Contracting: A Primer For Yard And Owner©
By I. Michael Heine, Esq.
As the seasons dissolve cinematically from one to another, many of us slowly begin to recognize that our once great new boat has become a much loved older boat. What this often means is a project which costs "important" dollars, and the engagement of a yard to perform the work.
Most sailors have only one boat, a limited amount of time to enjoy it, and a budget. And most yards enjoy the good will of quality performance and proper management of their contracts. Yet, when the boat owner crosses the pleasure line into serious contracting, there is a danger of frustration. I know, money and time issues can be painful. On the bright side, it may not be necessary to have a lawyer beside you. Yet, it will be helpful to keep a few things in mind so that your ballad of the Owner-Yard Passage ends in an uplifting chorus extolling timely good work in the planned budget.
The real culprit in the tales of conflict between yards and owners, in my view, is not skullduggery; it is what I call avoidable oversight; i.e., sailing at night without a course and compass. So to assure success in the contracting experience, at the beginning of the transaction we need to chart and follow the important waypoints for the journey; namely, the documentation of scope of work, pricing, time constraints and conditions. Let's examine these topics more closely.
Waypoints
Written Contract or Memo
Do not be bashful. Business is business, (even in sailing) and a written document is essential. People tend to have lousy memories and differences in recollection. Inevitably these are what spawn a conflict where money is at stake.
Either the yard or owner can prepare the memo. There is no technical form that the "agreement" or "contract" need take; it can be by letter, memo, scrimshaw or penned with quill on the back of an old chart. I guarantee that it will pass muster in your state's Supreme Court if, at a minimum, it carries signatures and recites the exchange committed to by each side. One caution to Ye of Quick Pen; when an ambiguity does arise in a written contract, a court will generally pick the interpretation which is against the drafter's interest. However, on balance, a not quite perfect memo is generally better than no memo at all.
Work
The contract should identify all the specific compensable tasks in a project which normally comprise and accompany the contract's primary activity. Be thorough. For example, if you are having your boat's bottom redone, clarify whether the price includes handling, yard storage over the winter, repacking a cutlas bearing strut or gudgeon, fairing, barrier coats (what process, number of coats), and resetting thru-hulls. For any blistering which may be encountered, describe the corrective work and how it will be priced; e.g. unit price per square area, or, (and this can be dangerous), time and material. If you need a new boot top, the issues will include the number of stripes, color and width.
The counseling point here is basic: Be meticulous. Be comprehensive. The balance of information between parties is a positive and leveling force in negotiation. I have found, regrettably, that owners are often disadvantaged in dealing with yards by their lack of technical sophistication. So, if the work to be performed is esoteric, you as owner might well benefit from an hour's worth of consultation with a good surveyor who can develop for you a comprehensive task schedule.
Pricing
Contract pricing should be thought through carefully. When the work activity and quantity is known before the work is performed, lump sum pricing is beneficial. Examples might include replacing canvas, deck teak or hull painting. However, where the work is identified, but the quantity not knowable until after the work is performed, unit pricing is practical. For example, the replacement of all plumbing to existing thru hulls, fixtures, pumps and tanks. At the end of the project, one can count up the quantities on the agreed unit price schedules, such as man-hours, hose footage, clamps, connectors and hangers.
For the budget conscious or inexperienced owner, time and material pricing ("T & M") could be a nightmare. There are some projects which, (perhaps attributable to short-term convenience), are priced out partly to a lump sum, and partly T & M. For example, the repowering of a yacht by substituting one manufactured engine for another such as gas to diesel - a common project. While the yard may have no difficulty quoting all the hardware, it may be less inclined to lump-sum the fabrication work. One engine's footprint is rarely that of another's. (Is the Atomic to Westerbeke the heralded exception?) On the other hand, the resistance of the yard to lump-sum the work in the engine room might turn on whether it has tackled a similar project on a sister vessel.
Another caution: A T & M contract with a cap on dollars is also dangerous. Yes, you can stop writing checks, but the work will stop, even though it is not completed. A vignette: The scope of work provides: Strip paint off bottom, repair all blistered fiberglass . . . Pricing: time and material; Work to stop when billing equals $10,000. The melodrama begins. The yard, at the time the job was sold, informs the owner with honest intentions that While [I] can't guarantee it, the job should not exceed $9,000 . . . but let's make it $10,000 to be safe. Do-si-do; the parties gently butt their heads, symbolically showing the meeting of their minds. Work starts. Unexpected conditions are encountered when the work is in progress. Oops! We have reached Act II of the opera; the project is only 60% completed and the cap is reached. Act III. Enter Pepsid.
In this slice-of-life the conflict between the yard and owner can be monumental. Obviously, a yard can only operate profitably by completing projects efficiently. Every stalled project creates storage issues, and a revenue impasse. The owner, on the other hand, is frustrated and adrift without budgetary controls in sight. Therefore, an owner who is considering a T & M contract should recognize the reality from the outset that a dollar cap may only be an intermission or seventh inning stretch. My recommendations are:
- Avoid T & M contracts where the scope of work is ascertainable before the work begins, and competitive yards are willing to quote a lump sum price for the project
- Avoid T & M contracts where you have not carefully investigated the reputation of the hands on mechanic for efficient, diligent and quality work.
