FORMATION OF THE

SHIPBUILDING
AGREEMENT
NA 10 : CONTRACT AND SPECIFICATION

STI Academic Center

P. Sanchez Street corner Pat Antonio
Street Sta. Mesa Manila, 1035 Metro Manila
Government Role in Commercial
Shipbuilding Contract
• Government agencies may directly or
indirectly participate in contracts
between commercial shipowners and
shipyards

Reasons for involvement

• Long-term charter to a government
agency : Technical oversight in shipyard.

• Financial support to promote domestic

shipbuilding,

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Government Financial Support
in Shipbuilding

Mortgage
Direct Subsidy Indirect Subsidy
Guarantee
• Ensures loan • Government • Cost-sharing
security for ship covers a agreements to
construction. percentage of reduce shipyard
progress expenses.
payments.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Long-Term Charter to a
Government Agency
DOTr contracts private shipbuilders
for the construction of roll-on/roll-off
(RoRo) vessels and patrol boats, which
are later used for public transportation or
maritime security.

Technical oversight is provided by the

Maritime Industry Authority (MARINA) and
the Philippine Navy to ensure compliance
with contract specifications.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Mortgage Guarantee
Development Bank of the
Philippines (DBP) – Maritime
Leasing and Financing Program
• DBP provides loan guarantees and
financial assistance to Philippine
shipowners to modernize their
fleets and support domestic
shipbuilding.
• Financing is usually conditional on
construction at a local shipyard
to boost the domestic industry.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Direct Shipbuilding Subsidy
MARINA’s Domestic Shipping
Modernization Program

MARINA provides financial incentives

to shipowners replacing old vessels
with modern ships built in Philippine
shipyards.

The government may cover part of

construction costs if the vessel meets
safety and environmental standards.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Indirect Subsidy (Cost Offsets for
Shipyards)
Subic Bay Freeport Zone & Tax Incentives
The Philippine government offers tax breaks
and duty-free importation of shipbuilding
materials in special economic zones like Subic
and Cebu.

These incentives reduce shipyard costs and

attract foreign and local investors to build ships
in the country.

Hanjin Heavy Industries’ shipyard in Subic

(before bankruptcy) benefited from tax
incentives and infrastructure support to become
one of the world’s largest shipbuilding hubs.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Contract Deliverables and
Communications
• "Contract management should
commence the moment a contract is
contemplated, not after it is signed.“

• Ensures rights, obligations, and

inspections are defined before signing.

• Any contract terms must be built into

the agreement from the start.

• Once signed, additional contract rights

cannot be added.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Contract Deliverables
Documentation Correspondenc Hardware Training
Deliverables e & Records Deliverables Deliverables
• Drawings • Inspection • Spare Parts • Crew Training
(General Reports • Operating & on Ship-Specific
Arrangement, • Official Maintenance Equipment
Structural, Communication Manuals • Safety &
Electrical) s • Special Tools Emergency
• Reports • Change Orders Drills
(Progress, • Simulator
Inspection, Sessions (if
Survey) applicable)
• Test Results
(Sea Trials,
Performance
Tests)
Contracts and Specification Formation of a Ship Building Contract Week No.6
 Entire Agreement
• This section of the Agreement
reminds the parties that only
this Agreement and the other
documents to which it refers
constitute the binding
contract; and that any pre-
contract agreements or
understandings, whether
written or oral, have no
standing with regard to this
contract.
Contracts and Specification Formation of a Ship Building Contract Week No.6
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 Importance of Coordinating
Contract Documents
• Clearly identify all components
of the contract.
• Avoid vague terms like “most-
recently revised”—use specific
authors & dates.
• Ensure all referenced
documents are current, up-to-
date, and accessible.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Definitions, Abbreviations,
Interpretation of Terms
• Prevents misunderstandings in
contract execution.
• Ensures terms are interpreted
consistently by all parties.
• Reduces disputes over ambiguous
wording.

