Chapter 6

Estimation of Building Cost

Abstract This chapter deals with the estimation of ship’s building cost for the
needs of preliminary design, in which ship’s main dimensions and other characteris-
tics need to be determined, taking into account a given transport capacity and speed
in accordance to the requirements of an interested ship owner. As the preliminary
design procedure is inherently an optimization procedure of ship’s main character-
istics, we need to define first the optimization problem in hand and its relationship
to the ship’s building cost. We proceed then with an analysis of ship’s building cost
and present methods on how to estimate the main components of ship’s building
cost. The variability of the ship’s building cost and volatility of ship market prices
are highlighted.

6.1 Statement of the Optimization Problem

The present book elaborates the procedure of the preliminary design of ships, aim-
ing at the proper selection of ship’s main dimensions and of other ship parameters,
which will meet the requirements and expectations of a concerned ship owner in an
optimal way. These owner requirements specify, for the ship under consideration,
the specific type, size, capacity, and speed (see statement of work/owner’s require-
ments, section 1.3.5); and may be considered as boundary conditions of an optimi-
zation problem, without excluding their irrational formulation.
Essentially, the owner’s requirements as to the transport capacity and speed of the
ship under design and construction must be the outcome of a more global type op-
timization problem, which takes into account projected market conditions and ton-
nage capacity of the concerned owner from the supply side of available ships point
of view ( supply and demand of maritime transport determined by freight markets).
The present problem, namely, the optimization of the main dimensions and other
ship parameters for a given transport capacity and speed in accordance to the require-
ments of an interested shipowner, corresponding to the tender of a shipyard to the
concerned shipowner, has as main objective the “minimization of the building cost” or
“minimization of acquisition cost” in the context of governing free market conditions.
The problem, however, from a shipowner’s point of view, is more complex and
goes even beyond the aforementioned exploitation of the total potential of avail-
able ships to the ship-owner ( optimization of fleet composition). Even for a given

A. Papanikolaou, Ship Design, DOI 10.1007/978-94-017-8751-2_6, 439

© Springer Science+Business Media Dordrecht 2014
440 6  Estimation of Building Cost

ship ­capacity and speed, the question of the appropriate dimensions and other ship
parameters is associated to the “operating cost” of the ship, thus to the cost of fuel,
crew costs, insurance cost, port charges and cargo handling cost, maintenance cost,
and invested capital cost (interest rates, loan repayment schedule, etc.). Thus, the
ship should be actually designed for optimal economic performance taking into ac-
count the economic lifetime of the ship (and the time of investment depreciation).
More details in this general approach to the set techno-economic problem may be
found in Buxton (1976), Schneekluth (1985), Benford (1991), and Stopford (2009).
It should be pointed out that the acquisition cost of a ship has substantial influence
on ship’s profitability, since it constitutes the most significant payment of the ship-
owner at the start of his investment. It has been shown by systematic studies (e.g.,
Schneekluth 1985), that optimizations of ship’s main dimensions with respect to:
1. the minimum building cost
2. the minimum annual operating cost
3. the maximum return on investment (ROI) or net present value (NPV)
lead to similar values for ship’s main dimensions regarding the criteria (1) and (3),
that is, the main dimensions that are optimal from shipyard’s view (minimum build-
ing cost) eventually serve satisfactorily also the needs of the owner (maximum ROI
or NPV, see Papanikolaou 1988). However, when optimizing only for a ship’s an-
nual operating cost, the outcome differs and generally leads to ships with minimum
fuel consumption1.
For cargo ships (e.g., bulkcarriers and tankers), the optimization is more often
conducted with respect to the transport cost for 1 t cargo (Fig. 6.1) or the required
freight rate (RFR).

