim, weight andstability calculations, finite element analyses fatiguestrength calculations,electrical load and fault-current analy-ses, heat-load and heat-balance calculations,among others.

Some will be dra wings, detail plans for re view,classification-appr ved plans, as-built/as-fitted dr wings,and others); some deli verables will be copies of ship yard


TABLE 9.V Possible Specifications Section Headings

1 General2 Structural Hull3 Houses And Interior4 Sideports, Doors, Hatches,5 Hull Fittings6 Deck Coverings7 Insulation, Linings And Battens8 Kingposts, Booms, Masts, Davits9 Rigging and Lines

10 Ground Tackle11 Piping--Hull Systems12 Air Conditioning, Heating and

Ventilation13 Fire Detection And Extinguishing14 Painting and Cementing15 Na vigating Equipment16 Life Saving Equipment17 Commissary Spaces18 Utility Spaces and Workshops19 Furniture and Furnishings20 Plumbing Fixtures & Accessories21 Hardw are22 Stowage & Protective Covers23 Miscellaneous Equipment Stowage24 Name Plates, Notices andMarkings25 Joiner Work and Interior26 Stabilization27 Container Stowage and Handling50 Main And Auxiliary51 Main Diesel52 Reduction Gears and Clutches—Main

53 Main Shafting,Bearings, Propeller55 Distilling Plant56 Fuel Oil57 Lubricating Oil58 Sea Water59 Fresh Water System60 Feed and Condensate61 Steam Generating62 Air Intake, Exhaust and Forced Draft60 Feed and Condensate61 Steam Generating62 Air Intake, Exhaust and Forced Draft63 Steam and Exhaust64 Machinery Space65 Air Conditioning & Refrigeration

Equipment66 Ship's Service67 Car go Refrigeration—Direct

Expansion System68 Liquid Cargo69 Cargo Hold Dehumidificatio70 Pollution Abatement and Equipment71 Tank Level Indicators72 Compressed Air73 Pumps74 General Requirements For Machinery

Pressure Piping75 Insulation—Lagging For Piping and

Machinery76 Diesel Engines Driving Generators78 T anks—Miscellaneous

79 Ladders, Gratings, Floor Plates,forms & Walkways in Mach'y

80 Engineer's and Electrician's shops,Stores And Repair

81 Hull Machinery85 Instruments and Miscellaneous

Boards—Mechanical86 Spares—Engineering (Crating And

Storage)87 Electrical Systems, General88 Generators89 Switchboards90 Electrical91 Auxiliary Motors and Controls92 Lighting93 Radio Equipment94 Na vigation Equipment95 Interior Communications96 Storage, Batteries98 T est Equipment, Electrical99 Centralized Engine Room and Bridge

Control100 Planning And Scheduling, Plans,

Instruction Books,101 T ests And Trials102 Deck, Engine and Stewards

Equipment and Tools,103 Requirements For Structure-borne

Noise

Appendix A: Owner Furnished Equipment

correspondence with classification and r gulatory bodies;some will be certificates from classification and gulatorybodies, and possibly from others. Some deliverables will betest and trial agendas and subsequent reports,and some willbe w arranty forms from v endors and others; and somedeliverables may be shipyard scheduling information, haz-ardous waste disposal records,insurance information,amongmany other possibilities. This list is by no means complete.

The completion and deli very of each of those deli ver-ables from Contractor to Purchaser represents a source ofcosts to the Contractor. If each of them is to be accomplished,the Contractor must know about them prior to bidding or pric-ing the work in order to have the budget available for eachof them. Accordingly, the persons developing the ContractSpecifications for the Purchaser must ensure that each sucdeliverable, hardware, drawings, calculations, correspon-dence, computerized files etc. is identified as a requiredeliverable in the documents made available to bidding ship-yards from the outset. All of the deliverables, besides the shipitself, have to be defined by the contract documents or th yare beyond the work scope requirements of the Contractor.

9.3.6 Defining the Complete Scope of WorkIn addition to the ship, the spares and all the other contractdeliverables, the entire scope of w ork which the Contrac-tor will have to undertake needs to be defined to the xtentthat there is sufficient information in the bid package or athe time of contract ne gotiations such that the Contractorcan identify and estimate all sources of costs. In other words,if an shipowner’s requirement for any information, materi-als or special tests will cause the Contractor to incur costs,such items must be separately identified in the contract documents as a Contractor responsibility.

Some examples of such items are:

• the payment of fees for classification and rgulatory ap-provals, if needed,

• confirming model tests if th y are to be accomplishedafter contract signing,

• maintenance of a detailed weights-and-centers spread-sheet for every item of equipment if appropriate,

• rental of testing equipment if it will be needed (testweights, electrical load banks, etc.), and

• any special testing requirements on shipowner-furnishedequipment that the Contractor has to perform.

There are some aspects of technical specifications thacannot be glossed over without increasing the likelihood ofsome consequential disputes. A negative example, one tobe avoided, is illustrated by the follo wing wording takenfrom a recent specification.“All work necessary to perform

the specified work shall be deemed to be part of the speci-fied work whether specified or not.” This was an attempt bythe specification writers to co vey to the Contractor theresponsibility to make everything complete and functionalat no extra cost to the Purchaser. However, such wording istoo broad to be usable for estimating and pricing, and thuslikely could not be enforced in court.

The intent may have been to include, for example, theunspecified supply and installation of remote motor controllers for some of those electrical motors defined by thspecifications. But inasmuch as the specification writer hinformation particular to the specified moto , that writerwas in a better position to know if a remote motor controllerwould be needed. When estimating the work scope, the Con-tractor would not automatically know that a remote motorcontroller would be required, and thus the cost of it wouldnot be included in the fi ed contract price.

A Purchaser should not rely on requirements such as firstclass marine practice or best marine practice or other ill-defined phrases in order to ensure quality of material selectioor quality of workmanship. Highly subjective requirements,phrased as those, are not conducive to quantitative estimat-ing, and thus cannot be included in the price of the ship-building contract.

It should be remembered that, in soliciting bids or re-questing pricing from a potential Contractor, the Purchaseris seeking quantities, quantities of production hours,mate-rial costs,subcontractor costs, facility and equipment costs,and schedule days. Accordingly, all aspects of the ContractSpecifications and Contract Plans must be suitable fortrans-lation into such quantities. Broad concepts,such as the neg-ative example given above, are not directly translatable intoquantification prior to accomplishment of most of the remaining design de velopment, and thus do not constitutewell-defined specification

9.3.7 Shipyard Schedule and UpdatesMany requests for proposals or similar solicitations byshipowners from bidding shipyards require that a prelimi-nary schedule be supplied with the bid to ensure that thebidder has an understanding of the work scope comparableto that of the Purchaser’s staff. It is common, but not nec-essary, for the contract documents to require that the Con-tractor provide the Purchaser with a detailed schedule withina stipulated period of time after contract e xecution. Thereare many reasons why the Purchaser’ s staff wishes to seethat schedule, some of which have been discussed in Sec-tion 9.2 (see the subsection on Project Schedule) and someof which are discussed in the follo wing subchapter 4 onManagement of Contracts During Performance.


The Contract Specifications may present more detailerequirements for the project scheduling to supplement thegeneral requirements of the Agreement. The more detailedrequirements may address,for example, the use of separateactivities for each of engineering,procurement, installationand testing for each item of equipment. The necessity of pro-viding the Purchaser with updates may be supplemented bystating that such updates shall be made periodically, the pe-riod depends on the particular project, or more frequentlyif major changes have been agreed upon.

If both the Agreement and the Contract Specificationaddress the Contractor’s responsibilities regarding projectschedule, it is essential to ensure that they complement oneanother and do not conflict

9.3.8 Engineering Design ResponsibilitiesIn Section 9.1, the subsection on Decision- making Author-ity pointed out that between the Contract Specifications anContract Plans, on one hand, and the ship yard’s detailedplans or working drawings, on the other, numerous devel-opmental design decisions likely will have to be made. Someof them will be guided or controlled by the re gulatory re-quirements, classification rules or identified standard suchas industry standards or Mil Specs, but many others are notso guided or controlled. In almost all shipbuilding contracts,when the parties executed the shipbuilding contract, the au-thority to mak e those decisions w as passed from the Pur-chaser to the Contractor. The only residual decision-makingauthority that the Purchaser retains is indirect confirmatiothrough review of the detail plans or working drawings.

From the shipyard’s perspective, however, that decision-making authority is a mixed blessing. It is appreciated by ship-yards because it gives shipyards the authority to seek least-costsolutions to ship production. In contrast,however, it puts themat a disadvantage when bidding the work because each ship-yard does not know with certainty how much economy, com-pared to the Contractor’s competitors, it will be able to buildinto the vessel though the use of such opportunities.

A shipyard is put at a further disadvantage when it hasresponsibility for significant design d velopment becauseit must use or hire naval architecture and marine engineer-ing design staff or subcontractors to accomplish that designdevelopment. This creates risks for the ship yard becausethe naval architects may be more likely to perfect the ves-sel’s performance attrib utes or operational ef ficien y in-stead of making the ship more economically producible (seeChapter 14–Design/Production Integration).

The Purchaser’s staff, when developing the Contract Spec-ifications and Contract Plans should bear in mind the ship-yard’s general wariness at having to incur such risks arising

from undertaking significant design d velopment. This doesnot mean that a Purchaser must allow the Contractor to avoidthat responsibility, but it does mean that the Purchaser, throughthe Contract Specifications and Contract Plans must ensurethat it is perfectly clear that the Contractor will,in fact, havethose responsibilities as appropriate to the project.