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 Definitions,
Abbreviation
s,
Interpretatio
n of Terms

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Definitions,
Abbreviation
s,
Interpretatio
n of Terms

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Delivery of Vessels, Options
for Additional Vessels
• This section of the Agreement
establishes the Delivery Date
of the Vessel and the place of
delivery. Sometimes the place
of delivery is other than at the
shipyard in order to address
taxes, operational limitations,
costs of delivery to the region
of intended use, or other
factors.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Contracts and Specification Formation of a Ship Building Contract Week No.6
ARTICLE III. COMPLETION DURATION OF WORK
A. The BUILDER shall commence construction works on the vessel only upon the
completion in totality of the following acts and deed:

1. Signing of the construction contract by the two herein parties; and

2. Receipt of Complete First Partial Delivery of Owner Supply Materials base on the Schedule
Delivery of Owner Supply Materials
The construction of the vessel shall then be completed and finished based on the scope of
work provide by the BUILDER in Three Hundred Sixty (360) good weather-working days
excluding Sundays & Holidays from the commencement date of construction works as
determined above.
Additional weather working days shall be added to such Three Hundred Sixty (360) good
weather working days to compensate for losses that may be brought about by delays in the
delivery of the OWNER supply materials and delays in payment of the OWNER to the
BUILDER.

Contracts and Specification Formation of a Ship Building Contract Week No.6

ARTICLE VI. ALTERATION OF CONSTRUCTION
A. Any changes in the specifications of the vessel under
construction, such as request to increase the capacity of the
vessel, or major changes in the specifications shall be subject
to the prior written agreement and/or conformity of the herein
parties.
B. The accomplished change order/s shall contain details with
corresponding cost adjustment the additional price, new
delivery period, etc.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Scope of Work and
Representations
Usually there are two major
aspects to the statement of the
Scope of Work, and several lesser
ones.
• The first major segment focuses on the creation
of the “hardware” aspects of the ship
construction project

• The second major segment of the Scope of

Work addresses the non-hardware, or
documentation, aspects, which are a vital part
of the completed ship
Contracts and Specification Formation of a Ship Building Contract Week No.6
ARTICLE II. SCOPE OF WORK
A. The BUILDER will provide the Following:

1. Labor for the completion of Steel Hull & Superstructure

2. Consumables such as Oxygen, LPG, Welding Rod
3. Equipment such as Welding Machine, Cutting Outfit, Chain Block
4. Piping Works
5. Deck Equipment Installation
6. Engine Equipment Installation
7. Testing & commissioning
8. Plans for Marina & Local Classification

Contracts and Specification Formation of a Ship Building Contract Week No.6

B. The OWNER will provide the following: 11. Classification Fee
1. All Steel Materials for the Completion of Hull & 12. Fuel Oil & Fresh Water for Dock Trials & Sea Trials
Superstructure 13. Commissioning, Security Personnel
2. Materials for Insulation, Electrical, Ducting, Paint & 14. Crane
Anode
15. Yard Facility
3. Sandblasting of all Steel Plate and Painting works.
16. Power Source
4. Machinery such as Main Engine, Aux. Engine,
Generator set, Pumps & Accessories 17. Painting Works, labor & materials
5. Stern Gear such as Stern Tube, Propeller Shaft, 18. Insulation & Ducting Job
Propeller, Rudder Sock, Rudder Blade, Rudder Casing 19. Electrical Works, Labor & Materials
6. Electro Hydraulic Steering 20. Carpentry Works, Labor & Materials
7. All Materials for Piping System 21. Launching
8. Machining Works 22. Warehouse
9. All Materials, Machinery, Equipments & Fixtures 23. Shipyard to provide adequate temporary facility
10. Registration Fee & Documentation for Marina area for builder

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Scope of Work and
Representations

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 Intellectual Property Rights
• Defines who owns the ship’s design after construction

• Prevents disputes between the Purchaser (Shipowner) and

the Contractor (Shipbuilder)
• Ensures that if the shipyard uses the same design for
another client, the original Purchaser is compensated
• Protects trade secrets and advanced technologies
developed during construction

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Intellectual Property Rights
• If a shipowner (Purchaser) funds the
development of an advanced propulsion
system, they may assume they own the
exclusive rights to that technology.
• However, the shipbuilder (Contractor) might
argue that since they provided the expertise
and infrastructure for development, they
should retain the rights to use it in future
projects.
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 Intellectual Property Rights
• The Philippine Navy's frigate project required
shipbuilders to develop a custom design. If the
government funded the entire R&D, it would
likely demand full ownership.
• However, if the shipyard invested its own
resources in design development, it might
negotiate a royalty agreement for future builds.

