Exploring the OBAC build contract
Tim Charles, owner of Crescent Custom Yachts, outlines the Open Book At Cost build method…
It is no secret that in recent years there has been a steep decline in the output of the North American 30m-plus new build market. Quite why this decline has happened has been attributed to many different things by many different industry stakeholders. However, Tim Charles of Crescent Custom Yachts believes that at least part of the issue was the North American shipyard’s determination to stick rigidly to the ‘fixed price’ build model.
“Over the last 10 years it became very clear to me that the North American Superyacht industry had some really big problems with its business model. Many prominent builders have closed their doors over the last 20 years, and few have managed to survive the ups and downs the everchanging economy,” starts Tim Charles, owner of Crescent Custom Yachts. “As you look around today in North America you can count the number of custom yacht builders on one hand that build over 100ft projects. I truly believe that the market grew to accept “fixed price” contracts on custom builds as the local industry standard and that ultimately was the demise of so many once successful custom builders.”
According to Charles, most shipyards do not have enough detailed information, design, engineering and scope definition to confidently make a fixed price bid at the beginning stages of a build contract. Invariably these same yards feel the downward pressure to outbid the competition, in terms of producing a reduced end cost, and fall foul of their inability to complete the project for the agreed upon fixed a price, thereby incurring the various negative consequences associated with failure on this front.
“Something had to change for us. Firstly, we had to remind ourselves that our clients are incredibly smart and successful people and even if the client is a ‘nice guy’ he has a team of wolves behind waiting to carve you up and not leave anything on the table,” continues Charles. “Understanding this we created what we call a ‘OBAC’ contract (Open Book At Cost). We are now on our fourth OBAC build project and we continue to evolve and fine tune it as we go along.”
For the OBAC contract, every line item, specific labour cost, material and overhead cost required to build the specified vessel is shown at true cost without any mark up or margin. With these costs factored in, Crescent Custom Yachts creates a high-level overall budget expectation based on the market, historic numbers and the complexity of the specified design.
“This weeds out pretty quickly if the clients cost expectations are realistic for a North American new build project,” explains Charles. Once we are past this point, we establish a time frame to develop the required detailed information to price of the target budget for the project and its true costs. We have the client pay for this phase and process and have them understand that if they don’t feel we are the right choice to build their project at the end, they own the information and can take it with them to another builder to use as a more detailed bid package – they don’t waste time or go backwards.”
By creating this consultative model Crescent Custom Yachts has diversified its revenue streams as well as creating a transparent and non-binding business model. However, this does beg the question, how does Crescent Custom Yachts make money of a build?
“We don’t use change order as our process does not require them, it requires us to communicate the target budget increases and time extensions to the build schedule,” continues Charles. “The only real negotiation we have is what percentage over true open book costs we agree too. Clients are business people and they know that we are in business to make money, it is just to negotiating what they are comfortable with us making on their project and what we consider to be acceptable to us given the time frame, overall utilisation of labour resources and risk.”
Charles concedes that this model may not be attractive to all owners and potential clients, given that it requires a significant amount of personal input and engagement on the part of the client. That being said, he believes that for those clients that prefer to develop a transparent partnership-style relationship, this may just be the solution to the North American new build conundrum.
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