- Explore the possibility that a fair yard may be willing to confine the T & M term to the preparatory work necessary to provide visible access to the subsurface, or unknown conditions. From that point the scope of work can be identified for a lump sum quotation.
Timely Completion
Timely Completion is a contract term not automatically measured by a utopian, or even, necessarily, an objective standard. It simply means a completion date to which the yard and the owner have agreed. If this item is not addressed, time can become a runaway disease, biting at everyone's groin. Owners and yards should face and deal with their needs. When a schedule is observed, smiles abound; the yard is proud, gets paid on time, and the owner respects the effort.
But be sensible here. There is often a legitimate justification for a minor delay. Fortunately, most yards are conscientious, and will respond to the moral imperative of an expressed firm completion date.
Fortunately, there are contract scheduling mechanisms which keep work safely on track. When the work scope has multiple major components a progress schedule can be developed which fixes milestone component completion dates and sequences along the way. For example, this might be a calendar day outdoor hull painting progress schedule incorporated in your contract:
| ||||||||||||||||||||||||||||||||||||
Given human nature, where a complex project has a single completion date and lacks interim milestones, the anxious boat owner who drops by the yard frequently to monitor the work (and push it along - who's kidding who?) is likely to be treated as a pain in the transom. Frankly, to an efficient yard, I am probably preaching to the choir. After all, a successful yard's revenue turns on completed work, and the management of the multiple and simultaneous activities does require effective scheduling.
An incentive provision in the contract can be helpful. For example: If the yard believes that the project will be finished by April 1, you might fix the completion date at April 15, but also plug in a bonus for each day early, and take a credit for each day late. Be sure to cap the adjustment so that the completion date can be achieved without either side getting killed.
Also, be sure to define the term "completion" . A function standard is often appropriate. For example, if the scope of work contemplates the installation of equipment which is not indispensable to the use of the boat, it would be unfair to both sides not to recognize completion (for purposes of an incentive clause) because of a late delivery of equipment not caused by the yard.
Payment
Frequently, a yard requests installment payments during the course of work. Indeed, some yards request payment in advance of the work. Use good judgment and build objectivity into your written agreement. I suggest these guidelines:
- Confine pre-work deposits to specially ordered goods and major pieces of equipment. Avoid any advance on labor. When equipment value is high, it may be a good idea to have an attorney help you secure title to the equipment at the time of the payment. Although the situation is unlikely to occur, it would not be one of life's pleasures to wrestle with the yard, other creditors of the yard, or a trustee in bankruptcy over title to your new engine.
- Tie all interim payments for work performed (including labor) to installed a defined pay period (several periods if the work is lengthy), so that the yard and owner can be tied objectively to identifiable work achievements; e.g. paint removal, filling, fairing, fabrications, installing an engine, hookups of all cables, hoses and lines, etc.
- In a very complex project, you might tie progress payments to the approval of the compensable work by an agreed upon knowledgeable and disinterested third party, such as a marine architect, experienced surveyor or recognized marine project manager.
Change Orders
Despite the best efforts of both parties to define the work that will be done in the lump sum price, unforeseen conditions may emerge which justify a price adjustment; usually it is up, rarely down. A well-drawn agreement will have a contractual mechanism requiring the yard, in advance of performing the claimed additional work, to notify the owner so that the price and schedule impacts of the new work can be mutually discussed. Although the owner must be willing to pay to remedy an unforeseen condition, only resentment and conflict will result if, without notice, the yard adds additional charges to the bill after the work is performed.
A more comprehensive agreement might also identify conditions when a dispute relieves - or does not relieve - the yard of the responsibility to proceed in the face of a dispute, and also describes the implications of unforeseen conditions which could materially alter the scope of the work. An example might be the discovery of a serious structural deficiency which (a) was not readily observable before the work began, and which (b) is discovered in a project that was bid on the premise that only the surface finishes would be refurbished.
Warranties
Warranties, (if an ingredient of your contract), are the legal devices which carry into the future the looks-good-feels-good-sounds-good condition which appears on the day the project is completed and final payment made. Warranties are creatures of both contract language and state statutes, such as the Uniform Commercial Code, as well as a vast quilt of consumer protection laws. Moreover, they can be layered. For example, if your yard is providing and installing an engine or genset, there may be, apart from the installation warranties, cumulative warranties of the manufacturer on the equipment, as well as those which the law imposes on a yard which is a reseller. The subject of warranties, both as to their creation, and elimination, can be complicated. Legal assistance is well advised where the project carries a substantial budget and the work affects the efficiency, performance, and structural integrity of the vessel.
Best intentions, healthy optimism and patience, while indispensable, are not adequate alone to navigate the contracting process. The best medicine for budget and time-controlled success, with minimum gastrointestinal and wallet distress, is twofold; first perform a thorough background check on the yard's and mechanic's reputation. Second, develop a comprehensive agreement which addresses the mutual expectations of the owner and the yard.
Contact Heine Associates, P.A.
Contact the firm online (Contact Us), or at 856-779-2525 to discuss your matter with an experienced litigator, mediator, and arbitrator.
