Running Costs

Economics
Quotations
Ship Management Series
Fairplay Publications
,
Ship Management Series

Running Costs
By JOHN M. DOWNARD

Fairplay Publications
Published and distributed by
FAIRPLAY PUBLICATIONS LTD
52/54 Southwark Street, London SE1 1UJ
Telephone 403 3164
Telex 884595 FPLAY G

ISBN 0 905 045 27 0

Copyright © 1981 by John M. Downard

Reprinted 1982

All rights reserved. No part of this publication may be reproduced

or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or any information storage or retrieval
system without permission in writing from the publisher.

Printed by Page Bros (Norwich) Ltd,

Mile Cross Lane, Norwich, Norfolk NR6 6SA
The Author

The author was born in 1928 and began his career with the P & O Group
in 1944. His sea service was spent in tramp ships and bulk carriers and
included a period as a huil inspector and eight years in command. He
came ashore in 1968 and held positions as Assistant Marine
Superintendent, Fleet Personnel Manager and Assistant Fleet Manager.
He joined the New York based Fairfield Maxwell Group in 1975 as
Managing Director of their London ship management company. From
1979 to 1981 he was a Director of a shipbroking and liner agency
company and a marine consultant within the group. He was also a
Director of the U.K. subsidiary of Marine Management Systems Ine. In
1981 he was appointed a Regional Director for Reefer Express Lines Pty
Ltd.

iii
 Author's preface

I am grateful to Bala Subramanian for prompting me to write this book

and to Ann Maree Rees for her advice on how to set about it.
I am especially grateful to the following friends and associates who so
kindly gave me their constructive comments: Malcolm Kimber, Richard
Mills, George Shaw, Brian Hill, Jerry Sample, Ray Tyers, Alec Harding
and Bill Lowry. My particular thanks go to John Downing.
My thanks also go to Jane Kitching and Gill Cripps for their patiënt
efforts in typing the drafts and final manuscripts.

Dedication

To my wife

JMD
March 1981

IV
Table of Contents

Introduction terminology — management and ix

operations.

PART ONE
Chapter One Planning 1
creation and implementation of plans,
time factor, challenge and commitment,
short term and long term planning.
Chapter Two Budgets 4
money plans, costs centres, grouping
costs, budget organisation, responsibility,
approval, procedure and timetables,
preparation, assumptions, detail and
records, setting forms.
Chapter Three Accounting practices and procedures 13
affecting ship managers
terminology, types of accounting,
concepts, treatment of costs,
management accounting systems, ship
managers and accountants.
Chapter Four Arrangement— relationship o f ship’s costs 22
background, arrangement of costs,
relationship between cost departments.

PART TWO
Chapter Five Crew costs 29
basis of crew costs, component parts,
wages and methods of treatment, the
establishment, travel, other costs,
budgeting, choice of crew
Chapter Six Technical costs 47
factors involved, outside factors affecting
costs, cost centres and groups, budgeting,
anomalies, surveys and time out of
service.
Chapter Seven Supplies costs 61
responsibility for ordering, multiplicity of
items, costs groups including victualling,
budgeting.

v
 Chapter Eight Insurance costs 71
protection against loss or damage &
liability, the costs of insurance, factors
and rates, loss of earnings and war risks
and other insurances, budgeting,
budgeting for losses, reserves for
supplementary calls, prevention is better
than cure.
Chapter Nine Admininistration 81
overheads, apportionment of costs,
alternatives, functions, cost groups,
budgeting.
Chapter Ten Summary o f Costs Departments 91
inclusion of depreciation and interest,
daily running costs, policy and
consistency.

