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THE QUEEN MARY 2



Introduction

The Queen Mary 2 (QM2) is the world’s biggest cruise
ship. It is 1,132 feet long (147 feet longer than the Eiffel
Tower is high) and it weighs 150,000 gross tons. The
vessel will carry 1,253 crew and 2,620 passengers and will
be based at Southampton.

The total cost of QM2’s construction was approximately £550 million. The owners of
the cruiser are Carnival through their Cunard brand. The QM2 was built by the
French engineering group Alstom over a period of two years at Alstom Chantiers de
l'Atlantique shipyard at St Nazaire in western France.

The QM2 was officially launched on the 8th January 2004.
The naval architect for QM2 was Stephen Payne. He played a large role in the

success of the project and it should be noted that his responsibilities went beyond
those that would normally rest with a Naval Architect. After designing the ship he
acted as the pre-construction Project Manager before being promoted to Director of
Project Management for this ship and others Carnival had under construction at the
time. His endeavours have recently earned him recognition in the form of an OBE.
He accepted this award “as recognition of the whole team’s effort that contributed to
such a wonderful result”. The Royal Academy of Engineering has also awarded him a
“special” prize in January 2006 for his work related with QM2.


COMMERCIAL

Engaging their suppliers

From May 1998, Stephen Payne spent 2 years designing the QM2. Carnival then sent
the design to five ship yards that they felt would understand difference between liner
and cruiser. Potential bidders were selected on the basis that two had worked with
Carnival previously and the other three were yards that in the past had built prestige
passenger ships.


Regarding sub-contract suppliers, the architect has a makers list. Carnival would

normally agree with the yards that they can choose between one of three suppliers.
Carnival agrees in advance which three suppliers they could use. The yards would
then go and tender for the sub contractors. Carnival would then have the opportunity
to accept or reject the yard’s sub contractor.


If Carnival rejected the shipyard’s preferred supplier in preference for one of the

others on the Makers List then they would be required to compensate the shipyard for
any resulting increase in costs. However, having accepted a supplier (even though
they might effectively have been nominated by Carnival), the shipbuilder would
accept total liability for the provision of that equipment.


Risk Management

Risks and opportunities were not systematically explored prior to contract for the
QM2, although experience and good practice were employed to evaluate all aspects
of the ship’s design. Following the merger between Carnival and P&O/Princess the
combined newbuild group is in the process of developing a comprehensive database
of risks. A new employee has just joined the office to examine risks and maintain the
database.


Procurement Strategy

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Sent out ‘mini’ spec and arrangement plan. The outline spec had been designed in 2
years by a Naval Architect, Stephen Payne OBE. This included the concept design,
layout and weight estimates, basic technical parameters, power and speed.


Five potential contractors entered the competition. This number soon reduced to two.

These remaining bidders worked equally for about 4 months developing the project.
Ideas that both of them had were shared between all parties.

Price, delivery and time are important deciding factors for the decision process for
who wins the competition. The specification offered by competing yards would be
very similar.


At the March 2000 Miami Shipbuilders conference. The potential contractors

attended with one of them putting an offer on the table. In line with standard practice,
the remaining bidder was given the ball park figure of this bid and given the
opportunity to match it. They could not raise the working capital required to fund the
building of the ship with a price tag of £550M (20% paid during construction, 80%
on delivery).


The contract was developed about 2 months before they signed it. Carnival gave

Chantier’s (the winning shipyard) a copy of a previous contract for guidance as to
what type of contractual arrangements would be necessary. They adapted it to suit
their needs. It was passed to Stephen Payne for review, and then to a lawyer for
review.


Through historic experience, yards have experience and know what to expect

contractually.

Incentives / Pricing Mechanism

Similar types of contract are used for each of the different yards. Type of penalty
would be different, dependent on the market. The shipbuilders yards are keen to
please the cruise ship/liner operators. Most yards publish their accounts; on the QM2
build, Chantier’s made about 6 to 7 % profit.


Carnival would mention in outline spec anything that would be expected to cost in

excess of £30k.

A letter of intent was produced on 9th March 2000. This was not contractually

binding and could be broken by both parties without penalties.

The contract for ship was signed on 6th Nov 2000 with delivery scheduled for

December 2003.

QM2 had a one year warranty, provided by the yard. Certain major equipments have

separate warranties provided by the sub-contractors. Carnival do not have visibility of
cost of equipment or cost of warranty, that is kept by the yard. All projects are gauged
on price per passenger berth, through life.


A cruiser would normally have repaid itself within 3-5 years. Carnival work on the

basis that 10% of the price of a ship is planning and a portion of that will include bid
costs.


