Designing and building a superyacht is a lengthy but ultimately rewarding process that requires great attention to detail and collaboration with the shipyards. Will Mathieson, editor of TheSuperyacht Report, talks to the experts for their insights on how to handle everything from payment methods to operational logistics
When a client signs a new-build contract they enter into an agreement that, initially, could last anything from 18 months to four years, but in reality extends further. Even upon receipt of the finished article, an owner would expect to be covered by a warranty agreement that extends a minimum of 12 months, while the more astute shipyards operating in today's market have begun to offer lifecycle packages that service the yacht adinfinitum, at an additional cost.
It is, therefore, of paramount importance that the client and their advisers negotiate a contract that offers them adequate protection over the entirety of the build process, and guards against the numerous pitfalls that present themselves with a construction project of such cost and duration.
Unlike the market's mid-2000s peak, under today's constrained market conditions shipyards find themselves subject to increased competition, and a relative sparsity of new orders. As such, it is the most reputable builders who find themselves with a proliferation of contracts, and rather than combatting the client during negotiations, today's culture is one of co-operation and collaboration between both parties.
Broadly speaking, a shipyard will require a deposit, a series of clearly defined stage payments, and a final sum before the transfer of titles can take place. Naturally, failure to honour these staggered payments will trigger damages, invariably in the form of penalty fees for delays, a burden that also befalls the builder in the event of delays to the schedule. However, with a new-build being such an idiosyncratic project, there are other factors to consider.
“Payments are [much] like custom yacht building,” explains
Royal Huisman’s Managing Director Roemer Boogaard. “A schedule is customised to a client’s liking; some prefer milestone payments, others prefer monthly or bi-monthly payment, and some create variations of both. Whatever is fair for both parties is good for both parties.”
At Royal Huisman, as with other top shipyards, it is deposits and bank guarantees that ensure contracts are closed. “We prefer to keep the rocket science out of what should be a clear, transparent transaction,” Boogaard says.
Despite the industry historically promoting various loopholes to reduce the VAT liability on a new-build, YPI's Director of Sales, Russell Crump, says it is a thing of the past. He recommends that, if an owner is going to register their vessel as private and use it within Europe, they must accept the reality of VAT and pay it accordingly. And because the European fiscal landscape is somewhat confusing, Crump suggests seeking advice from a corporate services provider at the very beginning of the process.
The operational profile of a superyacht will have a profound effect on its design, and as such, the parameters of the new-build contract. "It begins at 24 metres [78ft 7in] and then the next milestone is 500 gross tons, which is probably the biggest one because it influences how we build the boat, and subsequently, how the owner operates the boat," says Heesen's Sales Director Mark Cavendish. He explains the 500 gross tons figure presents a watershed of sorts, as vessels larger than this figure are subject to commercial maritime regulations, which impact the build process, and thus cost. "It leads a lot of clients to [opt for] yachts below 500 gross tons,” Cavendish says. "And it means we're forever playing around with the ratio of length, beam and height to get the most interior space within that rule."
The introduction of the Maritime Labour Convention too, which applies to seafarers' rights, requires more cabin space for crew members working aboard superyachts and minimum manning requirements for yachts over 500 gross tons. "If you take these minimum manning requirements and multiply them by the square-meterage of cabin space you need for crew, it sets the amount of space you have to set at, generally the front of the vessel, for crew," says Cavendish.
Even the dimensions of the engine room will be governed by regulatory requirements, with the introduction of emissionsbased regulation, MARPOL Annex VI Tier III on 1 January 2016. As Cavendish explains, this is currently only applicable to vessels over 500 gross tons, so if an owner is looking to exceed this ceiling, he suggests "breaching it by a long way," as the necessary equipment is both sizeable and expensive.
Sales Broker Will Bishop is YPI's sailing yacht specialist and he says the cabin configuration and optimisation of volume on board a sailboat is of even greater importance, if the owner intends to charter their vessel. "It gives clients far greater scope to invite guests, and ideally, they would expect a VIP, a master and two twins." Bishop explains that he has a number of clients whose vessels actually turn a profit via charter, but he attributes this to their very particular cabin arrangements.