PART THREE
Chapter Eleven Control 94
continuously monitoring and adjusting,
changing needs, feed back, the report,
definition of variances, reviewing the
report, reasons for variances, action,
forecasts, the work plan, measure of
control and cost group requirements,
actual control.
Chapter Twelve Stock Control 102
value of stock, spare gear and supplies,
method of control.
Chapter Thirteen Purchasing, Quotations and Tenders 106
Goods and Services — quotations for
quantity and regularity, new building,
modifications, repairs and maintenance
and other services.
Chapter Fourteen Economies and Cutting Back 114
methods, the inefficiënt company and the
efficiënt company, effects of reducing
costs, methods of lay up, scientific
approach to reducing costs.
Chapter Fifteen The effects o f Ships’ Management and 122
Operations on each other’s costs
Ship management and the ship — factors
affecting operations, operations
department & factors affecting ship
management and the ship. Profit is the
prime objective.

vi
Chapter Sixteen Theories & Practices 127
Work study, planned maintenance, spare
gear control, computers, weather
routeing, cathodic protection, COW,
automation, paints, the organisation,
minimum crews, industrial psychology,
training and safety, registry, the ship, the
cost of the ship, MBO.
Conclusion the need for balance between technology, 140
crew and systems.
Reference Books and 141
Papers

vii
Introduction

Terminology
With the passage of time words take on different meanings, not only
within a language but also within an industry. There are three particular
words or terms used in the shipping industry today which are often given
different meanings. They are “operations” , “management” and “running
costs”. The meanings given to them in this book are as follows:
Operations: The functions associated with the earnings of a ship, i.e.
responsibility for obtaining cargoes, scheduling, stemming or ordering
bunkers, making arrangements for the loading and discharge of cargoes
and associated port activities and the lay up of ships. The term also
includes the sale and purchase and chartering of ships.
Ship management: the functions of taking care of a ship, i.e.
responsibility for manning, maintaining, supplying and insuring the ship
and ensuring that the ship is available to the operators for the maximum
amount of time possible. In other words, all the activities not carried out
by the operators.
Running Costs; the costs of managing the ship, i.e. the costs of all the
activities associated with management of the ship — the subject of this
book.

Costs, managers and ships

The level of a ship’s running costs depends upon the owner’s policies, the
condition of the ship and the mode of operation. Within these
parameters the ship manager has control, but there are other factors such
as changing economie conditions and trading patterns over which he has
no control and which, because of their potential overall adverse effects
on costs, can make a profit-making ship lose money quickly. In these
circumstances there is need for management flexibility and the ability to
adapt to new situations as they arise.
Just as no two managers are alike, neither are any two ships the same.
Even if two ships of identical design are built at the same yard at the
same time and sail the same routes with the same nationality crew all
their years of service, there will always be something which will make
them different; a collision, metal fatigue, a worn bearing, a faulty
electrical connection, a poor mate, a negligent engineer; the reasons are
many.

IX
Despite the variety of factors involved, the tasks and responsibilities
associated with ship management, and hence running costs, remain
essentially the same regardless of ship or mode of operation, i.e. whether
the ship is operated on a liner service or is tramping on time or voyage
charter. All ships have to be manned, maintained, supplied and insured
and thus have the same basic requirements. The way in which those
requirements are serviced and the costs of such servicing depends upon
the concepts of management practiced by the ship owner and managers
concerned.
The use of words like “concepts” , disciplines” and “systems” may be off-
putting, seeming to imply restrictive and thus mechanical management.
Rest assured, there will always be a need for managers to have flair,
individuality and initiative. Nevertheless a systematic approach to the
problems and tasks of management is essential, particularly in a business
as complex as shipowning where care and attention to detail are required
if “management by surprise” is to be avoided and costs minimised.
Systems should never be restrictive but should be an aid to managers.
They should not be imposed but should be developed and practiced by
involvement of managers and their staff. They should be arranged to
assist those with responsibilities for results and for communicating
information to others. They should be the basis for decision making,
planning and control. No system is perfect and all systems need revision
from time to time. But if efficiency is to be attained then there have to
be systems which are workable and easily understood by all concerned.
The very existence of a merchant ship depends upon its ability to make a
profit. Running costs are an integral part of the profit equation whose
other two components are earnings and voyage costs. It is the manager’s
job to see that running costs are always kept to an optimum level, i.e.
the appropriate level for the particular moment in time.
“Experience has shown that with a proper approach to planning and
control, good management can achieve superlative results and average
management good results” . (S. V. Bishop, M.C., F.C.A. See Reference
Books and Papers).
Chapter One

Planning

“I f y o u d o n ’t know where y o u ’re going, any road will

take y o u ”.