Accordingly, the Contract Specifications or the Agree-ment must clearly define the Contractor s responsibilitiesto perform all the engineering and design development tasksnecessary to translate the requirements of the contract doc-uments into material procurement,equipment procurement,detail plans, working drawings, and production plans, allof which are then used for ship production. If the Purchaseris not going to be providing any additional engineering ordesign support for the project, it might be best to clearlystate, rather than merely imply, that no additional design in-formation is being provided by the Purchaser.

When the Purchaser is assigning to the Contractor suchresponsibilities, the Purchaser’s technical staf f should bemindful of the f act that the y will no longer ha ve controlover those decisions. If the Purchaser’ s technical staf f isconcerned that the Contractor may find means of makinthe ship construction too economical to suit the Purchaser,then tighter or more-detailed specifications should be developed for those particular aspects of the ship that are ofgreatest concern to the Purchaser. A Purchaser’s technicalstaff should be cautious when responding to a Contractor’srequest for additional design information by means of clar-ifications. This may be symptomatic of the Contractor’s re-luctance to undertake the design effort that it is contractuallyobligated to accept. Further , it may lead to alle gations bythe Contractor that the design information, if provided bythe Purchaser, implies a greater work scope than otherwiserequired, thus necessitating a Change Order.

9.3.9 Brand Names/ Or EqualOne mechanism that is often used in Contract Specificationdeveloped by the Purchaser is to identify a particular brandname and model number of an item of equipment,and thenstate that the Contractor must provide and install that par-ticular item or equal. The intent, by the Purchaser, is to en-sure that a certain quality is achieved. While this may be aworthwhile effort, it may not lead to the Purchaser’ s ex-pected results for any of several reasons.

When an or equal mechanism is utilized in the specifications, the specifications usually reser e to the Purchaserthe right to accept or reject the substitution proposed by theContractor. The Purchaser can minimize the lik elihood ofa misunderstanding of what will or will not be acceptableby giving greater definition. In particula, the Contract Spec-


ifications could define what parameters are going to be cosidered when determining if a shipyard-offered substitutionis truly equal. For example, the parameters that could beimportant for a motor/pump combination on a high-speedpassenger ferry likely would be different than those beingconsidered for a large tanker. Table 9.VI presents a partiallist of parameters that might be considered in such situa-tions; other parameters would be appropriate for other formsof equipment.

Another mechanism used in shipb uilding contracts tolimit the choices for equipment that will be made by the Con-tractor is to negotiate or include a maker’s list for variousitems. The maker’s list identifies the brand name and modeof equipment that is included in the base-line design.

Some maker’s lists will include more than one possiblebrand name and model for several particular items of equip-ment. Whether or not the Contractor has the right to seekan equivalent to the items on the mak er’s list must be de-fined in the contract documents; without such clarificatiothe Contractor may interpret that it does ha ve such rightsand the Purchaser may interpret that it does not.

9.3.10 Review of the Contractor’s Equipment SelectionsIn Section 9.2, the Purchaser’s review of the Contractor’sdetail plans and/or working drawings has been discussed.In a similar manner, some Purchasers may seek to re viewthe Contractor’s selection of major items of equipment thatare not already identified by brand name and model number, or are not covered by an or equal clause, or are not in-cluded in a mak er’s list. The purpose of the Purchaser’ spre-purchasing review of the Contractor’s purchase techni-cal specifications that will accompa y a purchase order isto ensure that the Contractor’s interpretation of the ContractSpecification s requirements pertaining to that item of equip-ment is compatible with the Purchaser’ s interpretation. Ifthe Purchaser seeks to have this right of an advance reviewof the purchase technical specifications for selected itemof equipment, the contract documents should create thatright, remind the Contractor to provide the purchase tech-nical specifications on a timely basis so as to not delay thschedule, and indicate the period of time that the Purchaserhas to conduct such review.

As with the review of the Contractor’s detail plans and/orworking drawings, some Purchasers may try to use this re-view process to persuade the Contractor to adopt the Pur-chaser’s interpretation when,in fact, alternate interpretationsmay also be valid. When the contract was executed, the Pur-chaser not only gave the Contractor the responsibility to se-lect that item of equipment,but also gave the Contractor theright to select it to maximize the benefit to the Contracto .The burden of demonstrating that the Contractor -selecteditem is not compatible with the contract documents lies withthe Purchaser. If the Purchaser can show that the Contrac-tor-selected brand name and model does not satisfy the con-tractual requirements, the Contractor must re vise itspurchase order to achieve such compliance.

In some cases, the process of such review may lead thePurchaser to appreciate that, although the Contractor’s se-lection is consistent with the contract documents, the Pur-chaser now sees that such a v alid, alternate interpretationof the contract documents leads to a less-than-satisfactoryequipment selection. The Purchaser may then seek to usethis review process as a basis for requesting a Change Orderto achieve a more-satisfactory equipment selection. How-ever, this action by a Purchaser may result in higher costs,delays, impacts on drawings and engineering, and second-ary impacts on other contract deliverables.

9.3.11 Resolution of InterferencesComposite drawings present isometric vie ws of spaces orcompartments within the ship, including scaled representa-tions of all structure, equipment items and distributive sys-


TABLE 9.VI Selected Parameters for DetermingEquivalency of Combined Pump/Motor

Maximum Continuous Rate of OutputMaximum Peak Rate of OutputPressure at Various Rates of OutputMaterials of ConstructionWeightAudible NoiseVibration TransmissionMean Time between FailuresMetric or Non-metric FittingsElectrical Feedback CharacteristicsControllability of Rate of OutputPower Requirements and Efficien yAvailability of Spare PartsAvailability of Tech Rep’sProven Marine ExperienceManuals in the Selected LanguageEase of MaintenanceCommonality with Purchaser’s Fleet

tems. If prepared in advance of physical construction, com-posite drawings can identify physical interferences that wouldresult from the use of unmodified Contract Specificatioand Contract Plans. Today 3D product models can performthe same function. It is not a common practice for theshipowner’s naval architects and design engineers to preparecomposite drawings of the structures, items of equipmentand distributive systems sho wn in and/or described by theContract Specifications Contract Plans or other contractu-ally-defined standards. Thus it is possible, if not likely, thatinterferences between elements of the contract design willresult from a strict interpretation of the contract documents.

In the event that the resolution of such interferences hasan impact on the producti vity of the ship yard’s crafts, theContractor may look to the Purchaser for compensation forthat rework or temporarily-reduced producti vity. To avoidthat situation, either the Agreement or the Contract Specifications could advise the Contractor of the possibility of suchinterferences, require the Contractor to not undertake phys-ical construction until the possibility has been examined andaddressed, and further require that the resolution of such in-terferences are to be achieved by Contractor at no additionalcost to Purchaser. In ship conversion or repair, the Contrac-tor could be gi ven access to the v essel for a pre-bid shipcheck to identify potential interferences if the Contractor isresponsible for the correction of them at no additional cost.

9.3.12 Inspection of Contractor’s WorkmanshipThe Agreement, as discussed in Section 9.2, usually in-cludes a clause which establishes the right of the Purchaser’srepresentatives to have access to the vessel and shops, in-cluding subcontractor sites,and to inspect work in progress.The use of inspection deficien y reports, or quality deficiency reports,has also been addressed in Section 9.2 in thesection on Inspection of Workmanship and Materials. In-spection deficien y reports should only be issued if the Pur-chaser’s representative can point to a part of the ContractSpecifications or Contract Dr wings with which compli-ance has not been achieved.

Many Contract Specifications state that the Contractorsworkmanship shall be adjudged by the Purchaser’ s repre-sentative, and only that individual shall have the authorityto make a determination of satisfactory workmanship. How-ever, if there is no other identified standard against whicthe workmanship will be measured, the Contractor is ef-fectively being asked to work to the unwritten standards inthe mind of that Purchaser’s representative. This is often anunsatisfactory mechanism,since the Contractor cannot knowin advance what standard will thus be applied.

Accordingly, the Contract Specifications should includ

sufficient information to pr vide a non-ambiguous basis fordetermining if the Contractor’s workmanship is adequate.Certainly the workmanship must satisfy the applicable reg-ulatory requirements and classification rules. The work-manship must also satisfy any applicable standards that areidentified in the contract documents usually in the Con-tract Specifications or in the Agreement. These referencedstandards may be marine industry standards, professionalsociety standards, such as SNAME standards, well-distrib-uted government standards, such as U.S. Navy Mil Specs,or even standards that are applicable b ut not necessarilyunique to the marine industry. The Agreement or the Gen-eral Section of the Specifications typically contains xpresslanguage requiring the Contractor to correct, at no addi-tional cost to the Purchaser, any workmanship or materialswhich fail to meet the standards.

The lack of an identified standard against which ork-manship can be judged creates risks for both parties,whichrisks may result in disputes, an unsatisfactory product, re-work and delay. Thus, the developers of the Contract Spec-ifications should ta e the time and effort to include thereinthe standards against which the on-site Purchaser’s inspec-tors will determine the acceptability of w orkmanship thatis not already co vered by applicable re gulatory require-ments and classification rules

9.3.13 Identification of Item’s Entire Work ScopeThis is the heart of technical specification writing. It is fairly complex matter, and not to be undertaken lightly orby unpracticed personnel. The history of risks and conse-quences that are associated with incomplete or misleadingspecifications is a suficient basis for ma y books. The pre-viously mentioned contractual disasters. As a foundationfor discussing this subject, four points that ha ve been al-ready discussed are brought to the forefront.

