Non-Legal Fine Points of Yacht New-Build and Refit Contracts - V

THE DIFFERENCE BETWEEN AN “ESTIMATE” AND A “QUOTATION” MAKES A REALLY BIG DIFFERENCE CONTRACTUALLY…

It may seem to be only a small variance in nomenclature, but the difference between an “estimate” and a “quotation” makes all the difference in the world when it comes to a new build or major refit contract.

An estimate is just that, namely, a (hopefully educated) guess as to what a particular job will cost. In contrast, a quotation represents an offer to complete a defined scope of work for a firm fixed price.

A quotation details not what the job may cost, but what the firm or individual quoting will charge, irrespective of what it costs that firm or individual to complete the job...

In some sectors of commerce, final billings are expected — and in some cases even regulated by law — to be within 10% of any estimate originally provided.  However, in yacht and ship building and refit, there aren't any such requirements, except by specific mutual agreement between shipyard and customer. Moreover, any contractual rider that establishes such a limit is exceptionally rare.

Going into a big job on an estimate is very risky for a vessel’s owner. Against that, insisting on the quotation of a firm fixed price for a given job most often results in a higher price being ultimately paid for the job than might have been otherwise, if the customer had one opted to accept a looser estimate, or had chosen to go the route of time-and-materials billing.

The firm or individual who quotes a firm fixed price has to accept a greater level of risk, and so has to build into a quote a larger margin of error than otherwise...

Occasionally, a contract will be built around a third pricing concept, that is, an estimate with a firm fixed maximum price quoted. This approach is referred to by some as “NTE” (not-to-exceed) pricing.

NTE pricing is initially appealing to many. For it appears, on cursory consideration, to give the buyer a lower target price, while protecting him/her against the cost of the job reaching beyond a defined ceiling. However, unless the builder or shipyard is contractually incentivized to bring the job in below the NTE number, any not-to-exceed price ceiling will every time become the actual final price, and in reality, no different from a firm fixed price quote. To the contrary, the lower “estimated” price will almost always be illusory, and will not really offer anything other than temporary psychological comfort.

There are, in fact, ways to make the NTE contract work to the benefit of both shipyard and owner, but that is a discussion for another day...

When comparing estimates and quotations, it is a mistake to think that a relatively low shop rate will result in a lower bill. It does no good to secure a shop rate per hour that is, say two thirds of competitive estimates, if the number of hours eventually expended by the shipyard offering the lower hourly rate is twice as much as for competing yards.

It is also a mistake to focus solely on shop labor rate, to the exclusion of other billable costs and charges. For example, a relatively low shop rate may be accompanied by additional charges for facilities support, dry dock days, consumables, environmental controls, and so on. The bottom line is that it is the bottom line that counts, not how you get there.

The next installment in this series will deal with emergent work and change orders. — Phil Friedman

Author's Notes:  The information, opinions, tips and comments here are based on my 30 some years in the yachting industry, including my several year stint as president and CEO of a major, world-class megayacht builder.

If you find yachts and yacht building of interest, you may want to read some of my other marine industry related articles:

"Sizing Generators to Run Greener and Cleaner"

"Ten Insider Tips on Yacht Build Contracts"

"App or Not, Garbage In Means Garbage Out"

And if you'd  like to receive further installments of this ongoing series, or regular noticiations of my other writings on a regular basis, click the [FOLLOW] button on my beBee profile.  As a writer-friend of mine says, you can always change your mind later.

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About me, Phil Friedman:  With 30 some years background in the marine industry, I've worn numerous hats — as a yacht designer, boat builder, marine operations and business manager, marine industry consultant, marine marketing and communications specialist, yachting magazine writer and editor, yacht surveyor, and marine industry educator. I am also trained and experienced in interest-based negotiation and mediation, and am currently supervising, as owner's representative, a new yacht build in Taiwan. In a previous life, I taught logic and philosophy at university.

The (optional-to-read) pitch: As a professional writer, editor, university educator, and speaker, with more than 1,000 print and digital publications, I've recently launched an online program for enhancing your expository writing: learn2engage — With Confidence. My mission is to help writers and would-be writers improve the clarity of their thought and writing, master the logic of discussion, and deal with criticism and disagreement.

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Text Copyright © 2016 by Phil Friedman — All Rights Reserved
Images:  Courtesy of Port Royal Group LLC and Phil Friedman

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