In this edition:
- Shipyards Dealing with Disruptive Claims
- Professional Spotlight: Michelle Neena Delehanty
- Favorable Ruling in Complex Design-Build Case
Involving U.S. Government Facility - Shipyard Contracts: New Construction vs.
Ship Repair
Shipyards Dealing with Disruptive Claims
By: Robert C. McCue P.E., EUR ING, CEng MIEI, MCIArb.
Shipyards that are building or repairing ships operate in a very complicated marketplace where costs are carefully monitored. Often claims are submitted requesting additional costs above the stated contract amount because problems
beyond the shipyard’s control resulted in disruption of their as-planned flow of work.
All too often, the alleged problems follow a pattern that becomes apparent when analyzing such claims. Common allegations of disruption include excessive owner changes, delays in approving changes, late responses to inquiries and problems, defective design, late or defective information or equipment supplied by the owner, and over-inspection. Such allegations form the basis for requests for equitable adjustments, claims, and lawsuits. However, many claims overlook problems that may be the responsibility of the shipyard such as underbidding the costs, rework due to poor performance, management and planning inadequacies, detail design errors, procurement problems and labor difficulties.
Changes
Changes to the bid scope of work may originate from several sources. Particularly in defense contracts, changing technology may require modifications to the original design. For example, advancements in electronics and communications may occur so rapidly that a three to six-year contract may involve several changes due to technological advancements. Regulatory agencies may also generate changes in requirements as their improved standards normally apply at ship delivery.
There are at least two important regulatory bodies unique to shipbuilding – the American Bureau of Shipping (ABS) and the United States Coast Guard (USCG) which regulates safety, ship design, the ocean environment and other maritime concerns. Their revised regulations are often the sources of contract changes and disputes. To deal with such changes, most ship construction and repair contracts contain clauses providing for the methods of pricing and implementing changes. Often the
effects that individual changes have on labor costs and productivity are negotiated and resolved as part of the normal contract administration. However, the shipyard may allege that the price adjustment for the labor productivity losses due to an individual change order (local disruption) is inadequate to compensate for the overall effect of numerous change orders (cumulative disruption).
Shipyards may also claim that there were changes in excess of what could be reasonably expected, straining the available labor pool and putting the planned work flow into disarray. Even for ship repair projects where the contracts may anticipate growth of more than 100% due to “open and inspect” work, allegations of productivity losses due to cumulative disruption are not unusual. Another common dispute by shipyards relates to the time required to approve pending change orders. It is often claimed that excessive time to process changes results in disruption and labor inefficiencies not compensated by the change order price. Several matters may entangle evaluation of changes: an extremely complicated change requiring a lengthy scoping effort; widely differing cost estimates between the shipyard and the owner; a large number of changes “in the loop” at once; disagreements over the program scheduled; and the need to increase the overall program budget or alter the ship delivery date.
Design Problems
Shipyards frequently argue that numerous changes and performance cost increases are the result of problems with the ship’s design as provided by the owner. Shipyards
may allege that the design contains errors, ambiguities, conflicts with other requirements, or fails to provide enough information or detail to allow adequate price or schedule analysis. Often in developing a new class of ships, the shipyard is engaged to design the first ship based upon the performance criteria established by the owner, and then to produce a specified number of units. The design developed by the original shipyard (the “lead shipyard”) is then the basis for the contract documents for the construction of additional ships by a “follow-on” shipyard.
It is not unusual for the follow-on shipyard to submit a claim for defective design developed by the lead shipyard although the lead shipyard constructed the first ships without a similar claim. In more than one instance, when the shipyard served as both the lead and follow-on, it submitted claims based upon deficiencies in its own design passed on as contract documents for the follow-on ships.
Late Responses
During performance of a new construction or repair contract, the shipyard may have inquiries concerning problems, details, and ambiguities found in the contract documents. If the responses to the requests are not timely, the shipyard may allege that its performance was disrupted and its costs increased. Timely responses and an agreed to goal for response time may have prevented or reduced such costs.
Over-Inspection
New construction or repair work is subject to ongoing inspections and special reviews at stated milestones such as dock and builder’s trial. A common complaint by shipyards is that the owner’s inspectors imposed a stricter standard of inspection than required by contract or industry practice. Constant interruptions by inspectors and the processing of additional documents allegedly disrupt the productivity of the shipyard’s work crews.