First, at the be ginning of this section, the three basicforms of specifications were discussed design or end prod-uct; performance; and procedural.

Second, the desirability of a voiding too-broad speci-fication language as also discussed. The negative exam-ple was given, all work necessary to accomplish the specifiedwork .....

Third, the fact that the Contractor is gi ven rights, notjust responsibilities, to make decisions about details andmaterials after the contract is executed has been discussedseveral times in Sections 9. 2 and 9.3.

Fourth, the shipyard’s decision-making authority givesit the right to implement least-cost solutions in design de-velopment and materials selection as long as it remains con-sistent with the Contract SpecificationsContract Plans, the


defined r gulation, the selected classification rules and thidentified standards

The identification of the entire ork scope for each itemrequires that those four points be k ept in mind when eachelement of the technical specifications is d veloped. Foreach element of the technical specifications the specification writer must be able to express in words and in support-ing sketches or drawings what is important, and thereforestated unambiguously, and what is also to be included butis not as important, allowing the Contractor to make detaildecisions.

Each technical specification must r veal whether the per-formance is important to the shipo wner, or if the form/de-sign/configuration is more important. If the specification isdesign or end product,generally the Purchaser is responsiblefor performance. A contract which includes a design certifi-cation process by the Contractor may serv e to alter the as-signment of certain risks. Precisely which risks andresponsibilities are different from the usual form of contractwill depend on the specific ording of the section of the Agree-ment which describes the design certification process. If certain procedures and/or standards are to be used or achie vedin the development of details or the e xecution of the w ork,those procedures and standards must be clearly identified

The writer of technical specifications must also understand what decisions the Contractor may be able to mak ewith respect to each technical aspect while still being con-sistent with the contract documents,and determine whethera possible least-cost solution will be acceptable; if not, amore tightly defined solution is to be specifie

All of the elements of the w orkmanship and materialsmust be adequately defined to enable a shi yard to trans-late the technical specification into quantities labor hours,material costs, and subcontractor costs,or the performancecapabilities of the technical item must be translatable intosuch quantification after the Contractor s suitable pre-biddesign effort.

There is no single style or form of technical specifications that is superior to other possible styles or form. Eachorganization developing Contract Specifications and Contract Plans should use the style and form with which it ismost comfortable,provided that such style and form has notresulted in prior contractual disasters or near-disasters. In-dividual styles or forms should give way to corporate stylesand forms, so that a Contractor is not confronted with dif-ferent styles or forms in the same Contract Specification

A specification-related risk that is too often encountereis that of pride of authorship. Even if a contractual disas-ter or near-disaster has previously resulted from the use ofa particular wording of a specification the writers of it maycontinue to belie ve that the troubles were not due to the

specification but rather due to an alleged intransigent atti-tude by the shipb uilder. This pride of authorship has noplace in a professional engineering environment; if the word-ing of a specification has pr ven unsatisfactory in the past,instead of pointing the finger of responsibility at some otheparty, the wording should be changed, based on a lesson-learned analysis of the disaster or near-disaster.

9.3.14 Technical Documentation RequirementsIn addition to the hardware of the ship itself and spare parts,Purchasers usually require substantial, supporting docu-mentation. This documentation is additional to the certificates from re gulatory agencies and classification whichhave been described in Section 9.2 with a sample listing ofthem.

Some of the required documentation is short-lived, suchas megger readings after installing (pulling) electrical cableor steel and air temperature readings when applying coat-ings. Once ship construction and testing is satisf actorilycompleted, no one will be interested in that documentation.Other components of the documentation are long-lived, suchas the sea trial results for all the machinery, forming a life-time engineering database for those items. Examples of thetypes of documentation which may be required are listedin Table 9.VII.

The development of each of those items of documenta-tion represents additional cost to the Contractor . Some ofthose documentation items may be generated by the Con-tractor or its na val architects and design engineers in thecourse of obtaining re gulatory and/or classification approvals. For those documentation requirements which arenot needed for such purposes,the Contractor cannot be ex-pected to prepare them unless the need for them is clearlystated in the Contract Specifications or in the Agreement,so that they can be included in the Contractor’s budget. Evenfor those documentation items generated in the course ofobtaining regulatory and/or classification appr vals, theContractor may not be obligated to go the extra step of pro-viding them to the Purchaser unless they, too, are identifiein the contract documents as being deliverable to the Pur-chaser. If any of those documentation deliverables are to beprovided to the Purchaser in computerized form, the Con-tract Specifications should clearly state that requirement iorder to avoid disputes over interpretation of what consti-tutes usual practice.

9.3.15 Common Problems with Specification LanguageThe work scope of shipbuilding contracts is sometimes besetby problems with grammar and w ord usage. The idea of


using a common language between the Contractor and Pur-chaser is to ensure complete understanding. Contract doc-uments between, say, a European shipowning organizationand an Asian shipbuilder may be in English because bothparties are reasonably fluent in English as well as their wnlanguage, but not fluent in the other partys language. Oncea common language is selected, it is important that bothparties use it in the same, correct manner.

Significant problems h ve arisen over colloquial wordusage when involving two parties that both use English. Forexample, when a project involves a British naval architectand an American shipyard; both parties speak English astheir native tongue, but in fact the colloquialisms that each

use sometimes have significantly di ferent meanings. Forexample, Americans pull cable when installing it, whereasthe British pull cable when removing it. The point made hereis to avoid colloquialisms for which others may not ha vethe same working definition

Words and phrases such as workmanlike, first-class ma-rine practice and good shipbuilding practice cannot be re-lied upon and should generally be a voided. The v erysubjective nature of these phrases, coupled with the differ-ing perspectives and expectations of the Purchaser and Con-tractor, effectively renders such phrases useless; they do notadequately support the Purchaser’ s interests or bind theContractor to any meaningful extent.

The words any and all are not equivalent. Any is an in-determinate number or amount,which may mean one,someor all. It is usually better to use all or any and all to pre-clude the shipyard from misconstruing the work scope. Inship repair, phrases such as as necessary, as required, to suitand as directed must be used with extreme care in order toavoid ambiguities. Those phrases do not lend themselves todevelopment of estimates of quantities, which is basis of abid and contract. In cases where the extent of repairs can-not be known beforehand, the specification should be carefully drawn and a procedure should be implemented tohandle open and inspect items and other conditional work.

9.3.16 Shipowner-Furnished EquipmentThe decision by the Purchaser to supply shipo wner-fur-nished equipment (OFE) to the Contractor for installationaboard the new ship may be based on any of several possi-bilities:

• long lead time procurement requirements,• already-stocked by the shipowner’s organization,• absolute control over equipment selection;• potential savings, and• easier procurement than by shipyard,among other pos-

sible reasons.

Regardless of the moti vation and/or reasoning by thePurchaser, which results in the use of OFE, none of themcan guarantee a risk-free relationship between the Purchaserand the Contractor.

The incidence of disputes and/or misunderstandings as-sociated with OFE is far too common to dismiss as an aber-ration. Rather , analysis of past OFE-related disputesindicates that there are six aspects of OFE that often are notadequately addressed in the specifications thereby causingdisputes and/or misunderstandings: content, form, place ofdelivery, schedule of delivery, vertical integration, and hor-izontal integration.


TABLE 9.VII Examples of Documentation Required byShipowner for New Ship Construction

Hull Model Test ResultsPropeller Model TestResultsPropeller-induced VibrationStudiesPreliminary Weights andCenters ReportsPreliminary Trim, Weightand StabilityFinal Weights and CentersReportsFinal Trim and StabilityReportsDamage Stability AnalysesTank Capacity TablesCorrespondence withClassification O ganizationCorrespondence withRegulatory AgenciesDetailed Initial Schedule(engineering, procurement,production and testing)Updated Schedules asappropriate and percontractual requirementsWorking PlansDetailed DrawingsProduction SketchesDrawings submitted toClassificatioDrawings submitted toRegulatory AgenciesP.O. TechnicalSpecification

Responses to comments ondrawingsFinite Element AnalysesFatigue Analyses(Structural)Heat Load CalculationsElectrical load CalculationsFault Current AnalysesInspection Deficien yReportsResponses to inspectionReportsTemperature/Humidityduring coatingsMegger readings (electricalcable)Noise Level ReadingsTest Results (numeroustypes)Vibration readingsCrane and Trolley TestResultsDock-trial Test ResultsSea-trial test ResultsOperational Placards on theBridgeSafety Placards throughoutthe shipProgress photographsComponent ManualsSystem ManualsFinal photographsAs-built (as-fittedDrawings

Each of these elements of OFE are discussed herein topromote an understanding of the potential problems thatmust be circumvented by appropriate specification language

The content of the OFE needs to be defined with su ficient precision so that the Contractor kno ws what is andwhat is not being provided. The Contractor will be respon-sible for supplying all of the necessary fixturesfittings anconnections that are necessary to incorporate the OFE intothe ship; but the Contractor must base its bid price on anunderstanding of what hardware it has to provide. Consid-eration of the interface hardware provides examples: foun-dations; con version fittings (metric to imperial units)connector cables and hoses; and resilient mountings; amongothers. Some Purchaser’s have supplied the entire propul-sion system as OFE, in which instances questions aroseover which shaft bearings and which foundations were alsoto be OFE. One shipowner thought the rudder and its con-trol mechanism were part of the propulsion system that wasbeing purchased separately from a vendor. Other shipown-ers have mistakenly thought that the governor is always partof the shipowner-supplied diesel engine; this is not neces-sarily correct. These examples are mentioned to illustratethat what is going to be supplied as part of the OFE may beobvious to one party may be far from obvious to another.

