Shipbuilding Contract Process

Excerpt from “A Shipyard Lawyer Handbook”, ISBN 978-981-11-6760-7.

This chapter summarizes the process of a shipbuilding contract from the inception of a shipbuilding project to vessel delivery. In the course of the discussion, readers will follow the development of a shipbuilding project, beginning with buyer’s visit to a selected shipyard to assess its capability for a potential shipbuilding project, followed by bid proposal, contract signing, construction and delivery of the vessel. 

Pre-Contract

The inception of a shipbuilding project is usually preceded by a buyer’s visit to a selected shipyard for discussion and to assess its capability. The itinerary during such a visit will normally include an opening meeting, followed by yard tour, commercial and technical discussions. Before the visit, it is common for shipbuilder to prepare a shipyard information memo. The buyer will usually provide shipbuilder with a meeting agenda and draft confidentiality agreement, also known as a non-disclosure agreement (NDA). 

The purpose of the NDA is to ensure that shipbuilder maintains the secrecy of business and technical information supplied by the buyer for the purpose stated in the NDA. The elements of such NDA should comprise (a) the purpose of the agreement, (b) definition of confidential information, (c) information excluded from confidential treatment, (d) recipient’s obligations, (e) retention of title to information supplied, (f) the duration of the agreement, and (g) governing law.

Opening Meeting

During this meeting, shipbuilder shares information that could assist with buyer’s initial evaluation of shipbuilder capability, followed by a clarification session. Thereafter, the buyer presents its proposal for the new vessel which could comprise either of the following arrangements:

  • Memorandum of understanding for the construction of a new vessel subject to contingent conditions. 
  • Consortium to bid jointly for a shipbuilding project. 
  • Shipbuilder responds to buyer’s request for proposal. 

After the opening meeting, buyer visits offices, facilities, workshops, warehouse and ongoing projects in the shipyard, followed by commercial and technical discussions.

Request for Proposal

During or after their visit buyer may invite shipbuilder to submit a bid proposal for a proposed shipbuilding project by sending invitation to bid or request for proposal (RFP) to the shipbuilder. The RFP will include instructions to bidders, the timeline for submission of bids and selection of the successful bidder, reservation of rights to accept or reject bids and the following items:

  • Description of the Vessel. A brief description of the vessel that buyer requires, the number of vessels or option vessels. Classification society and regulatory authority’s rules applicable to the vessel. 
  • Specification. Reference document forming the basis of the proposal including specification, plans and drawings. Documents including a list of drawings, certificates and documents. Technical and applicable industry requirements codes and standards.
  • Scope of Work. Design, engineering, construction, commissioning, tests, sea trials and delivery of the vessel.
  • Planned Programme. Setting out the expected start date of construction and delivery of the vessel. 
  • Commercial. Commercial requirements including the price proposal, currency and payment terms, insurances, performance bond and warranty bond.
  • Subcontractors. Shipbuilder’s proposed major subcontractors and estimates of all equipment supplied by vendors.
  • Project Team. Shipbuilder’s project organization chart and key personnel.  
  • Certificates and Manuals. Quality Assurance, ISO Certificates, Quality Management Manual and Project Quality Plan.
  • HSE Requirements. Health and Safety Plan.
  • Contract. Buyer’s draft contract, pre-qualification questionnaire, contract qualifications, commercial qualifications, technical qualifications, performance bond and warranty bond.

Bid Preparation

Upon receipt of the RFP, various departments in the shipyard work to complete their portion of the RFP, (including technical, commercial and contract matters). The commercial department will have to work closely with the estimating department for the price proposal which is essentially derived by collating the estimates for the following items: general expenses, labour, hull, superstructure, outfitting, hull preparation, painting, piping system, propulsion and auxiliary,  equipment ( related to electrical, electronic,  firefighting, safety, HVAC, navigation, communication), accommodation, carpentry, launching certification fees, documentation fees, insurance, designer’s fees, refund guarantee, bonds, financing costs, marketing costs, legal fees, commission, office facilities, warranty expenses, and overheads and profit.

A draft bid proposal and project summary is then submitted for shipbuilder’s management consideration. After approval from management, the bid proposal is sent to the buyer. After receipt of the RFP, the buyer reviews and evaluates the same. If the evaluation is satisfactory, buyer invites the shipbuilder for clarification meetings, followed by contract negotiation.

Contract 

The focus of negotiation between the parties will relate to technical, commercial matters and a definitive shipbuilding contract. In respect of the contract, the negotiation will focus on items highlighted in the contract qualification form submitted together in bid proposal from shipbuilder to buyer. Where buyer requests for an option to purchase another vessel with similar specification, this could either be included as a clause in the final shipbuilding contract or an option agreement. To secure payment, prudent shipbuilders will request buyers for a payment or parent company guarantee. 

Once final agreement have been reached, two copies of the revised draft contract will be converted into pdf format and printed for the parties’ final review and approval. After approval by both parties, two clean copies of the shipbuilding contract are printed and collated with the various attachments. This is followed by contract signing. Subsequently, there will be a kick-off meeting between the parties’ project personnel, followed by the sequent of activities stated in the planned programme below. If the effective date of the contract is subject to contingent condition(s) by a specific date, shipbuilder must monitor this closely.  

Contemporaneous with the contract negotiation above, shipbuilder will have to enter into conditional agreements to support related shipbuilding project. Such agreements will include (a) those for purchasing equipment, materials and machineries, (b) master service agreement to engage subcontractors, (c) professional service agreement to hire consultants, and (d) agreement for the supply of project personnel.

Production

Upon contract signing or the effective date of the shipbuilding contract, construction of the vessel will begin according to a planned programme as follows:

  • Effective Date of Contract. Issuance of refund guarantee, receipt of payment guarantee and receipt of first payment from buyer.
  • Start of Contract. Approval of plans and drawings, detailed engineering, shop drawings, as-built dossiers.
  • Procurement. Steel plates, sections, pipes, valves, fittings, deck outfitting, machineries, crane and propulsion auxiliaries; equipment related to electrical and instrumentation, equipment, telecoms, fire, safety, HVAC, and navigation.
  • Fabrication. Hull and superstructures, shot-blasting and primer, steel cutting, lay keel, double bottom, blocks and deck house, blocks and deck house erection, piping fabrication, installation and testing.
  • Painting and Outfitting. Painting and outfitting.
  • Launching. Launching of the vessel.
  • Tests and Commissioning. Test and commissioning.
  • Trials. Dockside, shipbuilder’s and sea trials.
  • Delivery of Vessel. Receipt of final payment, delivery of vessel, delivery and acceptance, documents, certificates and warranty bond.

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