Negotiated Design/Build Contracts

Background: The Pacific Northwest Section of The Society of Naval Architects and Marine Engineers sometimes schedules a Past Chairperson’s Night. Once when I was called upon to take a bow as a past chairperson, instead of saying something that was expected, I presented the following mini paper:

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A Comment for the 2 December 1994 Past Chairperson’s Night

by Louis D. Chirillo

During the year that I was Chairman, a significant event occurred that was to provide insight that is the basis for advice I wish to leave with you. I was assigned to be a program manager in the newly created government\ industry National Shipbuilding Research Program (NSRP). In that capacity I was especially alert for reasons why North American shipyards could not compete in the world market. A statement by John Boylston and Warren Leback, representing Sea-Land and El Paso LNG respectively, made a profound impression:

“When shipyards in years past provided their own design… it made sense in a contract for the owner to require guarantees on horsepower, speed, fuel economy and other such factors. It still makes sense today where an owner purchases a standard shipyard design. If, however, the design is prepared for the owner by a naval architect and presented to the yard for bidding, we believe the responsibility of the shipyard then reverts to that of an assembler of component parts as specified by the owner. Most owners presently have the naval architect prepare a preliminary design that is used for preliminary economic studies and model testing. If the owner decides to proceed, then this preliminary design is embodied in a contract design. The naval architect, who writes the specifications and draws the contract plans, then binds the shipyard to strict adherence to those contract plans and specifications while at the same time making the shipyard fully responsible for the final performance of the vessel. The shipyard is instructed to retest the lines, recalculate the calculations and in general to give the naval architect, on behalf of the owner, a ‘hold harmless’ agreement. It is the owner, whether he realizes it or not, who pays for this double engineering and who, through the technical bickering that always seems to ensue between yard and naval architect, receives a compromise design that neither fully meets his requirements nor one that has a responsible party for recourse.” [1]

Elsewhere in the same paper John Boylston and Warren Leback state, “…nowhere else in the world is a great percentage of the construction cost of a vessel allocated to legal fees, accounting procedures, and associated personnel.”

During my work for the NSRP, I acquired insight into the shipbuilding approach employed by Ishikawajima-Harima Heavy Industries Co., Ltd. (IHI) of Japan. I discovered that in IHI yards, contract design is regarded as part of the shipbuilding process and that each contract is the consequence of negotiation. The owner insures that ship performance aspects are incorporated and the shipbuilder insures that the emerging contract is consistent with the shipbuilding system. I also learned that IHI was never sued as a consequence of delivering approximately 3,000 vessels during the last three decades.

I recommend that you work to the extent that you can to achieve negotiated design/build contracts that avoid the pitfalls that the two enlightened owner representatives warned us about nineteen-years ago. If direct negotiations do not seem to be attainable, for example when some public agencies are involved, then I recommend that you seek ways to achieve the effect of negotiated design/build contracts.

In this way you would contribute to restoring the viability of shipbuilding in North America. In this way you would contribute to the health of this Society, provided you write about such experiences.

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[1] J.W. Boylston and W.G. Leback, Toward Responsible Shipbuilding, Transactions, SNAME Annual Meeting,
13-15 November 1975.

One thought on “Negotiated Design/Build Contracts

  1. Tom Swift wrote:
    Your experience seems to confirm that providing customer value is more important to both EU and Asian shipyards. There have been efforts to realign the US yards to provide design/build. Examples are the USCG Deepwater acquisition and the latest LCS acquisition. My understanding is that LCS is being designed to ABS rules for combatant vessels. As such, many of the traditional specification writing and interpretation that lead to low-bid, make-it-up-on-changes practices may be eliminated.

    Of course, I think the US Navy should be allowed to buy their ships on the world market. More transformational thinking on the part of Navy planners would lead to a mix of non-nuclear submarines, advanced surface vessels, and agile aircraft carriers all at a lower cost to the taxpayer.
    posted at 11:18:13 on 09/16/03

    Gary Newchurch wrote:
    In either case, NA furnished design or Standard vessel [design], All three, Owner, NA and Builder, dodge the responsibilty issue, The owner will never get a new ship if the one he contracted for does not meet his needs, at best he might get a new design. Or in some cases an amount of money, prorated on Ship’s perforance, but a pittance. The NA will not pay for anything occasioned by the faulty design, Says it’s the Shipyard responsibilty, and limit liability by contract, the Shipyard will guarantee only that the ship will meet ABS or other regulatory agencies’s requirements. Been there, done that.

    The design/build process is cleaner, and in most cases far less expensive, but a number of Shipyard cannot bear the overhead of a full design team on staff at all time. Why should they? that rescource is available outside.
    and again, the contract dictakes what the acutal warrenty is and in no way is it absolute. The Military says it will offer a design, fit for construction, they don’t know that, in most cases it has numerious problems that the Shipyard suffers with extremely, so the Change Orders or Request for Equitable Adjustment, REA’s battle begins to the disadvantge of time and proper compensation for devilvery. Also, in constracting with the Military, you do not have a customer, you have a very annoying partner, his interfience in your business is extreme and very non productive. During the fall of Russia, the populace had no knowledge of how money works, or how you work for it. The military has little knowledge of commerical shipybuilding, their way is expensive and could be done better.

    I don’t know the ulitmate solution, but have several suggestions.

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