The form in which OFE will arrive at the shipyard shouldbe communicated to the Contractor by the specifications tensure that all costs and schedule impacts arising from theOFE can be included in the bid price. The extent of assem-bly work that will be required if the OFE arri ves in piecesis important to the Contractor. The need to provide tempo-rary protective covering or other maintenance services priorto shipboard installation may also be a cost basis to the Con-tractor. Any other aspects of the form of OFE that may re-quire labor or materials to prepare the OFE for shipboardinstallation should also be addressed in the specifications

The place of delivery of OFE is usually addressed in theAgreement, such as the Contractor’ s warehouse at a spe-cific street. H wever, if it is not addressed in the Agree-ment, the point of deli very should be included in thespecifications. If some of the OFE is being del vered at anear-by seaport or airport,and other OFE is being deliveredto the shipyard, that differentiation should be made. If theContractor has to provide transportation of the OFE froma remote (non-shipyard) location, the Contractor may wishto include those costs in its bid price (dri vers, insurance,truck rental, etc.).

The Contractor is usually required, per the Specifications, to provide to the Purchaser a report on the conditionof the OFE upon its delivery to the shipyard, identifying anydamages or unexpected conditions. The Purchaser is usu-ally responsible for correction of those damages or condi-

tions, and the Contractor becomes responsible for any subse-quently noted damages.

In order to plan the work appropriately, the schedule ofdelivery of OFE must be communicated to the Contractorif it is not already stated in the Agreement. If the scheduleof delivery is not identified by the contract documents itmay be established by the Contractor and communicated tothe Purchaser through development and transmittal of thedetailed project schedule. If this occurs,the Purchaser mayface OFE delivery commitments that cannot be achie ved,in which case the Purchaser must advise the Contractor ofmore appropriate OFE delivery schedules before the proj-ect is substantially underway.

Vertical integration of OFE refers to the process of in-tegrating each item of OFE with all those parts of the shipwhich the Contractor has responsibility to supply. This in-tegration may include consideration of piping and electri-cal connections, air and exhaust connections, fuel and lubeoil supply, water and steam connections,the structural foun-dation, as well as the control,alarm and monitoring systems.Before the physical integration takes place, the design in-tegration requirements have to be addressed by having thePurchaser supply to the Contractor all rele vant connectiv-ity and interface information. The vertical integration alsoaddresses the need for component, system and ship testingas appropriate. The Contractor will need to know, for sched-uling purposes, if the vendor’s technical representative willhave to conduct independent tests to ensure proper instal-lation as a basis for issuing the vendor’s warranty.

Horizontal integration of OFE refers to the process ofintegrating each item of OFE with other items of OFE, asappropriate. When the Purchaser is supplying multiple com-ponents of a system as OFE,responsibility for the compat-ibility and connectivity of all those components with oneanother usually rests with the Purchaser , not the Contrac-tor. For example, if the OFE includes a diesel engine as wellas a torsional coupling, the compatibility of the physicalmating of the torsional coupling to the engine’ s flywheemay have to be assured by the Purchaser , not by the Con-tractor. If hydraulic cylinders as well as a hydraulic powerpack are being supplied as OFE, the hydraulic, electrical,control and alarm connections between them need to be ad-dressed, since the Contractor may otherwise belie ve thatthe Purchaser is supplying and arranging for all those con-nections to be completed by the vendor of the equipment.

Accordingly, specification writers must thoroughly investigate, understand and communicate in the written Con-tract Specifications all aspects of OFE that may cause thContractor to incur costs and/or schedule impacts. If an yassumptions have to be made by the Contractor to price theOFE-related work, the specification writer should realize tha


the assumptions will be “least-cost”ones, placing a greaterburden on the Purchaser and the vendors of the OFE,at theexpense of the Purchaser unless clearly stated otherwise inthe Contract Specifications

9.3.17 Identifying Necessary Tests and TrialsThe process of conducting any test or trial represents a costto the Contractor. In order to prepare a complete bid, theContractor has to know in advance the nature and extent ofall tests and trials that need to be conducted. Thus the Con-tractor must be able to ascertain from the contract docu-ments, primarily the Contract Specifications both the natureand the extent of the required tests and trials. The necessityfor tests may originate with regulatory agencies, classification organizations, the Purchaser’s additional requirements,or the OFE vendor’s requirements.

Many of the tests and trials will have to be conducted tosatisfy the re gulatory requirements and the classificatiorules. If, as is customary, the Contractor is solely responsi-ble for obtaining all regulatory and classification appr vals,the Purchaser need not spell out each and every such test thatis within that part of the work scope. However, if the Agree-ment doesn’t already state it,the specifications should clearlstate that the Contractor must perform all inspections andtests necessary to obtain all the approvals and certificates frothe various regulatory agencies and the classification organization that are listed else where in the contract docu-ments, all at no additional cost to the Purchaser.

The more challenging aspect of this section of the spec-ifications is to address the Purchaser s additional test re-quirements and the OFE vendor’s test requirements that aresupplementary to the other, already-addressed tests and tri-als. There is no nearly universal set of tests that falls withinthis category. Every ship type has dif fering requirements,and within each ship type, every Purchaser will ha ve dif-fering requirements. The Purchaser’s and OFE vendor’s testand trial requirements are shaped, in part, by their percep-tion of what is needed above and beyond the regulatory andclassification tests and trials. It should be noted that the duration or extent of tests and trials is also an important costfactor to the Contractor . If, for example, there is specialequipment aboard the ship due to its particular shipo wnerand mission, some Purchasers may require a full 24-hourheat run, and others may be content with a 4-6 hour test;the Contractor must know the extent of those tests and tri-als in advance of bidding, perhaps by references to appro-priate SNAME, ASTM, or other standards and procedures.

9.3.18 Compartment CloseoutsDuring the process of ship construction and testing, everycomponent and system will have been tested, all the struc-tural work will have been inspected,and all of the coatings,deck finishes and overhead closures will ha ve been in-spected. However, those inspections and tests will ha vetaken place while the ship yard personnel were still acti vein each space or working on each deck area,and while ship-yard equipment was still widely distributed throughout theship. Compartment closeouts are the inspection activity bythe representatives of the Purchaser to confirm that the shipyard has cleaned-up and withdra wn from each compart-ment prior to ship delivery.

For these purposes, a compartment is an y of the fol-lowing: tanks, void spaces, each level of sections of cargoholds between deep web frames or bulkheads, control rooms,equipment rooms, reefer spaces, store rooms, accommo-dations, heads, galleys, sections of passageways, chart room,interior bridge,bridge wings,steering gear flat paint rooms,chain lockers, shaft alley, each level of each of the ma-chinery spaces, bosun’s locker, each section of the weatherdeck, and every other type of area that may be appropriateto the individual ship.

This section of the Contract Specifications could requirthe Contractor to prepare each such compartment for a jointinspection after the shipyard has completed and withdrawnfrom each compartment. This would include, but not belimited to, removal of scaffolding and ladders, withdraw-ing of welding leads and gas hoses, removal of temporarylighting and v entilation, paint touch-up where temporaryclips have been removed, picking up papers, cans, weldingrod stubs and other disposables, clearing out all bilge suc-tions, disposal of all temporary protecti ve materials, andconfirmation of the placement of labels on cables and piping, if required by the specifications among other possibleaspects of these compartment close-out inspections.

To avoid having the Contractor present all the compart-ments on a ship for close-out inspection at the same time,the specifications could require the Contractor to present iadvance a list of all the compartments and a proposed close-out inspection date within a few weeks prior to vessel deliv-ery, which schedule w ould be subject to ne gotiation ifneeded. Certainly many of the compartments can be closedout prior to sea trials, and the remaining ones closed out inorderly fashion between the conclusion of sea trials andVessel Delivery.

9.3.19 Disposal of Hazardous and Toxic MaterialsThe process of ship construction may occasionally createwaste materials that are deemed hazardous or toxic ac-


cording to en vironmental regulations. For example, insome jurisdictions, empty but wet paint cans are hazardousmaterials. Ordinarily, the Contractor will be solely re-sponsible for the proper transportation and disposal of anytoxic or hazardous materials resulting from the construc-tion process.

If the delivery to the shipyard and installation of OFE cre-ates any toxic or hazardous materials, the handling, trans-portation and disposal of them has to be carefully addressedby the Contract Specifications. First the specifications h veto identify them by type, constituents, and quantity. Second,the specifications h ve to assign to the Contractor the re-sponsibility for containing those materials to pre vent con-tamination of the ship yard or the ship itself. Third, thespecifications must call for the Contractor to pr vide safetyand health appliances for emplo yees as may be appropriateand consistent with health and safety regulations. Fourth, thespecifications then should address the need to transport thosmaterials over public highways by carriers who are licensedto do so,and fifth to dispose of the materials at landfillsincin-erators or by other means at facilities that are licensed to un-dertake such disposal,all at no additional cost to the Purchaser.

9.3.20 Work Performed by OFE VendorsWhen the vendor of OFE sends a technical representative(tech rep) to the shipyard to direct or oversee the installa-tion or start-up of OFE, the Contractor may ha ve to pro-vide support services to that tech rep. These services maybe limited to the provision of temporary lighting and ven-tilation or scaf folding and ladders. Sometimes the OFEvendor’s tech rep may require the assistance of several ofthe shipyard’s mechanics or other craftsmen for a periodof time.

