With this post, I start a series of articles dealing with costs management in shipbuilding and shipping industries. I will first focus on cost estimating during the concept design phases.

Reliable and rational cost estimating helps the client to realise the magnitude of the investment and required finance, providing confidence in the their plans. Deltamarin’s cost model has been employed in numerous projects, offering cost estimating services across various types and scales for its clientele.

Typical cost estimate customers are shipowners intending to acquire a new ship or in need of converting or upgrading their existing fleet. Cost estimates can equally well be made for shipyards that are, for example, offering shipbuilding to a shipowner. Profit margins have decreased in many areas of shipbuilding, and the time to provide a quotation is always limited. It is therefore highly important for the shipyard to quickly prepare reliable cost estimates and respond to the inquiry.

I hope that you will enjoy reading. and please feel free to share your thoughts afterwards.

Projects, business and project business

Efficient and reliable cost planning and control are critical elements of every single capital-intensive investment project and among the most important cornerstones of successful business.

In maritime business, project cost management applies to both shipowners and shipyards. Shipowners acquire ships to run their business and to serve their customers. Shipyards build ships to fulfil market needs. Ship acquisition is a major investment of financial capital for the shipowner. For the shipyard, delivering ships in the required time and of the required quality calls for strict management of cash flows and external financing.

Misunderstandings and misconceptions about project cost levels, industry costs and market prices are common reasons for insufficient financing and budget overruns. Budget overrun is an evident sign of project failure and typically a result of a bunch of problems in project planning and management.

I don’t want to point out any specific projects that have ended up in massive cost overruns but, if you feel like reading more about specific cases, just type the words ‘cost overrun’ into your search engine, and add a word describing something you consider as, for example, a large structure, facility or vehicle. I bet you will get many results for further reading.

It’s not at all unusual for a large-scale, complex project to run into financial problems. In fact, it seems to be the norm in the project industry today. I would even say that anyone who has been involved in the management of such projects has, in one way or another, struggled with issues related to project finance.

Then it’s only a matter of project management skills, whether control of the project is regained or whether the situation leads to the accumulation of new problems. If you want to learn more about project performance, please remember to read the recent blog post on the subject by Jari Mäki.

After all, it’s all about money

Cost control already begins when the first idea for a project has been initiated. To create a reliable framework for a project, those involved in cost management and financing must have a clear understanding of the costs and capital flows associated with undertaking the project.

When you, as an executive of a shipowner, hear somebody telling you that we need to increase our fleet to respond to market demand, or to modernise our fleet to comply with the new regulations, what is the first question that comes to mind?

Or, if you are a shipyard executive and your sales manager excitedly tells you, “Now we have the chance of a lifetime to enter that new market we have been aiming for”, and “We’ve received an inquiry from a shipowner to quote for their new ship and now there is the momentum to take that big step”, all you have to do is to make the decision. What is the first question in your mind?

If the question is “I think I need some coffee”, don’t worry. That’s completely fine. Especially if you are a coffee drinker like me. Some say that caffeine boosts mental focus and thinking skills, and that it’s not harmful for a person to drink a couple of cups per day. But I guess that right after you get yourself focused, the real question in your mind is, “What will it cost?” and “What´s the benefit for our business?”

To give you the answer, somebody must estimate the costs. After all, money is what runs every business. In the case of capital investment project, to make correct decisions and to manage associated cost risks, you need to know how much you must invest, where you can get finance, when to invest and what the return on investment is.

As I said, a project’s cost control begins when the first idea of the project is initiated. To know how much financing you need for your project, you must have a cost estimate. To make a reliable project plan, you must have a cost estimate, and you also need one to compile a budget you can trust in and avoid unexpected cost overruns in your project. Yes, that’s right. You must have a cost estimate.

Cost estimates are approximations of the monetary resources required to complete the project successfully and establish the basis for your investment and project financing. There are different methods and techniques for cost estimating such as expert judgement, analytical techniques and computerised solutions.

Please read on to see how Deltamarin can support you in this area of business.