Late-Owner Furnished Items
Commonly, in ship repair or new construction work, the owner agrees to furnish the shipyard with items of specialty equipment and related information. If the equipment is delivered late or defective, the shipyard may claim disruption and delay. Similar claims may arise, particularly in the design effort, if the relevant information is inadequate or tardy.
Impact of Claimed Problems
The impact of the possible disruptive events described above varies both in scope and severity depending upon the timing of the event and the shipyard’s program status. A shipyard with financial or scheduling difficulties may claim a full range of impacts. Loss of labor productivity may be claimed due to the following: required overtime and the associated inefficiency, dilution of effective management by the craft supervision, inability to obtain necessary craft talent, doing work out of the
most effective sequence, congested work areas, and inability to use advanced outfitting techniques. The list of potential impacts on the productivity of the labor force includes several other theories, depending upon the project and the creativity of the shipyard.
Costs & Damages
A shipyard’s calculation of the alleged costs and damages from disruptive events often lacks exactness and the itemization found in change order back-up. This may be due to the difficult nature of determining the impacts with scientific certainty and mathematical precision, or from the difficulty in determining costs with proper record keeping during construction. Frequently shipyards resort to the use of formulas and factors. For example, one publication that was originally intended to assist in forward pricing of change orders has been used by shipyards to calculate damages on post-contract claims. Entitled Guidelines on Factors Influencing Cost for Forward Pricing Change Order Disruption, Delay a Cumulative Effects. NAVSEA 0283, this publication was based on a study of the application of statistical methods for determining damages for a variety of disruptive events. Known in the industry as the Factor Formula Method, impacts are quantified by factors based on the type of ship, number of trades affected, number of compartments impacted and the timing of the change. Each alleged disruptive event is assigned a factor multiplied by the number of direct labor hours involved in the change order to obtain a price for the disruption. To our knowledge, use of this approach has not been successful in litigation.
There are at least three major problems with the use of such factor formulas in claims and at trial. First, the factors are not based on the actual performance data for the particular contract, and may not be relevant to the specifics of the claimed impacts. Second, the statistical background for the factors may not be reliably established for litigation purposes. Finally, where agreements between the shipyard and the owner allow factors to be used for forward pricing change orders, the
agreements often specifically prohibit the use of formulas in claims or litigation. As an alternative to the factor formulas, labor efficiency variations may be determined by analyzing the detailed labor records for the contract during specific periods and in distinct locations. For example, labor productivity, measured by labor costs/units produced, can be compared for periods of time not subjected to disruptive events against periods affected by disruptive conditions. Difficulties in using this approach may arise if there are no distinct locations or time periods that are unimpacted to
compare with the allegedly impacted periods. Other problems arise if there are too many disruptive events or inadequate records concerning the labor hours, activities, or the disruptive events.
Conclusion
The maritime industry is highly competitive and cost-conscious which may be the reason for the frequency of disruption claims. Because these disputes are common, they will likely be subject to increased scrutiny. In particular, the approaches used in calculating the alleged labor disruption losses may be challenged with increasing vigor. For both shipyards and owners, good record keeping is important to resolve labor productivity claims.
Professional Spotlight: Michelle Neena Delehanty
P.E., PMP
CONSULTING ENGINEER
Ms. Delehanty has over 20 years of experience in the construction industry, having worked on all sides of a project including construction manager, contractor, consultant, operations, and owners’ representative. She has experience across multiple industries such as healthcare, utility plants, manufacturing, government,
museums, and residential.
Her skills include project management, cost evaluation, scope monitoring, contract administration, change order review, schedule investigation, earned value reporting, estimating, and commissioning. Her engineering experience contributes to her skills in design and construction defect analysis as well as code compliance evaluations. She has experience with MS Project, Suretrack, and Primavera (P3, P6) including the use of the Claim Digger program. These skills, along with a technical engineering background, enable her to add a unique insight into the discovery and analysis of an engineering and construction project.
Favorable Ruling in Complex Design-Build Case Involving U.S. Government Facility
Our client is extremely happy with the judgment in the United States District Court, Western District of Virginia, regarding the design and construction of a complex process facility. This Design – Build construction of a US Government process facility encountered several technical engineering and construction issues and associated delays before start-up operations. The contractor asserted that much of their work was outside the Design – Build contractual requirements. The bridging documents were complex and detailed, and their interpretation required a competent, knowledgeable engineering organization with many process design
professionals. The bridging documents incorporated a 3–D CADD BIM model based on a foreign licensed technology process design. During the litigation, MDCSystems prepared three dispositive Expert Reports. Robert C. McCue, P.E., delivered over seven hours of deposition testimony and five hours of direct and cross-examination testimony at the trial. The court determined that the technical and interpretive Project and Construction Management determinations that MDC Systems presented were significant in its final opinion.