For each instance where the OFE vendor’s tech rep willrequire shipyard support services, the rendering of thoseservices will be a cost to the Contractor . Accordingly, theContract Specifications could advise the Contractor of thneed to provide such support services and indicate the na-ture and duration of the manpower and equipment neededfor such support services. If this matter is not adequatelycovered by the Contract Specifications the Purchaser maybe asked later for a Change Order to cover those costs.

9.3.21 Facilities for Shipowner’s RepresentativesMost shipyards have rooms in their office uildings set asidefor use by the Purchaser’ s representatives during the de-sign, construction, testing and trials phases of the ship con-struction project. Some shipowners’ organizations requiremore space than others,and some require particular equip-

ment to be provided within those facilities. Unless the con-tract documents, usually the Contract Specifications indi-cate the type, size and furnishing of the f acilities, onlyminimal facilities may be provided, if any.

Thus, this section of the Contract Specifications shoulindicate the requirements for each of the following:

• total area to be provided,• number of different rooms within that total area and ap-

proximate area of each room,• the fact that the rooms should be located contiguous to

one another,• the number of desks and chairs to be in each room,• the capacity of the conference table (if required),• the size and number of drawing tables,• the number of telephone lines in each room and number

of connection points for each,• the total number of telephones to be provided,• the total number of fax machines to be provided,• the presence of a x erographic copier of a nominated

copying rate and document reproduction size,• other features that will facilitate the obligations and work

of the Purchaser’s representatives, and• proximity of the offices to the ship before launching

For reasons of security , if considered appropriate, thespecification could require that the phone and ax lines forthose offices be run directly from the street and not gthrough the shipyard’s centralized phone system. (Cellularphones are not a form of secure communications.) For rea-sons of con venience, the specification could require thshipyard to temporarily provide a certain number of pagersfor use by the Purchaser’s representatives.

9.3.22 Development of Contract PlansThroughout this section on Formation of Contract Specifications and Plans,the emphasis has been on the wording ofthe Contract Specifications and only occasionally have theContract Plans been mentioned. This is not to lessen theimportance of the Contract Plans,but rather recognizes thatthe Contract Plans are usually considered to be part of theContract Specifications or at least to be below the ContractSpecifications in the hierarchy discussed in Section 9.2 onFormation of the Agreement.

The purpose of Contract Plans is to con vey to the Con-tractor the spatial relationships, the configurations thearrangements and the appearances of the various parts of thevessel that are not capable of being conveyed solely by writ-ten words. By identifying them as Contract Plans, the intentis that they are non-alterable except by a formal Change Order.

The contract-level design expressed in part by the Con-


tract Plans can vary considerably; some contract-level de-signs will include only a few drawings and be sparse withdetails; others will include a large number of drawings, eachof which contains considerable details.

From the outset of the project,the Purchaser and its navalarchitects and design engineers have to decide what designconfigurations pertaining to the ship must be controlled entirely by the Purchaser (these become the Contract Plans),what design configurations can be determined from r gu-latory and classification requirements and what design con-figurations can be determined by the Contractor so long athey satisfy all other contractual requirements. The phrasedesign configurations is used here because that is the typeof information that is best contained in plans rather thanspecifications. In other ords, development of the list ofdrawings that will be Contract Plans is the output of a risk-decision analysis. If the configuration of a certain aspect othe ship is not included in a Contract Plan, the final configuration will be determined by the Contractor in its searcfor a least-cost solution.

If the presence of inclined ladders in a particular area ofthe ship is important to the Purchaser, for example, when reg-ulations would otherwise permit vertical ladders,that require-ment may be best communicated to the Contractor in aContract Plan. The shape of the hull may be considered tooimportant to be left to the discretion of the Contractor; but ifthe vessel is a low-speed barge, only general guidance as tothe bow and stern configuration may be necessar , therebyallowing the Contractor to design it as a least-cost solution.

Once a decision is made as to what information will beconveyed to the Contractor by the Contract Plans, the Pur-chaser’s naval architects and design engineers must ensurethat the Contract Plans are not misleading. For bidding pur-poses, the Contractor is allowed to rely on information con-tained within the Contract Plans as being consistent withthe nominated re gulations and classification rules. If forexample, the Contract Plans include a schematic ventilationplan showing 14 fire dampers the Contractor is allowed torely on the fact that only 14 fire dampers will satisfy r gu-latory requirements. If a lesser number is required,the Con-tractor is still obligated to install the indicated 14 firdampers; but if a greater number is required, the excessabove 14 may become the basis of an essential ChangeOrder.

Tolerances that are to be achieved are often implied byreference to a standard, in which case the standard shouldbe reviewed for applicability before citing it. Ho wever, iftolerances for certain elements of the ship are of specialconcern to the Purchaser , they should be e xpressly statedin the relevant Contract Plans or Contract SpecificationsFor example, the tolerances within cell guides for container

ships may be different from normal shipbuilding standardtolerances.

9.3.23 Interpretation of Contract PlansIn order to avoid misunderstandings that arise later, it maybe advisable for the Purchaser’s naval architects and designengineers to seek regulatory and/or classification appr valsof the anticipated Contract Plans before the contract is ex-ecuted. Problems have arisen in the past due to the fact thatthe Purchaser’s naval architects did not interpret the classi-fication requirements in the same manner as the classifiction organization itself. Pre-contract approval of the ContractPlans, however, does not eliminate the need for further ap-provals of the more-detailed plans that are to be developedby the Contractor after contract execution.

The Purchaser’s naval architects and design engineersshould appreciate that man y objects sho wn on ContractPlans are representations only, and do not indicate with pre-cision the dimensional proximity of structures or other itemsof equipment. This means that the Contractor will ha ve awindow of placement of that item of equipment. If clear-ances around that item of equipment are important,it wouldbe best if the drawing noted that requirement,possibly withreference to an appropriate Contract Specification item

Both parties have to recognize that the notes containedwithin a drawing are as much a part of that drawing as arethe graphical representations. If the note states that the di-mensions and linear weight of a stiffener is typ. or typicalfor a group of stiffeners, the Contractor cannot pretend thatthe information w as lacking. On the other hand, the Pur-chaser’s naval architects need to appreciate that shipyard per-sonnel cannot read the minds of the persons preparing thedrawings. Thus, the working rule should be that if there isany doubt as to how someone other than the author of a planwill interpret part of it,then more information is better thanless and more notations are better than fe wer, even at therisk of making the drawing look too busy. If it is necessaryto refer to a second Contract Plan to fully understand thefirst it is best to not assume the Contractor will e xamineboth plans concurrently. Rather, the first plan could reference the second one,and vice-versa, to ensure clarity, with-out which risks are being created.

A previous sub-section of this section addressed the sub-jects of composite drawing and the resolution of interfer-ences. Naval architects and design engineers who have notprepared composite drawings prior to the execution of thecontract should anticipate that likely there will be interfer-ences arising from a strict interpretation of the contract doc-uments. Accordingly, those persons should be prepared toaccept variations from the Contract Specifications and Con


tract Plans that need to be altered to eliminate such inter-ferences. Again, it can be expected that the Contractor willseek to eliminate those interferences in a least-cost manner.

If the Purchaser’s naval architects and design engineersare not going to be recepti ve to Contractor -determinedresolution of interferences, which arise from the contractdocuments, perhaps they may wish to undertake the devel-opment of composite drawings prior to contract execution.However, this would be meaningful only for those situationsin which the Purchaser wishes to control nearly all of thespatial relationships, configurations arrangements and ap-pearances through the use of a lar ge number of ContractPlans, which is fairly common for naval combatant vesselsand passenger ships.

Contract Plans generally should not include quantitiesof materials, though they could indicate types of materialsin a Bill of Materials at the top of the drawing if the typesare not already identified in the Contract SpecificationsThepresence of exact quantities on Contract Plans may lead toallegations of extras by the Contractor, resulting in an oth-erwise unnecessary Change Order.

If the Contract Specifications and Contract Plans are vail-able in computerized format,the Purchaser can provide themto bidders as long as a contractually binding hard ( paper)copy, produced by the original de veloper of them and notby another party, becomes the official contract document

9.3.24 Use of Guidance PlansSome naval architects who de velop and/or assemble thetechnical documents for a shipb uilding contract incorpo-rate into the contract package several Guidance Plans in ad-dition to Contract Plans. One possible reason for thedifferentiation between Guidance Plans and Contract Plansmay be that the naval architect has in mind a different de-gree of required compliance by the Contractor.

Another possible reason for the inclusion of GuidancePlans is to give the Contractor a starting point for its own de-sign development responsibilities. A third possible reason forincorporating two different types of plans in the contractpackage is to encourage the Contractor to seek alternati ve,lower-cost means which will lead to sa vings for both Pur-chaser and Contractor. There are several other possible rea-sons for including Guidance Plans in a contract package.

The realization that there may be any of several reasonsfor using Guidance Plans in addition to Contract Plans pointsout a potential cause of contractual difficulties. Namel , theContractor may attach a different significance to the Guidance Plans than intended by the Purchaser . The means ofavoiding such difficulties or disputes is to either void usingGuidance Plans, or to define the use of the ord guidance.

For example, the phrase Guidance Plans can be defined ithe Agreement to mean plans from which the Contractor mayvary, at no additional cost to the Purchaser, only if approvedin advance by the Purchaser.

Another possible definition of Guidance Plans could befor example, plans which must be adhered to in all respectsexcept that the exact dimensions shown or implied thereinmay result in physical interferences with other componentsof the ship, which interferences are to be resolv ed by theContractor at no additional expense to the Purchaser. Thereare, of course, many other possible definitions of GuidancPlans; but failure to define the term when Guidance Plansare included in the contract package,may lead to confusionat best, or serious disputes at worst.