Without direction or objective no one action has any particular

advantage over another; for to go fast or slow, spend raoney or restrict
spending, may be equally right or wrong. In fact, to do nothing may well
be the best “action”. The mate who paints the huil of his ship without
knowing what is planned can be right if the ship is to be maintained in a
service where upkeep and appearance are important. He would be quite
wrong if the ship was going to the shipbreaker in the very near future.
Throughout their lives most people have a succession of personal
objectives and plan in one way or another to achieve them; career plans,
marriage plans, family plans, holiday plans to name but a few. Even
contingency plans in case something should go wrong. This planning is an
ongoing process, often involving more than one plan at a time, requiring
adjustments, alternatives and cancellations because of unforeseen factors
imposing themselves upon the plan. There is also frequent involvement
in one way or another in other people’s plans.
The creation and implementation of a plan more often than not involves
other people; family, friends, associates and staff. The involvement may
be direct or indirect requiring either agreement, cooperation,
understanding or acceptance by those involved. As always when dealing
with people, communication plays a large part in such relationships.
People will only be helpful towards a plan if they know what is is about
and how it is progressing.
Time is an integral part of any meaningful plan. Without a time scale
indicating when it will be put into action and completed, a plan is
virtually only a dream. The statement of a time table adds substance to a
plan. It commits the planner to something tangible and thus gives him a
personal responsibility towards attaining the objective on time.
Most plans are based on current information, past experience and
“assumptions” that certain things will remain the same, change in a
 specifïc way or be introduced or removed. The way in which these
factors are built into the plan to form a realistic objective depends upon
the skill of the planner. But the plan needs to be more than realistic. It
also needs to be challenging and skill is also required in setting objectives
that are only just achievable and which will stretch those who have to
implement the plan.
The failure of a plan is always a disappointment to the planner and it is
natural for him to seek reasons for such a failure. Provided that this post
mortem can be kept objective there is considerable advantage in such a
process, as the experience gained through any mistakes can be profitably
used in any future planning.
Business planning is very similar to personal planning. It is based on
objectives, involves other people and is affected by many outside forces.
It is based on past records, the experience of the planners, assumptions
and forecasts of future events likely to affect the business. As with
personal planning, flexibility and communication are important
ingredients in its implementation.
One of the most significant differences between business and personal
planning is that business planning has to be more systematic. It has to be
stated in writing for communication, reference and comparison purposes,
and the detail of planning and number of people likely to be involved is
much greater. A division of a large company must always consider the
effect of its proposed actions on the other divisions and on the overall
corporate plan. It must also consider the effect on government, union,
professional and industrial organisations.
The level of personal commitment is also very much greater in business,
because the planner puts himself on the line so to speak. His
commitment is professional and published. The plan has to be approved
before it can be put into effect and once implemented he has a
responsibility to see it through to fulfilment. He also has to give early
warning if something is going wrong and give official explanations if the
plan is not achieved.
Although personal planning can be described as short and long term,
these terms are used very formally in business. Divisional long term
planning forms part of the corporate or overall strategie business plan
which takes into account the intended direction of the company and large
Capital investment. The time scale is usually not less than four years and
may often be ten or more years in such areas as public works and high
level technology or ship building.
Short term planning is more closely tied to the financial year of the
business or organisation. This usually covers a period of about sixteen
months including time for preparation and approval before
implementation. Although such planning is for a short period it has to
consider the objectives of the corporate or long term plan. For example,
a ship manager deciding whether or not to dry doek a ship during the

2
next short term plan period must know whether or not the ship will be
retained in service or sold in the following period.
Flexibility is a key factor in any planning and ship managers probably
need to be more flexible in their approach to planning than most
business managers. There are any number of unforeseen factors which can
arise during a year of a ship’s life to cause plans to be shelved, cancelled
and even reversed. However, despite the changes and adjustments which
have to be made, plan and replan they must if they want to know where
they are going.