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Contracts and Specification Formation of a Ship Building Contract Week No.6
 Materials and Workmanship
• This section of the Agreement
typically sets forth the
requirement that all materials,
machinery and equipment
furnished by the Contractor
and incorporated into the
vessel shall be new, of current
production and currently
supported by spare parts
available in a designated
geographic region.
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 Materials and Workmanship
Broad requirements pertaining to the materials and equipment can also
be addressed in this section of the Agreement. Some of these may be:

the
the
provision of
the flushing provision of
all working
of all piping all fuel for
fluids in
testing
systems

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 Materials and Workmanship
Broad requirements pertaining to the materials and equipment can also
be addressed in this section of the
the Agreement.
use of Some of these may be:
only
materials
the
and
installation the use only
equipment
of safety of certified
approved by
guards welders;
the
around among
designated
rotating and other
regulatory
sliding possibilities.
or
equipment
classificatio
n
organization
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Contracts and Specification Formation of a Ship Building Contract Week No.6
 Regulatory and Classification
• The Agreement should state with which particular sets of
regulations the design and construction of the ship must
comply.
• These regulations will usually include both domestic and
international requirements; domestic because the ship will fly
the flag of a particular nation, and international because the
ship will be trading with other countries, for which port entry is
keyed to compliance with certain international regulations.

Contracts and Specification Formation of a Ship Building Contract Week No.6

Contracts and Specification Formation of a Ship Building Contract Week No.6
ARTICLE VII. TECHNICAL GUARANTEE

A. The BUILDER guarantees and warrants that the subject vessel shall be
constructed in accordance with Local Classification of the work provide by the
BUILDER in the General Arrangement plan and Outline Specifications
mentioned in Annex "A" and "B" above, unless otherwise altered or changed by
the parties concerned.

B. The design to be introduced on the Roro ferry shall be provided by the

BUILDER to the OWNER.

C. As soon as the BUILDER turns over the vessel to the OWNER, any or all
defects or problems suffered which are attributable to natural causes or the
natural wear and tear of the vessel shall be for the account of the OWNER.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Contract Price
• Under fixed-price contracts, the
price for the Vessel has to be
established, and the currency in
which it is payable has to be
stated as well.
• For ship conversion or repair,
line item pricing is often used, so
that if the entire item is
canceled, the adjustment of the
Contract Price is known if
cancellations
Contracts and Specificationare limited.
Formation of a Ship Building Contract Week No.6
Contracts and Specification Formation of a Ship Building Contract Week No.6
A. Contract Price
The price to be paid by the OWNER to the BUILDER under this contract shall be
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (PXXXXXX.XX) PESOS
Philippine Currency, which price still be referred to in this contract as the "CONTRACT PRICE". .

B. The payment of the contract price agreed by the parties shall be made by the OWNER under the
following schedule:
15% - Upon Mobilization, Mold Lofting, Start of Fabrication of Frames
15% - Upon Keel Laying, Erection of Mid section transverse bulkheads, double bottom tank.
10% - Upon Erection of 50% of Bottom Frames, 75% of Transverse Bulkheads
10% - Upon Erection of 30% Side Plate, 50% of Car Deck Frames, 50% of Engine Room Framing
10% - Upon 50% of Car Deck Plating, 30% of forward and aft section
10% - Upon start of Fabrication of Superstructure Framing up to Promenade Deck
10% - Upon Erection of Superstructure Sides & Deck Plating
5% - Upon completion of Hull Plating & Framings
5% - Upon completion of Superstructure up to Navigational Bridge Deck
5% - Upon Launching
5% - 15 days after delivery & acceptance

Contracts and Specification Formation of a Ship Building Contract Week No.6

C. Upon receipt of the progress billing, the OWNER or thru any of its representatives
has the obligation to give payment immediately but not beyond seven working (7)
days therefrom.