9.3.25 Newbuilding, Repair and ConversionAlthough this chapter is intended to apply to new ship con-struction, certain aspects of it also apply to ship conversionand repair. It should be appreciated,however, that this sec-tion on Formation of Contract Specifications and Plans ileast applicable to ship repair, and a slightly greater portionof it may apply to ship conversion.

For ship repair , the specifications address each repaiitem individually, although the general section of the Con-tract Specifications may be som what applicable to repairas well as newbuilding. Ship conversion, which involves asignificant amount of n w steel and/or new arrangements,may appear to be more related to newbuilding than to shiprepair. However, ship conversion specifications are venmore difficult to write than nwbuilding specifications.Thereason for that greater difficulty is that in ship constructionthe specifications and plans must only define the final pruct, but in ship conversion, the specifications and plans musdefine both the starting point (the ship before co version)as well as the end point.

These points about ship repair and ship conversion spec-ifications are included only to caution the reader that thostypes of projects are quite dif ferent from ne w ship con-struction. Accordingly, the formation of Contract Specifications for ship repair and the formation of ContractSpecifications and Plans for ship coversion will be a meas-urably different process than discussed above.

9.4. MANAGEMENT OF CONTRACTS DURINGPERFORMANCE

9.4.1 IntroductionThe purpose of active and responsible contract managementis two-fold. First is the necessity of monitoring your o wn


team’s responsibilities and managing them through the useof your o wn contract management team’ s resources andthrough the timely redirection or re-allocation of those re-sources as appropriate. The second purpose is monitoringthe other party’s fulfillment of its responsibilities and notifying that party when the potential or actual failure to ful-fill its responsibilities arises

The responsibilities of each party are defined by the contract documents, primarily by the Agreement, the ContractSpecifications and the Contract Plans. The preceding sec-tions focused on the de velopment and formation of thosedocuments in a manner that provides a contractually-bind-ing foundation or basis that will ensure the Purchaser getsthe product it has bargained for, and the Contractor has toproduce no more than it is being paid for.

With that foundation in place, the Contractor e xpectsthat it should be able to proceed with its planning, engi-neering, procurement, production and testing with only min-imal interference from the Purchaser. At the same time,thePurchaser believes it has the right to e xpect that the Con-tractor will provide all the plans, schedules and documen-tation supporting the design, construction and testing in atimely manner, and expect that the Contractor will constructand deliver the ship on time.

These two sets of expectations suggest that, aside fromengineering and production work, there is not much for ei-ther party to do besides watch the ship being designed andbuilt. That perception is not only wrong, but also danger-ous. In fact, there are a tremendous number of contract man-agement activities that must be addressed by both partiesduring contract performance. If one party or the other takesthe attitude that it shouldn’t have to do much contract man-agement now that the contract has been signed, then thatparty is likely to pay a severe price for not having activelymanaged the contract.

In other words, those are theoretical e xpectations, andare not fully achieved in practice. Sometimes actual prac-tice varies considerably from those theoretical expectationsdue to either or both parties’ mismanagement of the con-tract during contract performance.

9.4.2 The Origins of Contract MismanagementShipowners’ on-site representatives sometimes believe thatthe Contractor has the attitude that the shipyard will followthe spirit of the Contract Specifications and Plans but willnot always meet certain exact requirements as stated therein.This, in the eyes of the shipowners’ representatives, under-mines the contractual requirements and dilutes the effort thatwas put into defining the Specifications and Plans. If that siuation is developing, shipowners’representatives must man-

age the contract more aggressi vely to get the Contractor’ sactions into alignment with its contractual responsibilities.

Similarly, from the shipyards’perspectives, it sometimesappears that shipowners expect the shipyard to modify theSpecifications and Plans to suit certain more-costly interpretations of the shipo wners’ representatives, but withoutformally changing the Contract Price or performance pe-riod. Sometimes Purchasers’ engineering staffs try to usethe drawing review process to micro-manage the detail de-sign decisions that were ceded to the Contractor. From theshipyards’ perspectives, any such behavior by shipowners’representatives undermines the right of the Contractor to se-lect the means of achieving compliance with the Specifications and Plans, all at a fi ed price. If that situation isdeveloping, the shipyard must also manage the contractualrelationship with the shipowner’s representatives more ag-gressively in order to restrain them from asking for morethan they have the contractual right to do.

It is appropriate to recall part of the introduction to thischapter:

. . . But there is another form of disaster in volving ships;namely, contractual disasters, situations in which the ship-yard and ship shipo wner are both terribly harmed due tomismanagement of the shipbuilding contract.

It is noted that disasters result from mismanagement ofthe shipbuilding contract. This means that the contractualdisasters can originate not only with poorly developed con-tracts, which development is part of contract management,but that contractual disasters can also evolve from improperor unsuitable management during contract performance.

In other words, situations arise in which one party or theother, Contractor or Purchaser , are not managing the con-tract, but instead are either expecting to maintain a relation-ship with the other party while operating contrary to the rulesof the contract, or are simply neglecting their responsibilityto actively manage their side of the contract. The risks asso-ciated with such actions are often translated into an aban-donment of the rights of one party or the other in order toavoid litigation, or may result in litigation or arbitration. Bydeveloping a clear understanding of each party’ s contractmanagement responsibilities during contract performance,and then fulfilling those responsibilities both parties are as-sured of achieving what they bargained for during contractformation and the described adverse risks can be avoided.

9.4.3 The Contract Management TeamThe actual management of the contract for each of the Con-tractor and the Purchaser is usually accomplished by a num-ber of specialists who, collectively, constitute the contract


management team. Depending on the size, complexity,uniqueness and schedule of a shipbuilding project,and pos-sibly depending on other f actors, too, the size of the con-tract management team after the contract is executed maybe as lar ge as several dozen individuals, as in lar ge navyprojects or cruise ships, for example, or as few as one in-dividual occasionally aided by consultants, as in a smallpilot boat, for example.

Some shipowners undertake a sufficient number of shipbuilding contracts to warrant having a full-time staff of con-tract management specialists; and other shipo wners use anoutside team of specialists or consultants. Usually a shipyard’scontract management team consists of its own staff members,but occasionally the ship yard will utilize specialist consult-ants if the ship type is unique or ne w to the shipyard, if theshipyard is experiencing a temporary surge of business, or tomitigate risks when contracting with certain shipowners.

Regardless of the type and size of the Purchaser’s con-tract management team, it is important that the remainderof the Purchaser’s organization give prompt, effective sup-port to the team whenever such needs arise. If there is anyshipowner-furnished equipment, the most important groupto provide support will be the shipowner’s purchasing de-partment. A lack of e xpediency and/or accuracy in order-ing the OFE can easily result in major contract problems.

Sometimes the additional support from the Purchaser’sorganization may be the timely need for information fromthe vessel operations department, or it may be to consentto the temporary use of specialist consultants when dealingwith some particular design or construction problem. An-other form of support for the contract management team maybe the need for approval from senior management of the de-ferral of changes requested by the operations departmentuntil a subsequent drydocking or ship repair period in orderto cease requesting change orders from the Contractor nearthe end of the construction phase.

9.4.4 Effective ManagementAn important question on which to focus at the outset of ashipbuilding project for both shipyards and the shipownersis: how will the success of the contract management effortbe measured? Some contract management teams ha vewaited until the project was completed, and then with hind-sight considered how much the budget grew during the proj-ect and how much later than the original contract DeliveryDate the ship was delivered. For some organizations, thatmay be an acceptable form of measurement,but it does notlend itself to actually managing a contract; rather, the par-ticipants having that perspective are essentially observingdevelopments, not managing a contract.

A more appropriate means of measuring a contract man-agement team’s performance is to have regular opportuni-ties to alter the emphasis and re-allocate resources beingapplied to the contract. This is comparable to a ship na vi-gator’s course correction at regular intervals. In that situa-tion, the navigator determines the ship’ s actual positionrelative to its anticipated position at that time,and then es-tablishes the new, corrected course and speed which shouldget the vessel to its objective in a timely manner.

Similarly, the contract management team for both thePurchaser and the Contractor establish w aypoints in eachof the functional areas that are discussed below. Periodically,the actual contract progress in each of those functional areasis compared to the baseline or planned status that shouldhave been achieved by that time. If appropriate, the teamcan then reassign resources within those functional areasthat appear to be impacting or close to impacting the proj-ect. This applies to the contract management teams and re-sources for both the Contractor and the Purchaser.

9.4.5 Managing the Entire ContractIn this chapter, the importance and the role of technical per-sons in formation of the Agreement, as well as in the for-mation of the Contract Specifications and Contract Planshas been discussed and emphasized. Too often,however, thecontract management team focuses on management of theContract Specifications and Contract Plansand leaves asidemanagement of the Agreement. Perhaps this situation arisesbecause the Agreement looks too legalistic or has been mod-ified and formatted by attorn ys. Nevertheless, the entirecontract has to be managed, including the Agreement aswell as the technical aspects of the contract documentation.The business managers and lawyers of the two contractingparties are not involved in the daily contract managementtasks. Thus, abandoning to or ganization’s business man-agers or lawyers the management of the Agreement is equiv-alent to not managing the Agreement at all. That is, if thecontract management team does not manage the Agreementas well as the technical documents,then the Agreement willnot have been managed, creating unnecessary risks andlikely incurring unnecessary costs.