To summarise
All Plans Require;
An objective
A time scale
Implementation
Realism with challenge
Personal commitment
Most Plans;
Involve other people
Involve communication
Are based on past experience, current information and assumptions
regarding future events
Business Plans Require;
A systematic approach
Formal personal or departmental commitment
Analysis of non achievement
Forecasts or early warning of change
Coordination of internal planning
Departmental consideration of the corporate short and long term plans

3
 Chapter Two

Budgets

“I keep six honest serving m en

they taught m e all I know ;
Their names are W H A T and W H Y and W H E N
A n d H O W a n d W H E R E and W H O ”.
(Rudyard Kipling)

Whereas a time scale puts substance to a plan, money gives it uniformity,

bringing all the parts to a common denominator. There are very few
plans which do not involve money and plans in money terms are known
in organisations as BUDGETS.
Business budgets are based upon the plans and policies of the company
and, when completed, should be the best possible estimates of the costs
of implementing those plans. As with all estimates, their accuracy
depends upon the quality of the information and other factors used in
their preparation. Poor information will result in poor budgets and vice
versa.
Budgets usually fall into two broad time categories, short-term and long­
term, in the same way as long- and short-term plans. The short-term
budget usually covers a year while long-term budgets can be anything up
to ten or more years.
The budgets are also named to indicate the area they cover such as unit
or ship budgets, departmental budgets, divisional and corporate budgets.
Thus one can have a long- or short-term corporate budget or ship
budget.
Each unit budget is made up of many parts like the bricks of a house and
these “bricks” are known as COST CENTRES. To follow this analogy
for a moment; the bricks are brought together to form walls, or
departments and these in turn form the house, unit or ship budget. The
bricks can be large or small as required but ideally they should all be the
same size in financial terms.
In shipping, as in a number of other industries, the size of the cost centre
“bricks” can vary due to three factors.

4
 (a) Convention: the traditional way of grouping certain items together.
(b) Convenience: certain items fall naturally into groups.
(c) High cost items: some items are of such high cost they can only be
considered separately.
The following diagram shows how the cost centres of one department
relate to the unit or ship and the Corporation as a whole, in a fairly
typical shipping group. These terms will be used throughout this book
but it is important to note that the arrangements of particular cost
centres into departments is not rigid and in some shipping companies
they are arranged differently to suit new ship management concepts.
Nevertheless, the cost centre components themselves are still required if
the budget is to be constructed properly on the foundations of
management knowledge and experience.
The diagram shows how the cost centre of “Crew Wages” forms part of
the Crew “Department” budget which in turn forms part of the unit or
ship budget and so on, eventually forming part of the large corporate
budget.

Budget Organisation
XYZ CORPORATION
*Z Shipping Co. Ltd
Corporate YZ Freight Fowarders Ltd
Budget ADE Tankers Ltd
WEP Haulage Ltd

Z SHIPPING CO. LTD.

M.V. Red Line
Divisional *M.V. Blue Line
or Company M.V. Green Line
Budget M.V. Yellow Line
M.V. Brown Line

M.V. BLUE LINE

Technical Department
*Crew Department
Unit or Ship
■ Supplies Department
Budget
Insurance Department
Administration Department

CREW DEPARTMENT
*Crew Wages
Department
Crew Travel
Budget Crew Training

5
 Thus it can be seen that in the Z Shipping Company, for example, there
will be many cost centres and a number of “crew wages” , each identified
by the particular ship name.
As this book is about the costs of a ship, the factors concerned in
producing a short-term budget for such a unit will now be considered.
However, it should not be forgotten that the unit plan is in itself
dependant upon the Corporation short- and long-term plans.

Budget responsibility
Because managers have to work within budgets they are more likely to
achieve their objectives if they produce the budget themselves or are
involved in its production. Modern management follows this philosophy
and in most companies it is the managers who make the plans, estimate
the costs of such planning and who carry the responsibilities for
implementing and achieving the plans within the budgets. The number
and levels of managers involved will vary considerably with the size of
the organisation. A one ship company may only have one manager,
whereas a ten ship company may have an overall manager for a number
of ships and managers for each department. Regardless of numbers
involved, responsibility should lie with the person who produces the
budget or portion of a budget, i.e., the manager. Of course, he must
obtain approval before he can proceed with the implementation of his
budget, but once this is received he should be allowed to carry it out
with minimum interference.