D. Any delay in the payment shall entitle the BUILDER to assess liquidated damages
at the rate of ONE THOUSAND PESOS (P1,000.00) per day of delay for each
corresponding billing within the first thirty (30) days and in the sum of TWO
THOUSAND PESOS (P2,000.00) per day after the first thirty days, computed starting
from the date each of the delayed payment becomes due, taking into account the 7-day
allowance indicated in the immediately preceding paragraph. Such liquidated damages
shall be separate from and in addition to the storage charges that may become due
under Article IV, section B, hereof. In addition, the BUILDER has the option to cause
the temporary stoppage of work in the construction until payment is made and resume
the work only after actual and full payment of the amount stated in the billing.

Contracts and Specification Formation of a Ship Building Contract Week No.6

E. In case of check payments, it shall be considered as payment only at the time
it is actually encashed or honored and credited to the account of the BUILDER.

F. In the event that the BUILDER opted to temporarily stop the work and wait
till the OWNER cause valid payment, the period during which there was no
actual work shall be added to the period granted to the BUILDER to complete
the construction.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Unit Prices
• Scope, negotiated through
Change Orders, the Purchaser
will have to utilize additional
materials, subcontractor
efforts, engineering and
production labor. Further,
extensions of the project
schedule may necessitate the
provision by the Contractor of
additional days of shipyard
services
Contracts and Specification Formation of a Ship Building Contract Week No.6
 Unit Prices

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 Delivery of the Vessel(s) to
Purchaser
• The place and condition of
delivery of the completed ship
should be identified in the
Agreement. Usually, the place
of delivery is alongside the
shipyard’s dock; but
sometimes for tax or financial
reasons, the place of delivery
may be at another location

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Contracts and Specification Formation of a Ship Building Contract Week No.6
 Project Schedule

Contracts and Specification Formation of a Ship Building Contract Week No.6

 Liquidated and Actual
Damages (Delivery)
• The purpose of this section of the Agreement is to set forth an
acknowledgment by the Contractor that if the ship is delivered
later than either the original Delivery Date or any agreed upon
contract extensions, the Purchaser will incur financial damages;
and the parties agree in advance that the damages are
approximated by a certain sum per day of delay, payable by the
Contractor.
• For legal reasons, this is not necessarily a penalty clause,
although it may give the Contractor similar incentive to achieve
timely delivery. If, however, it is phrased as a penalty clause for
late delivery, then there should be a bonus clause for early
Contracts and Specification Formation of a Ship Building Contract Week No.6
delivery.
 Liquidated Damages
(Performance, Design)
• The Contract Specifications and Contract Plans may provide
target quantities, amounts, or dimensions for various aspects
of the ship. Many of them will undoubtedly be achieved
because of the design process. Some of them, however, may
not be exactly achieved, such as maximum trial speed,
minimum continuous operating speed, fuel consumption rate
at design speed and draft, maximum deadweight, draft at
maximum deadweight, or liquid capacity in certain tanks,
among other possibilities.

Contracts and Specification Formation of a Ship Building Contract Week No.6

 ARTICLE VIII. LIQUIDATED DAMAGES
A. The BUILDER shall indemnify the OWNER the sum of
PESOS ONE THOUSAND (P1, 000.00), Philippine currency,
per day for the first thirty (30) days of delay, and an increased
sum of PESOS TWO THOUSAND (P2, 000.00), Philippine
Currency, per day for every succeeding days thereafter.

B. The Liability by the BUILDER for the delay excludes any

delay in the completion of the subject vessel occasioned by the
fault of the OWNER and those caused by force majeure, the
weather working condition and Schedule of Delivery of
OWNER supplied materials

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 Reference
 Lamb, T., 2004. Ship design and construction. Jersey City, NJ: Society of Naval Architects and Marine
Engineers.

Contracts and Specification Formation of a Ship Building Contract Week No.6