The importance of cost estimating in initial design phases

Acquiring a capital item like a ship, is a major investment. When talking about marine and offshore industries, design plays a significant role in the acquisition process. Design is a process whose purpose is to create feasible solutions before implementing them.

Concept design is an evolving process that starts from developing the first vessel design in the feasibility phase. Once the project is considered feasible, design leads to the outline phase where the design is refined to the level required for shipyard tendering purposes. Finally, the process ends in the contract phase with the goal of eventually signing the shipbuilding contract. Concept design is also a process in which the shipowner makes decisions that will have an influence on the entire life cycle of the ship to be acquired and, consequently, have a long-term effect on the shipowner’s business.

The major part of the ship’s capital expenditure will be determined in these early design phases. During the design, there are many decisions to be made, so it is crucial to understand how these decisions influence cost accumulation and the required project finance.

Deltamarin’s cost estimating services

During its 30 years in business, Deltamarin has executed a tremendous number of projects for its clientele. For every project, we collect, process and generate masses of data.

Deltamarin has an extensive network of companies with which it cooperates during the different design phases. In addition to the shipowners, shipyards, classification societies, authorities and other parties involved in our daily business, we also work closely with numerous manufacturers and suppliers serving the industry.

Deltamarin has an extensive network of companies with which it cooperates during the different design phases. In addition to the shipowners, shipyards, classification societies, authorities and other parties involved in our daily business, we also work closely with numerous manufacturers and suppliers serving the industry.

As a result of extensive contact network, our central role and fruitful long-term cooperation, over the years we have not only collected technical data and specifications, but also received a considerable amount of cost data. Needless to say, the amount of data accumulated over the years is massive.

IMO’s ambitious greenhouse gas strategy and future regulations have made many shipowners concerned about the future of their existing fleet and led them to look for potential options in order to future-proof their fleets.

As there are many alternative technical solutions on the market to respond to the future regulations, it may be difficult to evaluate which is the best solution for your needs. When considering several new technology alternatives, it is even more important to understand overall cost implications. As an independent organisation, Deltamarin can help you to objectively evaluate how well different options will fit your purpose and budget.

We use different methods to provide cost estimates for our clients. Our methods range from analogous estimates in the feasibility phase to the parametric method as soon as the main parameters of the ship are known. With Deltamarin’s digital toolkit and our DeltaWay platform, we are on the fast track to having the parameters of your ship defined very rapidly.

Better control with Deltamarin’s cost model

We, at Deltamarin, understand the role and status of our company in the market we serve. We are the intersection connecting the roads leading to the different players in the industry. As we know the players and how they connect in different projects, and as we have the necessary data in our hands, Deltamarin is the obvious partner in the network to respond to the demand of cost estimations.

We take our responsibilities seriously and turn our know-how into a service, which provides added value to our customers when they are dealing with their investment plans and project finance. That’s why we have launched our brand-new parametric cost model for the purpose.

Parametric cost estimates are produced using statistical relationships between historical costs and design variables like physical and performance characteristics defined during design. Deltamarin’s cost model is divided into a cost breakdown structure, utilising Deltamarin’s engineering groups system. This enables a hierarchical, product-oriented structure for our cost estimates, and allows us to see and evaluate how the costs of different groups influence the overall cost and how individual changes in design influence the cost formation within the groups.

I’m not saying that we can make all your cost-related issues disappear. No, we are not miracle-makers, although it might seem so when you look at the project references of Deltamarin. We do magnificent things, but no, unfortunately miracles are not in our scope. I can, however, promise you that, through our services, you will gain good insight into how the costs of your project are formed and accumulate during the design process, and how decisions will influence your investment and project plans.

Please feel free to share your comments and thoughts.

For more information about our concept design and cost estimating services, please do not hesitate to contact Deltamarin Sales and Marketing. Or, for a funny and light-hearted chat and for more information, please feel free to contact me.

Want to read more? See also our other published blogs.

For more information, please contact:
Jarkko Nurmi
Supply Chain Manager
jarkko.nurmi@deltamarin.com