Budget approval
Great care needs to be taken in approving or amending budgets. If the
guidelines given in the previous chapter are followed, i.e., that the
budget should be realistic, capable of fulfilment but challenging; and
providing it conforms to the overall plan, there should be little to amend.
It is the manager’s own plan and because he and his team have
constructed it, within the parameters laid down, they will do their best to
see it through. Unfortunately, there is a tendency for top management to
insist on a reduction in the budget as a matter of form, often in the
belief that the manager has probably set his figure too high and will
spend to the limit. This can have a detrimental effect upon the
relationship between top management and the manager concerned as,
having carefully prepared the budget in the first place, he will know it is
impossible to achieve at the reduced level without some amendments to
the plan itself.
Thus top managers should take care in pressing a manager to reduce his
budget. Of course they should challenge the budget and satisfy
themselves that the manager is not “playing safe” by overestimating. But
providing they are satisfied on these points, they should leave it alone
and if it is too high for the overall plan, seek a solution elsewhere.

6
Procedure and timetables
The annual budget usually aligns itself with the financial year. Budget
preparation at the cost centre level usually commences about five months
before the commencement of the new financial year. This allows
consideration of the acutal running costs of the first half of the current
year and gives sufficiënt time for completion and presentation of the
draft budget for approval. Providing all goes according to schedule, the
approved budget should be ready for presentation to the corporate
planners three months before the new year commences, so allowing them
time to include the data in their budgets.
The timetable should be agreed as company policy well in advance so
that all involved can be properly prepared and can plan their work
accordingly. An example of a typical timetable for work prior to a
budget year commencing on the lst January, follows.

The XYZ Shipping Company budget timetable:

15th July Department managers receive first half year results —
Commence preparatory work on costs centre
estimates.
15th August Department managers coordinate cost centre
estimates and present draft budgets to ship manager
for consideration.
lst September Ship manager discusses budgets with department
managers and on agreement coordinates into ship
budgets.
15th September Draft ship budgets presented to divisional manager
for approval.
lst October Approved/amended budgets finalised and passed to
budgetary controller.
As one would expect, the more complex the budget the more time will
be required to gather the information, calculate and estimate,
particularly in the first stages of preparation, i.e. the cost centre level.

Budget preparation
Accuracy, attention to detail and method are essential factors in the
preparation of a budget. The manager himself should decide the degree
of detail required. It should be sufficiënt to give him the answers he
requires, but no more, as too much information can create unnecessary
work and confuse matters. Essentially budget preparation depends upon:
Assumptions
Past Records
Current information
Detail

7
Assumptions: Many of these should be provided by top management in
order to ensure consistency with other budgets, particularly in such
matters as currency exchange and inflation rates. Other assumptions
should relate to corporate plans and policies, e.g., that the ship will
remain in service, but will be sold for scrapping in two years time and
thus will not be dry docked during the budget year being planned.
Whatever the assumptions and plans, they must be known before budget
preparation can begin.
Past Records: Examination and consideration of the previous year’s costs
and those of the first half of the current year can be of great assistance in
some areas, particularly of consumable commodities where it may be
sufficiënt to apply an inflation factor, or currency factor, to obtain an
estimate for the next year. Past records are also helpful in checking
against estimates to ensure that the new calculations are reasonably
accurate compared with past results.

Current Information: The quality of estimating depends very much on

the information available to the manager. If a manager knows that crew
wage negotiations take place each June, with any increases to commence
the following July, he can allow for an increase but can only guess the
amount. However, if the previous year’s negotiations allowed for wage
changes in two stages over a two year period he will know exactly the
amount of increase and his budget will be that much more accurate. This
applies to many areas in budget preparation and even the knowledge that
a strategically placed dry doek may be closed may have an effect on
repair costs.
Detail: When preparing a budget every item which will have a significant
effect must be considered. In some departments the number of items
may be so numerous that they have to be grouped under one cost centre;
nevertheless, the manager must know within which centre items are
grouped. Fortunately, in many cases the association of items is so close
that grouping is almost automatic.