A maritime industry contract management-training pro-gram (3) usually starts in the following manner: “Read theContract. Nearly every answer you may need, regardless ofhow the question is phrased, is found in the Contract.”

Of course, the Contract includes all of the contract doc-uments, including the Agreement. Many of the answersneeded during the project are found in the Agreement butnot in the technical documents. Accordingly, members ofthe contract management team should f amiliarize them-


selves with the table of contents of the Agreement, so thatwhen questions arise, they can easily refer to and study therelevant sections of the Agreement as easily as they do withthe Contract Specifications

9.4.6 Contract Management PhasesThere are numerous non-maritime books on contract man-agement, but a reader of them from the maritime industryhas to be aware that actual contract management practicesvary between industries. Thus, the direct adaptation of therecommendations of generic contract management booksmay create difficulties within the maritime industr . A di-rectly relevant paper, An Owner’s Management of Ship Con-struction Contracts (5), addresses shipbuilding contractmanagement from a shipowner’s perspective.

That paper views shipbuilding contract management infi e phases:

1. pre-contract management functions,2. early management functions,3. continuous Management Functions,4. intermittent management functions, and 5. later management functions.

As illustrated in Figure 9.4, those phases occur at vari-ous times relative to project initiation, contract execution,physical construction, ship delivery, and end of warranty.

Within those fi e phases of contract management, thecited paper lists a total of 38 managerial activities relevantto many shipbuilding contracts. Although that paper is writ-ten from a shipo wner’s perspective, it is recognized thatshipyards have reciprocal or initiating functions associatedwith each of those shipo wner’s management activities. Abrief description of those 38 management activities is givenin the Appendix to this chapter.

The progress of nearly all aspects of a shipbuilding proj-ect can be tracked by the communications between the Con-tractor and the other parties, including the Purchaser ,regulatory agency and classification o ganization. Nearlyevery step of progress is accompanied by a communicationfrom the Contractor, and followed-up by a communicationfrom one of the other parties.

9.4.7 Contract CommunicationsEqually, if there is an y shipowner-furnished information,equipment or materials, the delivery of such items to theshipyard is also accompanied by a communication. Thus,tracking the actual communications will create an under-standing of the status of each aspect of the project. Both theContractor and the Purchaser can employ this fundamental

mechanism. For example, if the Contractor is producing de-tail drawings that are to be reviewed by the Purchaser in ad-vance of construction, the transmittal of those dra wings isthe communication that e vidences the status of the Con-tractor’s design de velopment. If the Purchaser then sendscomments pertaining to those dra wings to the Contractor ,the transmittal of those comments is the communication thatevidences the Purchaser’s review of the design development.

As another example, if there will be some shipo wner-furnished equipment (OFE) as part of the project,its arrivalat the shipyard will result in a delivery receipt and possiblyan inspection report upon opening of the crate. Since bothparties, Contractor and Purchaser, will get copies of boththe receipt and the inspection report,those communicationsserve to evidence the arrival of the OFE and its conditionupon arrival.

9.4.8 Functional Areas of Contract ManagementIn order to create an orderliness out of the hundreds or thou-sands of communications that will be created during a ship-


Figure 9.4 Five Phases of Contract Management

building project, the communications can be di vided intofunctional areas, as illustrated in Table 9.VIII. The status ofeach of those functional areas generally can be determinedwith adequate accuracy by tracking the communications be-tween the parties pertaining to each of those functions.

9.4.9 Contract Management ProceduresThe tracking of communications to monitor the status of eachfunctional area is the first step in actve contract managementduring contract performance. Recall the analogy , above, tothe ship navigator’s course corrections. The first step as todetermine the position and current course of the ship.

Similarly, the status of the contract work, in each func-tional area, including both the Contractor’s and Purchaser’sroles, can be reasonably determined from the communica-tions being tracked.

The second step in the previously stated navigator’s anal-ogy is to determine where the ship should have been at thetime of measuring its actual location and course. In contractmanagement, a review of the project’s schedule and the an-ticipated status of each functional area relative to that sched-ule serve to establish the progress that should ha ve beenmade since the last course correction. This assumes thatthe project schedule has suf ficient detail is a valid repre-sentation of all activities in the project (engineering,purchas-ing, production and testing), and is not merely a showpieceprepared to satisfy a contractual requirement.

In the analogy, as the final step the navigator would thendetermine how the ship’s course and speed should be ad-justed in order to assure timely arrival at the intended des-tination, if possible. Similarly , the contract managementteam considers the difference between the actual status ineach functional area and the intended status at that sametime, and then evaluates what reallocation of resources areappropriate to correct any untoward variations.

Of course, even without reference to communications,the Contractor tracks the actual physical progress of theship construction relative to the planned and updated sched-ule. Whenever a discrepancy arises between actual and thelatest-planned schedules, the Contractor must e valuatewhether that schedule slippage will have any subsequent im-pact on ship delivery or the availability of resources that maybe in short supply, such as,having a limited number of work-ers in a particular craft available for the project. The Con-tractor may then redirect the use of its resources to a voidthe developing impacts.

This process of course correction is equally applicableto both the Contractor and the Purchaser. For example, re-lating to the Contractor, if it is determined that electrical in-stallations are falling behind schedule, the shipyard would

consider how to temporarily increase the rate of electricalinstallations by assigning more electricians or by the judi-cious use of overtime, among other possibilities. The Pur-chaser may ha ve similar responsibilities. F or example, ifthe review of detail drawings by the Purchaser’s engineer-ing consultants or staff is not keeping apace with the ship-yard’s submittal of them, in order to not lose the right totimely comment on the drawings, the Purchaser would con-sider a temporary increase of the drawing review staff.

9.4.10 Functional SpreadsheetsThe generally described contract management proceduresrely on both the Contractor and the Purchaser having an ex-pected status or target against which to measure the actualstatus in each functional area identified in Table 9.VIII.Many of those targets can be developed in both form andcontent in advance, and the form of others can be developedin advance but completed as to content during contract per-formance. For example, an advance drawing schedule iden-tifies each of the drwings, and the target date for completionof each, that the shipyard will develop to suit its needs. Also,the shipyard will have a detailed planned schedule de vel-oped in advance for construction and testing.


TABLE 9.VIII Functional Areas of Contract Management

DrawingsEquipment Purchase OrdersEngineering Analyses and ReportsWeight ControlSchedulesClassificatioRegulatory AuthorityOwner Furnished InformationOwner Furnished Equipment (or Materials)Secondary ContractsChange OrdersInspection by ShipownerInspection Deficien y ReportsTest and TrialsInvoices and Progress PaymentsSpare Parts and Hardware DeliveriesPaper/Computerized DeliverablesWarranty Items

The content of some functional areas cannot be definein advance. For example, the number and subject of in-spection deficien y reports cannot be anticipated, but themeans of communicating about such deficiencies can bplanned in advance.

The anticipated and the routine contract managementprocedures for ship construction are achieved with the aidof spreadsheets in each of the functional areas that pertainto the particular project. Some contract management teamsuse checklists, but it is recognized that a checklist is a lim-ited form of spreadsheet,not suitable for easy updating andthe addition of other information. A spreadsheet, on theother hand, whether manual or computerized, allows formultiple data entries for each line item.

As an example, the column headings for a spreadsheetfor inspection deficien y reports (I.D.R.’s) are listed in Table9.IX. Upon inspection, if the shipowner’s representativesidentify a deficien y relative to the Contract Specificationor Contract Plans, an I.D.R. is sent to the Contractor.

The Contractor may acknowledge that it constitutes a de-ficien y and correct it then or at some other time; the Con-tractor may dispute that it is a deficien y; or the Contractormay offer a credit if correction of it is waived by the Purchaser.

The spreadsheet has to be capable of addressing each pos-sible outcome, as well as have as its final column the datof closeout, when the issue w as resolved between Con-tractor and Purchaser due to either correction or w aiver-with-credit. Any special retainages associated with thedeficien y are noted in the same spreadsheet.

Thus, at a glance, the contract management team for ei-ther Purchaser or Contractor will know the status of all theidentified I.D.R’s. This forms a status report that both par-

ties can use for continuing or concluding the managementof that functional area.

As another example, nearly all of the inspections to beperformed by the shipowner’s representatives can be listedin an inspection spreadsheet long before actual construc-tion commences. The approximate target date of such in-spections can be inferred from the Contractor’ s detailedschedule. The spreadsheet then performs two functions: 1.it ensures that the shipowner’s representatives do not over-look any intended inspections, and 2. it tracks the timeli-ness of the Contractor’s preparations for inspections.

Similar use is made of all the other spreadsheets devel-oped for each of the other functional areas listed in Table9.VIII as well as any other functional areas appropriate tothe specific project

9.4.11 Active versus Passive Contract ManagementThe theme of this section on the Management of ContractsDuring Performance is captured by a principle of contractmanagement stated in (3):

“Both parties to a contract must be active participantsduring performance; passive contract management is taxed,active contract management is rewarded.”

It was noted above that passive contract managers areno more than observers of the project’s events, having noinfluence on a y adjustment in how the responsibilities ofeach party are being fulfilled. H wever, once a decision ismade instead to be active contract managers, mechanismshave to be developed to measure the success of that activecontract management. As discussed in the prior section,theuse of spreadsheets, either manual or computerized, asso-ciated with each applicable functional area has been foundto be an effective means of monitoring the effectiveness ofsuch management.

