0-9-3] D7O2020>0' OyOHOitOsOvOuG) 9 cS 6@6 C006 « @e@ee SHIPBUILDING COST ESTIMATION COST AND PRICE : Cost is concerned with how much money the shipbuilder will pay for shipyard labour to build the ship, subcontractors to assist, all material and equipment contained in the complete vessels, miscelleneous services and all establishment charges. Price is a complex quantity and is strongly influenced by market conditions, competition, supply and demand of ship type, intemational exchange rates, cargo freight, interest rate on investment etc. For a ship building process to be profitable, Price > Cost in real terms. Therefore, cost and price are related. Since shipbuilder has little control over price (as seen from above), he must keep a strict watch and control over the cost. COST ESTIMATION AND SHIP DESIGN : ‘Accurate estimation of building cost is an important part of the ship design activity. This is because (@ _Ameestimated cost at tender stage is essential for submitting quotation; Gi) A comparative study on the basis of building cost can be done for various sets of parameters at concept design stage; (iii) A detailed estimated cost is necessary before signing contract; (iv) A record of actual cost of the ship at various stages of construction is necessary for cost check, cost control, etc. (v) The cost components of previously built ships are useful for statistical analysis and for estimation of costs of new ships. COST COMPONENTS : ‘The total cost can be broadly broken down to material, labour, direct expenses and indirect or overhead expenses. MATERIAL COST : Material cost can be further broken down to steel plates and sections, machinery, outfit, electrical and miscelleneous items. 3-1Total steel material cost is based on gross steel which is gross steel weight = nett estimated steel + scrap. The steel material includes plates and sections used for hull, superstructure, main and minor bulkheads, double bottom and decks, bulwark, steel seatings for machinery ete., but excluding structural forgings, castings and deck fittings. The outfit items include materials such as timber, internal and extemal paints, primers and thinners, deck covering, insulation etc and equipment such as cranes or derricks, hatchcovers, winches, structural forgings and castings including stem frame, stern post and rudder post, A.C. and ventilation equipment, refrigeration equipment, ship's piping and pumps, anchoring and mooring equipment and fittings, steering gear, autopilot and navigation equipment, chain cables, B-class bulkhead panels, C-class or joiner bulkheads, ceilings and linings, windows and scuttles, life saving equipment and launching equipment, provision winch and davit, accommodation ladder, accommodation furnishings and fittings, galley and pantry equipment, smithy work, steel metal work, ship's inventory, hardware and consumables, etc. Machinery items include the main engine, DG Sets, air compressors and botlles, marine pumps and engine room piping, heat exchangers, centrifusers or separators, Boiler, sewage Plant, CO, plant and bottles, pollution control equipment, propeller and shafiing, E.R. Crane, control systems, valves, E.R. workshop equipment, general tools, stores and spares. Electrical equipment include electrical items, automatic equipment, main and auxiliary switch boards, electrical cables, electrical fittings, radar, wireless, DF, VHF equipment, etc. Material cost must include all taxes, freight and insurance during transit. An indegeneous equipment cost must include sales tax, excise duty, freight, octroi and insurance. An imported item, if quoted as FOB (freight on board) price, must be enhanced to include cargo insurance and freight (CIF) to the country and internal freight and customs duty. LABOUR COST : Labour cost is generally taken as the costs of direct labour allocated to the particular ship. This can be computed as the total wages including salary and all perquisites such as providend fund, gratuity, leave of all types, LTC, medical, subsidy on canteen facilities etc. of the labour as per job allocation for the ship. This labour € € <€ € € € é€ € «ali etal oO includes all charge hands, tradesmen, trainees, apprentices, helpers, etc. Labour cost ean be computes as Labour Cost = Labour rate (Rupees per manday) x No. of mandays for the job in question. ‘The number of mandays is the shipyard norm based on production efficiency and is estimated from previous data over the recent years. For initial estimate of labour cost, it can be broken up into four main components (as was done for materials) such as steel, machinery, outfit and electrical labour. For more detailed estimate, labour cost associated with each material component can be computed. Actual labour can be calculated later as per the job allocation of each shop in the shipyard. The production rate or, for steel, tonnes/man hour is a function number of variables which are not easy to define. Some examples are given below. As the unit size (and weight) increases, the tonnes/manhour