How to judge the fairness of a given New Building Price of (for example) a 6,000 DWT single Decker double hull, double bottom General Cargo vessel with IACS Class Notation for Ocean going? or New Building price for a 5,000 DWT double hull, double bottom, IMO Type I/II Oil & Chemical tanker, with IACS notation for coastal service, built locally?
To be able to do so, one has to know exactly what factors could drive the Shipyard/Shipbuilder to come up with a certain selling price for New Building construction. There are at least 2 main factors that might influence The Shipyard/Shipbuilder in defining their best quoted price for New Building in a given time.
First and foremost is The External factors, factors which are beyond their power to control, such as;
- Supply & demand situation in the market, sometime is The Builder/Seller market but some other time is a Buyer market.
- New Rules & Regulation applied, i.e. by Class, IMO, Statutory, Local Government, etc
- Steel and other commodities price level, even though some attempts could be afforded by The Shipyard to peg or hedging the price, still on some certain extends it’s beyond their competence to keep.
- Global Energy price level
- Currency exchange & borrowing rates level
- Old Tonnages phasing out rate & Scrap value rate
- Taxation scheme, etc
Secondly is The Internal factors, factors which are still within their competence to control, those are including but not limited to as follows;
- How good they manage their production cost level to stay efficient and competitive.
- How good their production system is, to maintain schedule & production phase.
- How good their project management is, one right time and one time right, right in time without fail & repetition.
- How good they manage their overhead allocation for the project.
- How good they raise and manage their project financing
- How good they manage the project risk, etc
On Shipyard / Shipbuilder’s perspective, New Building Project is normally having relatively less return compare to any Repair & Conversion Project. Thus the profit expectation for a New Building project is quite marginal compare to other project types. One of the reason is just because of the New Building project is typically having longer turn around time, hence the cost of fund is very much involved through out the project period of time.
What are the major groups of production cost, of a New Building Project, and how are they well distributed in forming a given New Building price?
The figure below is showing the distribution pattern of each group of The Production costs of a new Building project that drive the Price.
* The figure is extracted merely from the author’s extended experiences in handling New Building Projects both at Shipyard perspective’s end as well as Owner perspective’s end. Wisely it shall be treated as guidance only, the exact and actual percentages of each might be vary on every certain specific projects.
Where the detailed of each (in the order of the biggest portion) are as follows;
- Machinery Group, in the region of 40% up to 45% – consist of all costs incurred to procure and install all the machineries and systems onboard i.e. main propulsion system, main engines, auxiliaries engines, boilers, pumps, compressors, gearbox, shafting, steering system, heat exchangers, etc
- Hull Part Group, in the region of 35% up to 40% – consist of all costs incurred to procure and fabricate all the Ship’s Hull and Deck Dept onboard i.e. Hull steel construction, rudder construction, mooring system, life saving appliances, deck piping, cargo handling systems, accommodation, coating, etc
- Electrical Group, in the region of 7% up to 10% – consist of all cost incurred to procure and install all the electrical system onboard i.e. radio communication systems, radar systems, satellite communication system, cabling, lighting, Navigation system, etc
- Fitting & Installation Group, in the region of 7% up to 10% – consist of all cost for Labor, workmanship, handling facility, etc
- Design & Class cost, in the region of 3% up to 5% – consist of all cost incurred to procure Ship’s design, Class survey & inspection service, Class Plan approvals, testing, trials & commissioning, etc
- Other miscellaneous Group, in the region of 2% up to 3% – consist of all cost incurred for the Project’s cost of fund, ceremonial, etc
The above mentioned distribution pattern, in general is likely and widely applicable to the new building of all types of vessels / ships, be it General cargo, tankers, break bulkers, bulkers, supply vessels, etc, should there be variety on the portions/percentages of each groups, let say on a particular case of the new building of a specific types of vessel i.e. FSO, FPSO, FSRU, DSV, and or other Offshore support vessels, etc, believed it won’t change the main pattern in a whole.
It’s obviously seen from such pattern, that the 2 most contributing groups are Hull and machinery, where both are contributing total 75% of the Ship’s New Building Price, these are the areas that contributing most to the New Building price. In fact the Design and Class only less contributing compare to the others, all together only less than 5% contribution to the Price.
Last but not least, by understanding the pattern well, hopefully we can have a better basis for evaluation and eventually judgment of the fairness of the Ship’s New Building Price given by any Shipyard.
June 2011
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