Material cost can be further broken down to steel, machinery, outfit and electrical and miscellaneous items.
Total steel cost is based on gross steel procured for the ship where Gross steel Nett estimated steel scrap= +
Steel material includes rolled plates and sections used for hull and superstructure con- struction, main and minor steel bulkheads, double bottom, decks, bulwark and steel seat- ings for machinery and equipment. The weight of some steel items could be grouped under steel weight or outfit weight based on shipyard practice, which may include steel forgings and castings and deck fittings, steel hatch covers, rudder plating, etc. Scrap depends on effective utilization of steel material. One way to minimize scarp is to use computerized optimal nesting of plates. The scrap percentage varies from 8% to 12% of gross steel.
The outfit items include materials such as timber, internal and external paints, primers and thinners, deck coverings, insulation, non-steel and synthetic bulkheads, ceilings and linings, furnishings and fittings, galley and pantry equipment, ship’s inventory, stores and spares, anchoring and mooring equipment, cargo-handling equipment such as cranes, air- conditioning and refrigeration equipment, ventilation fittings and equipment, life saving and firefighting equipment, ship’s piping and pumps, steering equipment, navigational equip- ment, hatch covers, ladders, companion ways and access hatches, windows and portholes, etc. Machinery items consist of all equipment, piping and valves and auxiliary support sys- tem components of main power-generating systems. In the case of a ship, this includes the propulsion machinery and electrical generation system and their auxiliaries. This also includes the CO2 system for fighting engine room fire, ER workshop and crane and pollu-
tion control system.
Electrical equipment includes main and auxiliary switch boards, cables, automatic and control equipment, radar, wireless, DF and VHF equipment and all electrical fittings.
Material cost must include all taxes, freight and insurance during transit. Taxes consist of local and central government taxes. An imported item may be delivered at the origin sea port on free-on-board (FOB) basis where freight for shipping, insurance and transporta- tion cost from destination port to the client’s site and customs duty must be added to the quoted price. On the other hand, if the quoted price is on cost, insurance and freight (CIF) basis, the transportation cost from the destination port to the client’s site and customs duty must be added to arrive at the total acquisition cost.
4.5.2 Labour Cost
Labour cost is generally taken as the costs of direct labour allocated for the construction of the product. This can be computed as the total wages, including salary and all perquisites of the labour as per job allocation for the product. Then
Labour cost labour rate number of mandays for the jobin question L
= *
= aabour rate Totalquantum of work Work per labour manday *æ
è
ç ö
ø ÷
There are three components for estimating the labour cost: (1) labour rate or average cost to company per labour man-day, (2) the total quantum of work based on the type, size and com- plexity of the product and (3) the amount of work done in one man-day or production rate, which also depends on the facilities available in the yard and the yard size, including size of building dock and/or slipways. To some extent this would also depend on the design, plan- ning and management. The number of man-days is the manufacturing yard’s norm based on its production efficiency and is estimated from previous data over recent years. For initial estimate of labour cost, it can be broken into four main components: steel, machinery, electri- cal and outfit labour. For final estimate, each of these components can be broken down further into particular jobs in different shops in the shipyard and labour required for each such job.
4.5.3 Direct Cost
Direct costs can be directly billed to the ship but cannot be attributed to material or labour. The examples of this cost are launching, transportation, installation and delivery expenses, insurance during the period from contract to delivery, expenses due to external
supervision by classification societies, statutory bodies, owner’s representatives, etc. If steel fabrication and assembly work are subcontracted to a vendor, the subcontractor’s charges are direct expenses.
Normally, a negotiated contract is arrived at between the owner and the builder to decide a stage payment agreement such that the builder’s expenses are matched by the payments received. Despite this, if the builder has to take assistance from financial institutions, the repayment is a direct expense on the product. Further, if there is a delayed payment due to delayed production, there is a loss in the real value of money in addition to the penalty the builder has to pay. If the owner defaults in stage payment in the right time, there is also a loss of real value of money and the owner must compensate it by paying a penalty.
4.5.4 Indirect Expenses
A large portion of the total cost cannot be billed on the product’s account directly but is incurred due to the construction. These indirect expenses include the following:
• Full company establishment expenses such as rates, rents, water, electricity and other services
• Supervision cost of production such as wages of managers up to the chief execu- tive officer
• Design and drawing office expenses
• Expenses of purchase, planning and production control departments • Expenses due to quality control, administration, sales, marketing, etc.
• Capital and interest repayment on investment made in the yard on borrowed capital and inventory cost
Figure 4.6 gives a break-up of the total ship cost. Very often it is enough to consider the total cost made up of three components – material, labour and overhead – each with its own indi- vidual break-up. Thus, all expenses other than material and labour can be termed overhead. The overhead expenses are dependent on production as well as duration of production. Most of the expenses mentioned under indirect expenses are dependent on the duration of production, whereas the expenses mentioned under direct expenses are more or less dependent on total production. Thus, the overhead expenses can be subdivided into two subgroups as (1) fixed, which is dependent on the duration of production and (2) variable, which is dependent on the quantum of production. When the annual accounting of the yard is carried out, all other expenses not billed under material or labour are termed overhead expenses, which are then proportioned to the ships (fully or partially) constructed that year. Doing a statistical analysis of these expenses, one can arrive at some norms regarding the percentage in which the fixed and variable overhead expenses can be apportioned.
Very often labour cost and overhead cost components are difficult to estimate separately and, therefore, these are expressed together under the broad heading of labour cost. Some factors that affect this labour cost are discussed as follows.