Shipyards: New Construction vs. Ship Repair
By: Robert C. McCue P.E., EUR ING, CEng MIEI, MCIArb.
Contracts for new ship construction exhibit several significant differences from those for ship repair, primarily concerning the nature of work involved, but also in
aspects such as changes, scheduling, engineering, and disputes. Understanding these differences is essential for attorneys and professionals engaged in contract
administration and dispute resolution.
Changes
Ship repair contracts are inherently flexible and often encompass a blend of specific upgrade tasks and broadly defined “open/inspect” work. This combination can lead to disputes regarding what exactly is included in the base contract because the specific scope of open/inspect items may not be known until the repair work commences. To address potential pricing disagreements, repair contracts usually
employ unit prices and stipulated labor rates, allowing additional repairs to be calculated based on prenegotiated labor hours, which helps mitigate pricing disputes.
In contrast, contracts for new ship construction are generally structured as fixed-price or fixed-price with incentives, without allowances for anticipated additional hours or unit rates. Change orders in these contracts often arise from technological advancements or regulatory updates that occur during the design and construction phases. Consequently, disputes may arise from delays in approving and processing these changes, affecting the overall timeline of the ship’s construction.
Schedules
The execution of both contract types demands extensive investment in shipyard facilities and equipment. Ship repairs are typically shorter in duration and require intensive labor, often completed in less than 90 days, with thousands of labor hours dedicated daily. As such, damages claimed in repair contracts are more frequently associated with labor disruptions rather than general delay costs. Repair
schedules usually consist of few logical ties beyond key contract milestones, and various activities often occur simultaneously. Shipyards may argue that any delays or changes initiated by the owner negatively impact labor hours and overall performance time.
On the other hand, schedules for new ship construction tend to be longer, with labor hours peaking at specific project phases rather than being evenly distributed throughout the entire contract period. Repetition of production activities plays a vital role in reducing overall durations and labor hours for new builds. Shipyards often assert that disruptions caused by owners to these repetitive activities lead
to delays in completion dates and increased labor requirements. Typically, network schedules are utilized in new ship construction to focus on logical sequences of work and appropriate labor staffing. Key milestones in this process include keel laying, launching, and sea trials, each carefully sequenced to ensure effective schedule adherence.
Engineering
In the realm of new ship construction, detailed design engineering may not be fully complete before the construction phase begins. Initial design work may have been conducted by a naval architect, while further detailed engineering is often the responsibility of the shipyard building follow-on ships. This approach allows the shipyard to tailor the design for manufacturability, ultimately aiming to reduce
construction costs. The successful execution of new construction contracts often hinges on the availability of well-budgeted, experienced design engineering teams, as deficiencies in this area can lead to disputes and project challenges.
Conversely, ship repair contracts typically prioritize field engineering over design engineering. Due to the uncertainty surrounding the number of open/inspect items, significant field engineering input may be necessary to coordinate and implement repairs effectively. Disputes frequently arise regarding the timeliness of actions and responses to unexpected conditions discovered during the repair process.
Modularization
In new ship construction, shipyards frequently utilize prefabrication techniques, producing modular units for systems such as piping, HVAC ducts, and electrical distribution. These modular components undergo subassembly and modular assembly before being installed on board, significantly contributing to timely completion. However, delays within the shop environment can impede overall project timelines if not managed effectively.
For ship repairs, the use of modular units is limited, primarily because existing ships cannot accommodate such assemblies. However, repair yards may still create project pallets for tasks such as piping, sheet metal work, and electrical installations. Additionally, repair shipyards often designate specific areas on ships for particular types of work, although standardized modular units remain largely absent in this context, except in cases of substantial upgrades.
Conclusion
Disputes and claims associated with new ship construction and ship repair contracts differ considerably, shaped by the nature of changes, the extent of undefined work, scheduling complexities, and engineering practices. Both contract types are susceptible to claims and disputes, particularly when awarded on a fixed-price basis. Understanding these nuances can help stakeholders effectively navigate the challenges inherent in each type of contract.
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