Budget setting forms and their arrangement

There is a good maxim that every form should be as much use to the
person completing it as the person who gets it. Good forms are the
keystone of any system and one can never spend too much time on their
design in order to get the most effective result.
The form used to set the budget is called a “budget setting form”. It
should be arranged so that it helps the manager to prepare the budget
and be useful for reference later. Although he can group items into cost
centres as he wishes, in most industries there are some fairly
conventional ways of grouping costs and it is perhaps best to adhere to
these conventions whenever possible. It is particularly important to try to
be consistent and keep the same groups and cost centres from year to
year in order that useful comparisons can be made. With this in mind,
budget setting forms should be pre-printed to ensure standardisation, not
only of groups and cost centres but also of layout.
To avoid excessive detail on the budget setting forms it is preferable if
small items grouped into cost centres are listed in a separate manual for
easy reference. Thus the form should be as uncluttered as possible and
only contain relevant detail.
On examining the cost centres of each department, it will be found that
some departments e.g. Supplies, have many while others e.g. Insurance,
have few. In order to be able to summarise the costs easily on the form,
they are grouped together as follows:
Cost centres are designated 3rd Category Costs.
Groups of 3rd Category Costs are designated 2nd Category Costs.
The sum o f all the 2nd Category Costs is the lst Category or
Department Cost.
As stated earlier, if the cost centres, or 3rd Category Costs, are
composed of a number of items, these are not shown on the budget
setting form but are listed in a manual. An example of this is shown on
the next page. In departments where there are very few cost centres,
they will be designated 2nd Category Costs.
It should be noted that in addition to the need to group large numbers of
cost items, there are requirements for different levels of information.
Whereas top management may only want to know the total ship costs, or
the ship costs broken down into departmental totals, the ship manager
will want more detail and the departmental manager will want even
more, to be able to highlight fluctuations in the cost centres. The
significance of this will be seen when the aspects of control are
considered.
One cost centre which should be carefully avoided is that of
MISCELLANEOUS, a convenient dustbin into which staff can place
costs rather than take the trouble to seek the appropriate allocation.
There should never be a miscellaneous section in any budget as every
item of any significance should be accounted for.
Each cost centre is usually given a code number which forms part of the
overall coded company accounting system and these are printed on the
budget setting form. Codes simplify the allocation of costs, and adapt
well to computer and other accounting equipment.
It is usual to arrange the codes into numbered groups and sub groups for
easy identification of departments and categories; for example, crew costs
may be arranged into a 3000 series, technical costs into a 4000 series and
supplies costs into a 5000 series. Taking this one step further, 2nd
category “crew wages” may be arranged in the 100 group of the 3000
series (3100), “crew travel” may be arranged in the 200 group (3200) and
“crew other costs” into the 300 group (3300). “Ten” groups are arranged

9
 Z SHIPPING COMPANY

MANAGEMENT ACCOUNTING MANUAL

M.A.S. Codes — Department: Supplies

Ship Code: Refer to Ship Code List
Head Code: 5. Series 5000

2nd Category 3rd Category

Item Code Item Code Uncoded items included

Safety 5110 Safety equipment, Lifeboat

stores, Lifesaving equipment,
firefighting equipment
pyrotechnics.
Paints 5120 Drydocking paints, other
paints, primers, paint
solvents.
Cargo equipment 5130 Blocks, shackles, pulleys,
Marine Stores 5100 chains.
Ropes and wires 5140 Ropes, cordages, wires,
mooring ropes, mooring
wires, canvas.
Deck stores 5150 Tools, painting equipment,
flags.
Fresh water 5160 Dry doek requirements.

Chemicals 5210 Refrigeration, tank cleaning,

degreasing.
Gases 5220 C 0 2, Frecon, Acetylene.
Engine Stores 5200
Electrical 5230 Bulbs, tubes, shades, fittings,
wire.