The initially developed spreadsheets constitute the tar-gets for performance by both the Contractor and the Pur-chaser. The up dating of the spreadsheets establishes theactual point of progress in each functional area. Noting thedifference between target and actual progress, the relevantparty can redeploy or reallocate its available resources, orsupplement those resources if appropriate, to get the proj-ect back on course to the extent needed.

It should not be for gotten however, as quoted earlierfrom (3), that “Contract management should commence themoment a contract is contemplated, not after it is signed.”As discussed in the prior subchapters on formation of thekey components of the contract,that stage of contract man-agement is the most important, as it creates the contractu-ally-binding foundation for all subsequent participation byboth parties.


TABLE 9.IX Spreadsheet Column Headings forInspection Deficiency Reports

I.D.R. NumberDate of InspectionSpecification Item NumbeDate Acknowledged by the ShipbuilderIntended Correction date by ShipbuilderDate of First Reinspection if Not FinalDate of Second Reinspection if Not FinalDate Disputed by ShipbuilderAmount of Credit for WaiverAmount of Special RetainageDate of Closeout

9.5 REFERENCES

1. Clarke, M. A.,Shipbuilding Contracts, Comité Maritime In-ternational, Lloyd’s of London Press, London, UK, 1982.

2. Fisher, K. W., “Responsibilities Pertaining to Drawing Ap-provals During Ship Construction and Modification ”SNAME Marine Technology,Vol. 28,No. 6,November 1991.

3. Training Program Notebook:Fundamentals of Contract andChange Management for Ship Construction, Repair and De-sign, Fisher Maritime Transportation Counselors, Inc.,Florham Park, New Jersey, USA, Revised January 2000.

4. Daidola, J. and Llorca, M. R., “The Legal Ramifications oMargins of Error,” Transactions, SNAME, 1999.

5. Fisher, K. W., “An Shipowner’s Management of Ship Con-struction Contracts,” Proceedings of the Newbuild 2000 Con-ference, Royal Institution of Naval Architects, London, UK,October 1995.

9.A APPENDIX

9.A.1 Shipowner’s Contract Management ActivitiesThe following constitutes a brief description, from a ship-owner’s perspective, of each of the acti vities of contractmanagement, divided into the fi e phases of contract man-agement identified in Section 4. These descriptions areadapted from An Shipowner’s Management of Ship Con-struction Contracts (5). The activities described below startwith the draft Agreement, draft Contract Specifications andraft Contract Plans. The corresponding shipyard’s contractmanagement activities, in addition to engineering, pur-chasing, production and testing, usually are either parallelactivities or mirror images of the shipo wner’s activities.They are not separately discussed below.

In these descriptions,OFI indicates Shipowner-FurnishedInformation and OFE indicates Shipowner-Furnished Equip-ment, or Materials. The phrase secondary contract refersto a contract let by the ship shipo wner to an or ganizationother than the Contractor, but which is meant to support orsupply the Contractor.

9.A.2 Phase I—Pre-Contract Management ActivitiesOrganization—Development and structuring of Ship-

owner’s contract management organization, including func-tional and reporting relationships pertaining to prime andall secondary contracts associated with the project (con-tractor, engineering, regulatory, classification suppliers,vendors, services, etc.). A secondary contract is one be-tween the Purchaser and a vendor or service-provider otherthan the prime Contractor, which secondary contract sup-ports the project of the prime contract. Generally, the Pur-

chaser has responsibility for the performance of the sec-ondary contractors,and the Contractor has responsibility forthe performance of the subcontractors.

Specifications—General: Review of specifications tmaximize Shipowner’s and Contractor’ s mutuality of in-terpretation of each party’s technical responsibilities and toidentify ambiguous or incomplete aspects of specificationwhich may require clarifications

Specifications—Schedule: Development of specificationto supplement the Na val Architect’s specifications with section or sub-section pertaining to the Contractor’s sched-ule development and schedule-reporting commitments.

Specifications—Tests and Trials: Development or mod-ification of proposed specification pertaining to tests & trals as necessary to maximize pre-delivery verification of alsystems and components modified by the shi yard.

Specifications—Downward Review: Coordination be-tween specifications and contract plans to maximize consistency between those components of the contract.

Specifications—Upward Review: Coordination betweenagreement and specifications to maximize consisten y be-tween those components of the contract.

Communications: Review of specifications to identify alcontractually anticipated communications evidencing com-pliance with contractual obligations by both Shipowner andContractor. (see Deliverables)

Deliverables Control Spreadsheets: Development ofcomputer-based, revisable, detailed lists and related infor-mation for each party’s communications,approvals, reports,other software and hardware deliverables in hard-copy andelectronically.

9.A.3 Phase II—Early Management ActivitiesProject Kick-Off Meeting—Meet with Contractor’s con-

tract management team to de velop mutual interpretationswhere ambiguities exist and to discuss other administrativeand procedural matters,which may be relevant to a smooth-running contractual relationship. Some of the other mat-ters, as identified in reference 2 are:

• Avenues for exchanges of documentation and informa-tion,

• Clarify contract specifications & plans• Clarify precedences, inclusions, exclusions,• Identify OFI that is needed early to get project started,• Identify what is not already included in price & work

scope,• Identify unit prices for labor, services, lay days, ma-

terial mark-up,• Identify crafts and services that will be directly

charged in change orders,


• Procedures to control shipo wner property (if appli-cable),

• Billing and payment practices,• Reporting requirements (weights,stability, vibration,

noise, EMI, others),• Change order procedures, including distributed, lim-

ited authority,• Number of change order hours that automatically

gives one day extension,• Quality control, testing, inspections, compartment

close-outs,• Identify standards that will apply to key inspections,• Turn-around times for condition reports and change

proposals,• Disposal of hazardous and/or toxic materials,• Spare-parts requirements,• Subcontract, or prime contract) issues,• Where shipowner will inspect the subcontractor’ s

work,• Up dating & release of scheduling information,• Special retainages for outstanding deficiencies and• Fire watch, fire response pressurized fire main

Schedule: Review of Contractor’s proposed critical pathnetwork to ensure all elements of the work scope are prop-erly included, such as completion of design, engineering,procurement, production, subcontracts, tests & trials.

CFE Procurement: Monitoring of Contractor-furnishedequipment (CFE) having long-lead time procurement win-dows. Failure by the Contractor to allo w realistic, that is,long lead times for major or specially-manufactured equip-ment is a too-frequent problem leading to costly repercus-sions in ship construction projects. F or that reason, thePurchaser should consider monitoring the Contractor’s or-dering process and its schedule.

OFI Procurement: Procurement of Shipowner FurnishedDesign Information as required by contract.

OFI Schedule: Coordination with contractor for timelydelivery of Shipowner-Furnished Information.

OFE Procurement: Procurement of Shipowner FurnishedMaterials & Equipment and associated technical informa-tion.

OFE Schedule: Coordination with contractor for timelydelivery of Shipowner-Furnished Materials & Equipment.

Secondary Contracts: Management of Shipowner’s sec-ondary contracts for design, support services and any OFEor OFI.

Drawings: Receipt and re view of Contractor’s detaildrawings, including bills of material, and preparation ofcomments as appropriate.

9.A.4 Phase III—Continuous Management ActivitiesCritical Path Network: Review of Contractor’s updates

of the critical path network to ensure that schedule updatesreflect actual project conditions and vents (start, percentcomplete, finish)

Progress Meetings: Leadership at regular progress meet-ings with Contractor and follow-up to ensure all obligationsby both parties arising there from are timely satisfied

Progress Monitoring: On-site identification of when critical path activities have started and finished to monitor Contractor’s performance vis-à-vis its own planned schedule.

Progress Payments: Review of Contractor’s progress in-voices to ensure that all invoiced amounts have been earned.

Classification: Oversight and re view of Contractor’scommunications with classification o ganization.

Regulatory: Oversight and review of Contractor’s com-munications with appropriate regulatory authorities.

9.A.5 Phase IV—Intermittent Management ActivitiesContract: Maintenance of up-dated contract including

changes to price, technical specifications contract draw-ings and delivery date.

Change Specifications: Development or review of tech-nical aspects of proposed changes and Shipo wner’s esti-mate of cost of changes.

Change Negotiation: Negotiation of proposed changesafter review and acceptance by technical staff.

Delays: Review of Contractor’s requests for force ma-jeure delays and oversight of other potential causes of delay.

Extensions: Review of contract extensions requested byContractor in association with potential changes.

Rework: Identification and documentation of typesareasand timing of Contractor’s own rework necessitated by itsown errors.

9.A.6 Phase V—Later Management ActivitiesInspections: Identification of ork in progress and com-

pleted items to be inspected and accepted.Deficiencies: Development of inspection deficien y re-

ports for transmittal to ship yard and follo w-up to ensurecorrection of cited deficiencies

Tests & Trials: Review of draft agendas for tests and tri-als, oversight of tests and trials, review of final reports otests & trials.

Acceptances: Preparation of notices of acceptance of in-spections, tests and trials, and conveyance of the accept-ance to Contractor.

Compartment Closeouts: Final closeout inspection ofeach compartment upon presentation by Contractor (includes


each tank and v oid space as well as w orking spaces), andconveyance of the acceptance or deficiencies to Contracto.

Manuals: Review of draft manuals, including signs andplacards, preparation of comments to Contractor, review offinal manuals

Spare Parts:Development of approved spares lists and com-munications with Contractor to ensure timely arrival of spares.

Delivery: Development of draft v essel delivery docu-mentation and inventorying and filming of status of ship atime of delivery.

Warranty:Accumulation of warranty items identified boperational staff, transmittal of reports to shipyard and fol-low-up to ensure correction of cited warranty items.
