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

DETAILED DEFINITION OF PAYMENT MILESTONES ESSENTIAL...

Most contracts for large-yacht builds and major refits include a schedule of “progress” payments. These are based on the achievement of designated milestones during the the project. Unfortunately, in the vast majority of cases, the number of milestones used to schedule progress payments during a project is almost always too few.

Just as often as not, the definitions of "progress payment" milestones are insufficient in detail to provide an adequate basis for financial control. For example, a designated payment milestone might commonly be described as, “Payment due of x percent of  contract price when the main propulsion engines are set.” Pretty clear? Not on your life.

A shipyard pressed for cash flow may choose to “set” the engines on their beds, long before other logically and operationally precedent work has been completed...

Far too often, a shipyard pressed for cash flow will choose to “set” the engines on their beds, long before other logically and operationally precedent work has been completed. Then, having drawn down the payment associated with such a "main-engines-set" milestone, will remove the engines in order to complete tanks, bilge plumbing, electrical in the engine room, or what have you. As a result, the original intent of the milestone, namely, to define and link a percentage of vessel completion to the release of a progress payment, is entirely defeated.

There are several non-exclusive, non-exhaustive precautions which can be taken to avoid this unacceptable situation...

• Every definition of a payment milestone should include an omnibus clause to the effect that, “…every task logically, operationally, or customarily accepted by industry standards as precedent to the achievement of this milestone shall, in fact, be completed.”

• Such use of an omnibus clause can be further improved by actually defining in detail every task or task group that must be completed prerequisite to the milestone being considered to be achieved.

• The number of "payment" milestones can be increased from the six or eight commonly specified, to 18 or more, thereby breaking the project duration into segments more amenable to meaningful financial control.

Best practice is to specify a milestone for each month or two of the anticipated total project duration...

Granted, during the course of any build, circumstances may require breaking with, or modifying the project schedule and its associated milestone designations. For example, engines might be late coming in from their manufacturer, or some other item coming up for installation may be delayed. But in such cases, the exercise of good judgment and experience by a project manager and/or owner’s rep can avoid seeing the build slow to a crawl, or even grind to a halt, as owner and shipyard argue about a progress payment being due or not. The point is have a reasonable baseline against which to work. ― Phil Friedman

The next installment in this series will discuss surveys, classification, and industry standards.

Author's Notes:  None of this series is intended to be legal advice. However, 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 shipyard.

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"

"App or Not, Garbage In Means Garbage Out"

"Financial Protections for New-Build Yacht Buyers"

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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. In a previous life, I taught logic and philosophy at university.

Currently, I am supervising, as owner's representative, a new yacht build in Taiwan.  For a free 1/2-hour consult concerning your current or planned project, email phil@portroyalgroup.com

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