rate increases. Similarly, if the complexity of the unit increases, production rate falls (Fig. 1). The complexity can be thought of as directly related to number of components in an unit, the plate preparation required before assembly, total weld length etc. One can also mention here that with proper flow of material, installation of efficient and automatic machines and proper jigs and fixtures, complexity effect on production rate can be reduced. Similarly, based on number of machines and extent of floor area in a shop floor, there is an optimum level of workforce which can give maximum production. If the work fed to the shop is less, then idle labour is generated and gmilarly, if labour force is less, production reduces. On the othethand, if there is more than optimum labour force, there is unnecessary interference between workers which reduces production efficiency and does not increase the total production. ‘Therefore, for estimating labour cost, the job complexity (based on yard facility ‘as well as design), the total work content as well as the labour available must be considered. Direct expenses : This item of cost is such costs which can be directly billed to the ship but, can. not be attributed to material or labour. The examples of components of direct expenses and launching and delivery expenses, insurance during construction, expenses due to extemal supervision such as classification, MMD surveys etc and similar items. 3-3oO 3 2 : G Increasing unit complexity 3-40 ° 0 0 9° ° ° © ° 5 0 ) d } O Indirect expenses : A large portion of total cost can not be billed on the ship’s account directly, but is incurred due to ship construction. These are normally termed as overhead expenses. This item includes the following : Full company establishment charges such as rates, rents, water, electricity and other service charges, supervision cost of production which include wages of foremen and ‘managers upto CEO, design and drawing office expenses, expenses of purchase, planning and production control departments, quality control, company administration, sales and marketing etc. Fig. 3 gives a breakup of the total ship cost. Very often it is enough to consider the total cost as made up of 3 components as material, labour and overhead, each with its own individual breakup. Thus all expenses other than material and labour can be termed as overhead. The overhead expenses are dependent on production as well as duration of production. The expenses such as rates and rents, salaries to supporting staff ‘such as watch and ward, canteen etc are dependent on duration of production rather than. quantity of production. Thus the overhead expenses can be broadly subdivided into two groups :- Fixed or dependent on duration of production and, Variable or dependent on production. When annual accounting of the shipyard is carried out, all other expenses not billed under material and labour are termed as overhead expenses which are then proportioned to the ships (fully or partly) constructed that year. Doing a statistical analysis of these expenses, one can arrive at some norms regarding percentages in which fixed and variable overhead expenses can be apportioned. STAGES OF COST ESTIMATION : Costing is normally done at three different stages : (i) Pre-contract cost estimation This cost estimation is done at the preliminary/concept design stage so that a quick analysis of various feasible alternatives with regard to cost can be made and a suitable decision for an optimum design taken. At this stage, since the costs of detailed items of material and labour are difficult to estimate, previous cost data are analysed with regard to a few variables only, such as the main ship parameters, type of ship and majorMaterial RECT Labour Prime/ EXPENSES Direct Cost L__ Direct expenses Gee Manufacturing — Cost [— Factory Work expenses Cost of |__. Production Production or overhead Gross Cost INDIRECT ___ | — Office &Administration, XPENSES: Establishment overhead 8 Cost on L_ sales & Distribution = “Siioe Profit Sale Price Fig 3 Shipbuilding Cost Components scm2_is?9070909 %% 0090 %0P 08a! @505050 POCPY 2A OOS Pe CHOW items of equipment like the main engine, generators, cargo handling gear ete. It is possible to do a quick statistical analysis of previously built ship data and predict the cost with reasonable accuracy (i) Contractual cost estimation ‘This cost estimation is done prior to the signing of the contract when contractual design drawings and specifications are ready. So, it is possible to estimate the gross material cost (purchase department information) and also the labour cost (from labour production norms and labour wage rate). This can be easily and accurately predicted with the help of a computer if updated building cost data are available. (iii) Actual costing ‘Actual costing of the ship is carried out as the ship is being constructed. This is done by the costing department by noting the actual materials and labour issued to the ship. This cost is passed on