6.2 Building Cost Analysis

The building cost2 of a ship is commonly analyzed according to the main building
entities that make it up, thus the steel structure, the machinery, and outfitting (see
2.15.5, weight groups). Typical (indicative) values for the distribution of the build-
ing cost in various cost categories for a dry cargo ship are given in Table 6.1:

1 
Recent drastic increases of fuel cost have reinforced the importance of the minimum operating
cost and minimum fuel cost criteria. This leads to more close results between the optimization
solutions according to the above defined three criteria. Nevertheless, it is possible nowadays to
conduct holistic, multi-objective optimizations with respect to a series of optimization criteria by
use of genetic algorithms (see, Papanikolaou 2010).
2 
It should be noted that the building cost of a ship is not identical to the acquisition cost ( mar-
ket price) of the ship. For the estimation of the latter, in addition to the anticipated profit of the
yard (if any), the market conditions (demand and supply) and freight rates must be taken into
account. High freight rates, which occur in conditions of high transport demand, lead directly to
high acquisition prices of ships. According to data of the renowned maritime research company
Clarkson Research Services Limited (2008), the prices of tankers VLCC (320,000 DWT) have in-
6.2 Building Cost Analysis 441

Fig. 6.1   Transport cost versus speed for large tankers. (Friis et al. 2002)

Table 6.1   Typical values for the distribution of the building cost for a dry cargo ship. (as % of total
costs according to Schneekluth 1985)
Weight group Total building costs (%)
Steel structure (main hull) 24 – 35
Main engine 8 – 13
Other elements (superstructures, other machineries, accommodation, 50 – 60
and equipment/outfitting)

The above breakdown is obviously function of the ship type, the absolute dimen-
sions of the ship, the manufacturer/shipyard, and the time of building. If the main

creased from US$ 76.5 million in year 2000 to US$ 146.0 million in 2008. For capsize bulkcarriers
(180,000 DWT), the increase during the same period was from US$ 40.5 million to US$ 97.0 mil-
lion. Similar increases were observed for all ship types and were associated to the dramatic in-
crease of freight rates over the same period due to the high maritime transport demand in that pe-
riod in the rapidly developing Far East countries (China and India). However, with the beginning
of the world economic downturn at the end of 2008 and the collapse of the high freight rates, the
prices for new buildings returned again to more rational levels.
442 6  Estimation of Building Cost

engine is supplied by external manufacturers, as the great bulk of other equipment

and outfitting, then approximately two-third of the building cost payments to the
yard have to be transferred to external suppliers and merely about one-third remains
for the costs of the yard (i.e., the added value of the shipyard).
Of the expenses of the shipyard for labor, about 17 % refer to the design and
management of the shipbuilding (payments of white collars) and 83 % to the pro-
duction process (payments of blue collars, according to data of German shipyard).
If during the preliminary design process the main objective is to achieve the
“minimum building cost,” then it is actually not required to accurately estimate all
cost components, i.e., the absolute building cost, but only those cost components
varying with ship’s main dimensions and parameters affecting the specifications of
the under design ship. These costs are:
1. Cost of built/processed steel: Assuming that in the preliminary design proce-
dure, the extent of superstructures does not change, when varying ship’s main
dimensions and other parameters, it is enough to accurately estimate the cost of
the steel structure of the main hull.
2. Cost of machinery/propulsion installation: It is not required to include the
cost of auxiliary machinery/fittings that are not associated with the main engine
and are independent of the installed propulsion power.
3. Cost of accommodation/equipment/outfitting: It concerns only the compo-
nents varying with ship’s main dimensions and other relevant ship parameters
during the optimization.

6.3 Cost of Built/Processed Steel

The cost of the processed steel in the building of a ship can be grouped into two
main categories:
a. Cost of unprocessed steel (plates and stiffeners): This cost can be easily calcu-
lated based on the cost of required plates and stiffeners per ton.3 Note that it is
necessary to include an increase of the estimated ship’s steel mass due to a wast-
age margin, depending on the type and size of the under construction ship, so as
to better estimate the weight of the required steel, as it is ordered and paid by the
yard to the steel supplier.

3 
The cost of shipbuilding steel has increased drastically over the last years, in line with the high
demand for ship new buildings until 2008 and before the commencement of the following global
economic downturn. Thus, the cost of shipbuilding steel plates increased within 5 years from
about US$ 300/t (2003) to US$ 1,000/t (first half of 2008), while the average construction cost has
increased over the same period from about US$ 850/t DWT (2003) to US$ 1,500/t DWT (first half
of 2008), according to the renowned maritime research group Clarkson Research Services Limited
(2008). These increases are justified only by the high demand for new buildings, while there was
no sufficient supply in terms of available shipbuilding shipyard capacity. However, with the start
of the global economic downturn in 2008, the construction of new large shipyards and the increase
of steel production in China, the prices returned to reasonable levels.
6.3 Cost of Built/Processed Steel 443