All Carnival ships are produced on firm priced contracts, whereby the price that is

contracted for is the price that Carnival pay. There is a very strict procedure for
working out how to cost for changes. Carnival’s guiding principle is: Don’t change
anything unless it is going to result in a marked increase in profitability.

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Typically in cruise ship building payment would be made 5% on signing

contract,15% during build and the remaining 80% paid on delivery.

Carnival has on occasions offered up front payments in order to incentivise

contractors. Market forces also incentivise the yards. The prospect of future business
is considered the biggest incentive.

Level of liquidated damages is higher in P and O contracts. However, Carnival
acknowledges that they will most likely pay for this somewhere in terms of paying
for risk.


Shipbuilders are also incentivised by pride. Carnival took people from the yard to

Cherbourg to keep them focussed.

Contract Negotiation

Carnival stated very early that they would need to work as a team. Due to good
relations for the first time the shipyard organisation gave the complete breakdown of
every single cost. They were willing to listen and negotiate with Carnival on very
basic costs.


Once the Letter of intent and main contract had set the price for the ship, both parties

were trading different elements of the specification. There was intense negotiation
and trading between them.


Chantier’s were building five other passenger ships at the same time. QM2 was

resourced at 1.7 – 2 times the level on a normal ship building job.

Complete planning and bidding process is about 10% of the cost. Therefore if a sister

ship was to be ordered it would be about 10% less.

The contract is considered ‘standard’. Contracts do not vary much between yards

although certain aspects are negotiated with the ship yards. The naval architect
negotiated the specification.


The contract was preliminary agreed with the yard before review by a lawyer and

finally signing. There is no specialist contractual team, other than the lawyer. The
naval architect had not undertaken any specialist negotiation training.


Performance Management

Although Industry standards exist, their application and their interpretation are not
consistent across companies. It is very difficult to enforce the standards.


Carnival would contract to the standards and say in the contract that the standards

apply. If the ship builders are not working to the standards, then it is unlikely that
Carnival would enforce it on principle; only if it is necessary and very important.


Ship builders would typically increase the cost of the next ship in order to cover the

additional work associated with meeting the standards on an earlier one.

If it is a new piece of equipment or a larger model of kit than they have had

previously would typically go and visit the supplier. Carnival places great importance
on relationships with suppliers, especially as the delivery period is relatively short.
After delivery the relationship for maintenance will be with the ship builder for the
first year during the warranty period before reverting completely to the ship owner.

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There is a group in Miami called Global Sourcing. They buy parts in volume on
behalf of the various Carnival brands and enable significant economies of scale to be
achieved.


Maintenance and support for some of the smaller parts have service level agreements.

Carnival would then have a number of contracts with suppliers for maintenance.

Ship building is done centrally. Once ships are delivered they are handed over to the

operating companies (brands). However, maintenance is a consideration in designing
the ships. The overall designs aim to be as maintenance friendly as possible.

Carnival have had variable experience of yards meeting contractual delivery.
Prototype ships have historically been very bad. Some could have been rejected on
grounds of incompleteness; however, there can be a commercial justification to
accept a vessel in poor condition.


QM2 was completed and delivered entirely to contract. The yard can be credited with

wanting to deliver the ship and be seen to be delivering a prestige product. It is not
felt that any specific intervention by the naval architect was essential to achieving this
smooth delivery. The relationship between buyer and yard is most important. The
architect would not personally do things differently. The individual relationships with
people are very good and this made a big difference.


They experienced some very big issues along the way. However because of the

relationships enjoyed by the team, these were all worked out.

Carnival’s current new build programme is spread throughout four shipyards. Three

in Italy (all part of Fincantieri) and one in Germany (Meyer Werft).There are four
project managers, each residing in one of the shipyards. With QM2 the naval architect
fronted up all the arguments with the yard. Historically a dispute resolution procedure
has never been required to be used. Problems were generally resolved amicably with
the yards. Early identification of problems by ship yards helps prevent this. In fact,
ship yards typically make proposals to ship buyers off their own bat.


For QM2 the naval architect did most of the negotiation and had formal training to do

so. Most of this was left to common sense.

Acceptance criteria are set out in the contract. Typically, these would require Dock

Trials, factory trials, onboard (alongside) trials and sea trials. For QM2, there was
comprehensive testing with measurements being made in each cabin. The ship had to
run for 8 hours at full power without anything go wrong. There are no formal aspects
for maintainability or reliability within the contract except some statements that
equipment has to be to marine grade/quality with a view to ease of
maintenance/reliability. There has never been a problem regarding interpretation of
acceptance criteria.




Lessons Learned

At the time there was no formal process for learning from past experience. This was
not regarded as a problem as small teams and good working relationships facilitate
the dissemination of good practice. A more rigorous approach using a database is
now in place.


CULTURE
Relationships

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