4.5.5 Production Quantum
The quantum of work involved in constructing a marine structure or vehicle can be expressed in terms of weight such as deadweight or steel weight. But either of these items is not a proper measure since it does not take into account the dimensions or size of the
vessel and the machinery installed. The volumetric measure of a ship’s volume is GT given by
GT k V= * , where
k is a coefficient based on the total volume V defined by Tonnage Measurement Rules, 1969, of the International Maritime Organization
V is the total enclosed volume of the ship
Also the complexity of the vessel plays a major role in determining the quantum of work involved. The complexity can be thought of as directly related to the number of compo- nents in the unit, and in the case of steel construction, plate preparation required, weld
Direct expenses Direct expenses Factory work expenses Production over head Indirect expenses
Office and administration establishment overhead
Sales and distribution
Profit Cost on sales Cost of production or gross cost Sale price
Labour Prime/directcost
Works/ manufacturing
cost Material
FIGURE 4.6
length, type and complexity of machinery and equipment, etc. Keeping this in mind, the Organization of Economic Co-operation and Development (OECD) Working Party on Shipbuilding (WP6) developed compensated gross tons (cgt) along with the Community of European Shipyards Association, the Shipbuilders Association of Japan and Korean Shipbuilders Association. The cgt system is a statistical tool developed in order to enable a more accurate macroeconomic evaluation of shipbuilding workload which is possible on a pure deadweight (dwt) or gross tons (GT) basis. Compensated gross tons is a unit of measurement intended to provide a common yardstick to reflect the relative output of merchant shipbuilding activity in large aggregates such as ‘world’, ‘regions’ or ‘groups of many shipyards’. Cgt is defined as
cgt A GT= * B
where A and B are given in Table 4.1 as per the report published in 2007 (NCCV means non-cargo-carrying vessel).
If series construction takes place, later ships in a series can be built with lesser quantum of work because (1) the jigs and fixtures built for the first ship can be used for subsequent ships, (2) learning process improves as more ships in a series are built and (3) not only work can move faster but also rework due to mistakes and errors reduces. OECD data show the total labour effort (y) required for subsequent ships reduces from the first ship effort by a ratio given by
y= 1 0 1483– . ln( )i
where i is the number of ship in the series varying from 1 to 10. Table 4.2 shows reduction in effort y.
Though no data are available, it is assumed that there will be some reduction in the total effort if similar ships are built even if these may not be sister ships.
TABLE 4.1
A and B Values for Calculation of CGT
Ship Type A B
Oil tankers (double hull) 48 0.57
Chemical tankers 84 0.55
Bulk carriers 29 0.61
Combined carriers 33 0.62
General cargo ships 27 0.64
Reefers 27 0.68 Full container 19 0.68 Ro–ro vessels 32 0.63 Car carriers 15 0.70 LPG carriers 62 0.57 LNG carriers 32 0.68 Ferries 20 0.71 Passenger ships 49 0.67 Fishing vessels 24 0.71 NCCV 46 0.62
4.5.6 Production Rate
Production rate can now be defined as cgt per man-hour and is a function of a number of variables which are not easy to define. Some of the factors can be stated as follows: (1) sophistication of equipment, lifting capacity and facilities; (2) yard size or total area of building berths and (3) use of modern management practices utilizing modern IT prac- tices and product lifecycle modelling. Based on these technology factors, the National Shipbuilding Research Program of the United States (2001) has defined six levels of ship- yards (Lamb 2007). The first level of shipyard has the so-called traditional shipbuilding practice with least sophistication of equipment and using slipways for ship construction. Sophistication of equipment, shipbuilding and management practices improves with the increasing level reaching the highest sophistication and minimum crane lifts at level 6.
The production rate increases with increase in the level of the shipyard. Sometimes production rate is also given as cgt per m2 of shipyard area or shop floor area or build-
ing berth area since all these have a bearing on production as discussed earlier. Further, production rate also varies based on the workload in a particular shop, being maximum with optimum work load. If workload is less, the production rate reduces resulting in idle labour. On the other hand, if the workload is more than the optimum capacity, errors in work result causing increased rework. Thus, production rate varies widely from nation to nation, reflected in the sophistication of the yard, and also in the same country based on yards’ order book position. This is reflected in Table 4.3 prepared in 2012.
4.5.7 Financial Complications
Considering financial terms in a small established shipyard which builds small boats and launches or in a well-established medium or a large shipyard, there may not be any finan- cial input to the shipyard which needs to be taken care of in the shipbuilding cost under overhead expenses. On the other hand, in a shipyard which is being upgraded or a new shipyard, there is a large amount of financial input due to infrastructure build-up, which may reflect in the shipbuilding cost under overheads. Of course this expense should be compensated against improved production rate. It is well known that financial inputs play a major role in shipbuilding cost, but it is rather difficult to define it exactly. Many a time,
TABLE 4.3
Shipbuilding Productivity in Various Countries
Area/Country Year MH/CGT Europe 2007 12–15 Japan 2007 9–15 Korea 2007 16–21 China 2007 52–103 India 2007 42–117 TABLE 4.2
Reduction of Effort in Series Construction of Ships
Number of the
Ship in Series 1 2 3 4 5 6 7 8 9 10
the builder may compromise with material and construction quality for better cost control, which also compromises with design and performance.
4.5.8 Labour Rate
Labour rate is related to the living standards of the country of the shipyard. As can be expected, labour rate is low in developing countries and high in developed countries. Figure 4.7 (Zakaria et al. 2010) shows the relative labour rate in various countries around the world. The ratio of the highest to the lowest labour rate can be as high as 20 times. Thus, even if the level of shipbuilding yard in developed countries is higher, the total ship cost may be lower due to low labour rate. This is reflected in the recent order book posi- tions around the world, as shown in Figure 4.8 (Sea-Europe Ships and Marine Equipment Association 2012).