The estimated wastage arising during the construction of a full type ship, like
a tanker or bulk carrier is in the order of 11–14 %, for a general cargo ship
12–18 %, while for more sophisticated, complex ships, for example, container-
ships or RoPax, it reaches values of 16–20 %. The above values are obviously a
function of the following factors:
• Way of ordering steel plates (standard size or customized)
• Efficiency of cutting the plates by simpler or sophisticated cutting machines
(minimization of wastage with optimal allocation of cutting pattern by com-
puter (“nesting”), automated production systems supported by advanced
hardware and software)
• Ship’s block coefficient (expresses the fullness of the hull, low CBassociated
with extended uneven surfaces: high wastage)
b. Other costs: Here we understand mainly the staff costs and other general costs
(overhead costs) of the yard. These costs are calculated based on the estimated/
required working hours (man-hours) for the construction of the ship.
It is estimated that for a dry cargo ship or container ship, the required working hours
per ton of steel structure is approximately 26–36 h/t (according to indicative data
of H. Kerlen for German yards). Of course, this value depends on the productivity
level of the yard and the difficulty of the particular ship’s construction.
It is considered that the effort in working hours to build 1 t of superstructure is
about 30–40 % higher than that for 1 t of the main hull. Roughly the same applies to
the sections/blocks at the ends of ship in comparison with the sections in the middle.
Also, small ships are generally more laborious than the corresponding large
ones. Thus, according to H. Kerlen (1981), the effort in man-hours resulting from
an increase of the volume below the main deck from 20,000 to 70,000 m3 decreases
by about 15 % t−1 of steel construction.
The cost of the steel structure (CST) of the main hull (without superstructure) can
be calculated as follows:

 (6.1)
CST [C] = K ST1[C/t ] ·WST [ t ]+K ST2 [C/h ]·MHS [h]

where

CST [C] Steel structure cost in currency units [C], e.g., in US$, Euro, etc.
WST [t] Weight of steel structure [t]
MHS [h] Required working hours for steel structure
WST KST1[C/t]4 Cost of unprocessed steel per ton
KST2[C/h]5 Man-hour cost
The above calculation method may be used by a yard on the basis of available cost
and man-hour data typical to the yard in question (estimations of WST and MHS,
KST1 and KST2).

4 
Typical values 2006: Greece ~ 650 €/t, China ~ 300 €/t
5 
Typical values 2006: Greece ~ 35 €/h, China < 5  €/h
444 6  Estimation of Building Cost

Other, more simplified ways of calculating the cost CST are:

• Reducing the above relationship to a single cost value per ton of steel structure
(very common approach)6:

CST = K ST1[C/t ] ⋅ WST [t]

(6.2)

• Reducing it to a single cost value per man-hour of steel structure:

CST = K ST4 [C/h] ⋅ MHS[h]

(6.3)

• Reducing it to cost values per square meter of equivalent plate area, i.e., KST5[C/
m2]. The latter equivalency is defined as the ratio between the total weight of the
plates and the average weight of the plates per unit area.
• Reducing it to a cost value per meter of welding (see, practice of Japanese ship-
yards).
Approximation Formulas: H. Kerlen (cargo ships)  Cost coefficient per ton of
steel structure:

 4 3   3 0.65 − C B 
K ST [C/t] = K ST0 ⋅  + + 0.2028 ⋅  − 0.07
 3L[m] L[m]   2.58 + C B
2
0.65 
(6.4)
where
KST0 [C/t] Cost [C] per ton for a parental cargo ship (L = 140 m, CB = 0.65).
Remarks 
1. The above relationship, although initially proposed in the currency units of for-
mer West German (C ≡ DEM ≈ 0.5 €), it can be implemented independently of
cost units, if the unit cost of the parent ship (KST0) is known and appropriately
adjusted.
2. According to Kerlen the relationship is valid for:

0.5 ≤ CB ≤ 0.8 and 80m ≤ L ≤ 200 m

Danckwardt’s formula is as follows:

(6.5)
K ST [C/t] = X ⋅ WST −0.125

6 
Typical cost values of ton of steel structure (2006): Greece (Perama, small yards): ~ 1,500 €/t,
(Large shipyards): ~ 3,000 €/t, China ~ 700 €/t
6.4  Cost of Machinery and Propulsive Installation 445

where
WST Weight of steel structure without wastage [t]
X Constant that is determined by the ship type and size, currency units, shipyard
costs, etc.