And it is also important to consider how the yacht's registration will affect its residual value. Crump recommends selecting a white listed and superyacht-focused flag state with which to register. "I'd stick with the Ensigns, and if you plan to build to [the Passenger Yacht Code, yacht-specific regulatory guidelines for vessels carrying 13-36 guests], I would go with the Cayman Islands. You've really got to be specific with what you want to achieve," he says.
As Bishop explains, owners should be aware that a superyacht is unlikely to hold its value, and that is why the negotiation of a fair price is vital from the outset. "The optimum thing is to look for a project that will offer the buyer a return on the operational costs. And another important thing is to have a broker that really knows what is available and where those boats can be bought so that capital investment is made at the right level," he says.
“An experienced new-build broker understands which yards are best placed to build a client project,” says YPI Managing Director Laurent Debart. “They can advise on the yards’ liquidity, their order books, their track record on building similar yachts and their delivery performance. Brokers work to protect the client’s short- and long-term interests, so once a yard is chosen, they will help negotiate stage payments, warranties and guarantees for the client as well as helping bring together the new-build team of experts that will ensure every step of the project is kept in check, on budget and on schedule.”
For pre-owned projects, the market continues to be the victim of a surplus of inventory, which has driven prices down. These prices continue to favour the buyer heavily, and as Bishop says, the recruitment of a good sales broker can help to cut the wheat from the chaff. It is also worth noting that today's asking prices rarely reflect the sales price, with anecdotal evidence indicating many resales are made at around 30-50% of the asking price. This is yet another reason why identifying a reputable broker will ensure that the buyer gets the best out of a transaction.
It is also worth considering the risks of not leaving enough financial manoeuvrability within a contract to build, says YPI’s Crump. “For me, one of the most important roles of the broker is to help ensure the yard is not tied down to an impossibly tight budget at the onset. I have seen a number of projects go off the rails and end up in trouble, even to the point of creating financial issues for the yard, simply because in their desire to get building, they were pressured into working to a budget that was not realistic. In this scenario, there are no winners. It’s a fine line between efficient costing and detrimental false economy.”
The reality of a new-build project is that its eventual cost will not match the initial cost specified in the contract; there are so many variables that additions and subtractions are inevitable. But over its course, client and builder should work together to anticipate as many of these costs – often incurred by changes to the specification on the part of the owner – as possible.
"It's a negotiation process,” says Cavendish, "because everyone has a budget that they want to stick to." He says the costliest changes in the midst of a project are related to materials and modifications to the AV systems. "We have no interest in overpricing a boat because you become uncompetitive in the market and owners don't like it. But it is a high-end product and owners want the best so it's a matter of discussion as to how far they want to go to get that level of luxury just right."
“We have no interest in overpricing a boat because you become uncompetitive in the market, and owners don’t like it”
The role of the project manager in this process is a key one, says YPI’s Debart. “When you watch a newly built superyacht glide into the water, you are witnessing the culmination of some of the world’s most high-precision engineering, pioneering design and advanced technology – the result of thousands of man hours from hundreds of exceptionally specialised and talented workers. The project manager is the person that makes sure all those people are focused on one thing – producing the vessel the owner has dreamed of on time, on budget and to the correct specifications.”
It is therefore crucial to appoint the right project manager, according to Nikolas Rabier, YPI Head of Yacht Management. “All yards appoint a quality project manager, however, we believe it is vital that owners appoint their own project manager acting in the owner’s interests. Project managers are the owner’s vital link between him and the yard, designers, marine architects, interior fitters and suppliers. Communication and experience is key. The person chosen must be compatible with the owner, and for such an important and far-reaching task, they must have a proven track record in project management, able to negotiate with the yard to ensure the yacht receives its fair share of management attention and labour time compared to the yard’s other projects in build, able to find the right line between the owner’s interests of building the highest precision yacht as quickly as possible and the yard’s frequent aim to keep costs to a minimum.”
There will, says Rabier, always be changes to the specs or design during a build, from the owner, flag state or even for classification requirements and these need to be negotiated, timetabled, noted and costed so budgets and timings do not go astray. “It’s the project manager, working with the owner’s yacht management company, that will track change orders and report on them regularly to the owner,” he says. “We recommend a professional project manager for the role, someone with the skill to work their way through it all for the best result possible for the owner.”
This article was first published in the issue 2 of YPI printed magazine "360° Magazine"