to the cost database and is also utilised to update norms etc. COST ESTIMATION SPREADSHEET : Once the shipyard norms have been established, itis a standard tabular calculation procedure leading to estimated ship cost. A spreadsheet type of calculation on a computer can be easily adopted. A typical template for such calculation is given in Fig. 4. The items can be filled under various heads as per convenience and shipyard practice. Subtotals can be incorporated if desired. A standard template has the advantage that the estimates can be continuously updated till ship completion and hence, it is easy to keep control over the cost incurred during the fabrication process. To make this job easier, a cost database of various items is very convenient. This database can then be utilized for different purposes. A conceptual cost information system is shown in Fig. 5. PRELIMINARY SHIP COST EFFECTS ON MAIN PARAMETERS ‘At the concept design stage, parameteric study gives a number of feasible solutions and the ship designer should find out the one solution that is cheaper to build in a particular shipyard. To understand the effect of changes in main parameters, it is necessary to express ship cost as a function of the design variables. Based on statistics employed and analysis procedure one can obtain this functional relationship for a particular shipyard. One such method has been suggested by J. Carreyelte in his paper presented in the Naval Architect, July 1978 entitled, ‘Preliminary Ship Cost 3-7Be Ol OOO OO een eee ~ et PO EBBGEEEEEI seas acu ee Lvoyouyea 4903 GupIAGdS 40 UoHoINDI09 aayepooids 40) aIDIEWOL 7 “BL 8+ ¥ = 4302 Gupangdys yo;oL ay - a= (0) X = 1909 yoyo, ‘sy = y = {809 posyieno pax syjuow = pouad Au0ane0 8j0uy)99 juenbasqns pu puOIB so (o}) UUN}OD Jay sauy Jo Jequnu » paypadas aq ud (ot) 04 (€) suum a : T Ke T T T T T Tz i I | | | | | | cae sana °° : om , + yaaa z ‘ + wiPo z . Asaugpou z . jerora] ae | waxor | | | om | @ Ta | oo |) fn ame | ato ure] | inn a 4302 |poayseno} 4809 #902 | anoqoy jay | L9IOW ior | amo, | sgor | 00007 mere ‘492000 fugyooupeds| PHL ayouys3gsi-zuas WAISAS UOlHOWIOJU| uolous4 jsoj Buipynadiys SB sjuawjsodaq 48410 ty so) UO!JINPOld 4noqo> uol}O}N2}0 |soD jonny }so} yonjaD4ju0 BJOMIJOS UO!OINI|OD, aspysindg a SB10|S BJOM|JOS sisA|DUY uo|oWISsa {sO (oDjloasol ed: meres 4s} JOWayOW oa jo aspqojog Wea ss sg gH OMHHOOOO OCP CEE HOH BBWS OAePaasaG Estimation’, The salient features are extracted in drawing up the cost equation described below. 9 G Ship cost is divided into two main categories - steel and labour. Labour includes o overheads also, No subcontracted work is assumed. Each component is subdivided into three groups - steel, outfit and machinery. The steel labour data analysis showed the o relationship oC wis e ae Ree Gs (Ce een Ke oO a Where W, Steel weight in tonnes L : LBP in metres R, : Manhours/tonne K _: A constant based on shipyard and ship type. CO manhrs | t and Total manhours H = R,.Ws Total Labour Cost = H x wage rate x a constant for overhead ‘© = AWE LIC, Q Outfit labour cost was shown to be dependent on outfit weight as ae : Total outfit labour cost = CW. “ Where C= £ (wage rate, productivity, overheads) and it is a function of the e shipyard and, W, = outfit weight in tonnes. In the absence of any definite correlation between m/c power and weight, the machinery labour cost has been shown as ¢ machinery labour cost = F.P* °8889S PoP PoP ah aP OP oPo oO Where F’: factor dependent on shipyard as before, P : service propulsive power in KW Material cost has been shown as, Steel material cost. = B'W,!* Ourfit material cost. - D’W,°% Machinery cost = ope Thus the total cost Pes 2 GA WILT G+B WOW 1D WOP +r Pees gp oe or ae sas G =A WILT Gt. YO DW +B! pom Where B=F+G. Once the constants A‘ to E’ have been established for each shipyard, it is convenient to study the effect of main dimensions on ship cost. Effect of small speed change on cost (L, B, T and D remain constant) Change in C, : G, « ¥~% SS Katsouli’s formula etalce = on elas Gao v Change in A : A= LBTG, x 1.031 o 8a=5.8GIG = -06135.4. F 3-1Change in machinery weight : 2 Weight « Power & Va? for small changes of V. 2 We «Via ? yO és or 8 We 3 Ke Se 3. WK, Ht See eas Way - 3. 0.6135. 27 - - ous by Wi, (3.0 - 0.409) 29: 2.591. Hy =F Similarly, 8P = 25917, 9¥ Change in cost of machinery material and labour cost (Cy) Cy = EIPOB on 8 Gy = 0.82. G, 2F sv = 0. 82 Gy 2-591. bv = 2.25 G, Change in steel weight : Approximately steel weight & displacement or We LBTG, 8G Then 3 We = Wee pes ov 0.6135. %. 2F Change in steel labour cost (C,) = Gt 3.( 0.0135). 2¥ +0. 