Remark According to Danckwardt’s formula, an increase of WST = 10,000 t by

10 % involves a reduction of KST by 1.2 %.
For the sake of completeness, some relationships for the required man-hours that
correspond to WST are listed. These relationships are of the general form:

MHS[h] = a ⋅ ( WST )
b
(6.6)

where according to Benford:

a = 243 b = 0.85 for cargo ships

a = 175 b = 0.90 for bulk-carriers
a = 141.2 b = 0.90 for tankers

Remarks 
1. It is obvious that particularly the coefficient “a” greatly depends on the produc-
tion level of the yard.
2. The above estimates of “a” and “b” of Benford refer to a typical large-scale
American shipyard in the 60s decade; they have, of course, today little value
in absolute terms; however, the general form of the relationship is valuable for
qualitative studies.

6.4 Cost of Machinery and Propulsive Installation

The cost of the machinery and propulsive installation may be considered, to a

major part, as directly associated to the propulsion power. Thus, if the cost per
horsepower of the installed power is known, which obviously depends on the
type of main engine and the manufacturer, the cost of this part of the propulsive
installation is easily calculated by multiplying it with the required propulsive
shaft horsepower (SHP):

CM = K M [C/SHP] ⋅ PS [HP]
(6.7)

where
KM Machinery/propulsive installation cost per installed horsepower
PS Installed shaft horsepower [HP]
446 6  Estimation of Building Cost

Certainly this estimation can be replaced by more accurate cost data for the main
engine and likely of the gearbox (as applicable), according to quotation data of
manufacturers, or their price catalog.
In this cost category, the additional costs for the propeller, bearings, shaft,
exhaust ducts, control and supply systems of main engine, which correspond to
30–50 % of the cost of main engine and gearbox, can be approximately included.
Other elements of the mechanical installation that are independent of the pro-
pulsion power, such as auxiliary machinery (electric generators), ballast systems
(pipes, pumps), etc., can be considered as fixed costs with respect to the optimiza-
tion of the main ship dimensions in the preliminary design of the ship.
Approximation Formulas (referring to the cost of the complete mechanical
installation)
General Form
(6.8)
CM =K M [C/HP]·Pα ,

where
α =  0.5–0.7

Remark  The KM and α coefficients are function of the type of main engine (upper
limit for α for diesel engines, lower limit of α for steam turbines), the position of
the engine room and the size of the ship. Guideline values are given by H. Benford
for diesel-engine and turbine-engine ships, however, they are outdated and of no
essential value in absolute terms today.

6.5 Accommodation/Equipment/Outfitting Cost

In the framework of the optimization procedure of a ship, we need to identify what

elements of ship’s “Outfitting” vary with the main dimensions. It is clear that, de-
pending on the type of the ship under design, certain elements can be regarded as
either variable or fixed. Especially the following is noted:
1. The cost of the hatch covers for cargo ships, while it increases linearly propor-
tional to the length of the cover, its increase with the width of the cover goes with
the exponent 1.6. Thus, long and narrow covers are relatively cheaper than the
beamier ones.
2. Certain equipment/outfitting items and their involved costs, such as the anchors,
chains, ropes, etc., which depend on the equipment index of the ship, may change
with the variation of the main dimensions, if the category of the equipment index
of the classification society in charge of the ship changes.
3. Finally, other elements, such as electronic systems, etc., are to be considered
fixed in the loops of a ship’s preliminary design optimization.
References 447

Approximation Formula  (referring to the cost of the complete accommodation/

equipment/outfitting)

(
COT = a 0 + a1 WO T1 + a 2 WO T2 + a 3 WOT3 ⋅ WOT
(6.9) )
WOT Outfitting weight
a0to a3 Factors depending on the specifications of the ship and the productivity
level of the yard
The outfitting cost in the advanced design stages is estimated in detail based on
manufacturers’ catalogs and quotations of the suppliers of the yard.

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Benford H (1991) A naval architect’s guide to practical economics, Rep. No. 319, Dep. of Naval
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(BSRA), 2nd edn.
Clarkson Research Services Limited (2008) World shipyard monitor, report August 2008. Clark-
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Friis AM, Andersen P, Jensen JJ (2002) Ship design (Part I & II). Section of Maritime Engineer-
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89502-56-6)
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