6135 3%)oO bv = 0.2045. c,. SF Change in steel material cost (C.,) C= We x6 Gar ete clas ae The change in outfit weight and cost is assumed to be negligible for small changes in speed. BGs = 8 Gute Sas 8 by = 2.125 GP & F +9.2045 6, SY 0.6135 Coy SOME EXAMPLES OF RETURN ON INVESTMENT IN SHIPBUILDING A. Stage Payment In constructing a new vessel, shipbuilder’s investment is over a long period and in large quantity. To offset his non-receipt of return, statge payment by owner is adhered to. Main landmarks in the ship construction process are identified and some payment is made on reaching that landmark. Examples of such landmarks are contract signing, placement of order for steel and machinery, keel laying, 50% erection of steel, launching, installation of main engine, dock trials and delivery. Depending on present worth (PW) factor, the present worth of the total payment may vary whereas, the shipbuilding cost is estimated at present worth. So stage payment should be organised such that @ the investment of the shipyard is not held up unduely due to lack of timely return on previous investment and, Gi) the present worth of the total payment should be such that Ithe desired profit can be achieved. B. Delayed Delivery Very often the delivery of the ship is delayed due to some reason or the other. The delay causes heavy financial loss to the shipyard. This can be estimated and quantified also. The financial losses are due to the following reasons :w@ i) Gi) (iv) ™) Shipyard has to pay a penalty as per contract. Increase in overhead cost due to the following reasons - The production-independent portion of overhead cost increases due to increase in building period. - Drop in production efficiency or increase in idle labour add to overhead cost ‘The stage payments are made later since the landmarks are reached later. The present worth of this payment is much less than what was estimated earlier. ‘The entire building schedule gets upset. ‘The shipowner’s confidence level on the builder reduces. C. Series Construction If a shipbuilder enters into a contract with a single owner or'with a number of owners for construction and delivery of a series of vessels of the same design, he cam negotiate a suitable price keeping the following points in mind : @ Gi) (ii) (iv) There will be a reduction in material cost due to bulk order and purchase of material provided inventory cost does not increase. Due to improvement in learning process in subsequent constructions, mistakes made in the first vessel can be avoided and productivity increases due to worker's familiarisation with work. Thus the labour cost may reduce in latter vessels. ‘There is likely to be a drop in overhead cost since - the cost of design, development of rigs ete can be distributed over the entire series; - the delivery period for latter vessels may be reduced (improvement in production efficiency) thus reducing overhead cost. Taking account of all the above factors, building cost for all the vessels is estimated at present worth. If the contract for all the vessels is to be signed at the beginning also, care must be taken with regard to stage payment (which will be affected much later) such that the present worth of all payments match with the estimated building cost to bring in the desired profit. © | 888998888660°0°2° 0% 90 99° 99990 Pe Po! Q = ~ OO O@ Problem 1 : Tiree feasible solutions to the design exercise in appendix yield following results Design 1 Design 2 Design 3 Lee (m) 90.67 91.25 95.63 B(m) 15.90 15.51 16.11 D (m) 7.85 7.66 191 ig 0.50 0.497 0.609 MCR (kW) 5966 5836 6734 Steel weight (0 1668 1624 2078 M/c weight (1) $50 341 605 Outfit weight (1) 433 425 462 Do a building cost comparison of the three vessels and choose the optimum design assuming ( in $ units) (a) A’ = 1851, B’ = 436, C = 37169 D’ = 6466, F’ = 476, G’ = 1047 (b) Estimates A’, B', C, D’, F and G’ values of your shipyard based on previously built ship. Problem 2 : The basis of estimated cost is the solution of problem 1 (b) for design 2. If the speed is altered from 20 knots to (i) 19 and (i) 21 knots and main dimensions remain unaltered, estimate the change in building cost. Problem 3 : A shipbuilder has estimated that the building cost of a vessel at present value is P of which material cost is 55%, labour cost is 25% and overhead is 20%. With a profit of 10% he has to sign a contract with a prospective buyer. The negotiated payment terms are as follows : 20% at signing of contract 20% at keel laying (after time T) 31540% at launching (after time 2T) and 20% at delivery (after time 37) Assuming an equivalent interest rate of 6% for each time period T, calculate the contractual price. ‘The construction is however delayed such that each time period is extended from T to 1.5T. What are the implications of this delayed delivery in financial and othe contractual terms ? Problem 4 : A shipbuilder wishes to quote for a new ship with 5% profit over his totd investment He has to draw up a contract with an owner for a single ship who wishes to male 3 equal installment payments at the beginning, at the middle (after time T) and at the time of delivery (after time 2T). What should be the contractual price in terms of total investment of 100 ? Assume 4% interest rate for each time period, @ (ii) The owner wishes to order for 3 such ships, each such ship being built at T time interval. What should be the contractual price ? 3-16 a