(continued)

for 3rd category costs as was seen in the sample MAS Manual page
above.
These groups are usually preceded by a code to identify the ship and
followed by other code groups used by the accounts department to
identify suppliers, items to be re-charged etc.
Although the budget is for a whole year, it is usual to show costs for
each quarter year on the budget setting form, in order to highlight
exceptional changes compared with other quarters. To provide for this
the budget setting form is usually arranged with columns for costs for the
four quarters and a total column for the year.
Finally, each budget form should have space to show in writing all
assumptions used and estimates of out of service time for dry docking,
crew changes and any other items of importance.

10
Background notes
During the preparation of the budget a number of notes and calculations
will be made in order to arrivé at the figures and data entered on the
budget setting forms. These should be kept carefully on file for reference
and future use. The importance of these notes should not be
underestimated.

The budget is the budget

There should be only one budget. The draft or proposed budget being
only a draft is not a budget until properly approved. Once approved it
should remain unchanged. If this rule is ignored, terms such as revised
budget, first budget and second budget arise and staff become confused
as to which budget people are actually referring. This causes considerable
difficulties when explanations of differences between the budget and
actual figures are required.
Adherence to the “one budget” rule will ensure that the yardstick
against which results are measured remains the same.

Fringe benefits
Budgets have an additional use in that the information contained in them
can be of considerable use in Research and Development projects. The
data can save considerable time when a quick idea of costs is required
and can be adapted to suit a particular project.

Completing the form

Once the background notes and calculations are finished the next step is
to transfer the data and fill in the budget setting forms. Providing one’s
writing and figures are reasonably neat and legible it is preferable for the
forms to be hand-written for the following reasons.
1. If copied by a typist errors may occur.
2. The figures will be transferred to a computer or other business System
and thus it does not matter whether they are typed or handwritten.
In other words, the less the figures are copied the better.

To summarise
A budget is a plan in financial terms.
It is based on the plans and policies of the company or organisation
and on good information.
lts creation and implementation is the responsiblity of management
with the approval of senior or top management.
It must be both realistic and challenging.

11
 It must be meticulously prepared and produced in accordance with an
agreed time table.
It should consider every factor and each factor or group of factors
should be given a cost centre label.
It should never have a MISCELLANEOUS cost centre.
It should be prepared on a Standard form which should aid managers
before and after the budget is approved.
There should only be one budget.

12
Chapter Three

Accounting practices and

procedures affecting ship
managers

One of the difficulties experienced by ship managers when dealing with

accounts and accountants lies in reconciling the financial data presented
to them to events which they know have occurred. This is largely
because accountancy is based on a number of philosophies regarding the
arrangement of business accounts which appear strange to those not
initiated into the mysteries of their conventions and practices.
Fortunately the development of management accounting has resulted in
data which is much easier for non-accountants to comprehend, but there
is, like many professions, a certain amount of professional jargon which
needs to be understood. For example certain computer output sheets
may be referred to as “journals” or “ledgers” which they are not, in the
sense of bound books, but are so called because they contain the
information which used to be contained in ledgers and journals when
information was recorded by hand.
It is not intended that this chapter should cover in any way the large and
complex subject of accountancy. lts purpose is only to acquaint ship
managers of those accountancy terms and practices with which they will
come into contact. With this in mind it is preferable to start with some
broad reasons for accounts and equally broad descriptions of types of
accounting.

DESCRIPTIONS
Accounts are prepared for three reasons.
(a) To show the financial position of the business.
(b) To allow tax calculations to be made.
(c) To provide management with the information it needs to exercise
proper control.
Accounting is the method of recording the money value of business
transactions, sales, purchases, receipts and payments.
Financial accounting or reporting analyses the income and expenses
(costs), by the type of transaction e.g. — cash, stock, creditors, debtors,
assets, liabilities etc.
Cost accounting provides analyses of the costs of a business by function
or activity. It is most effective in manufacturing and similar industries.
Management accounting or reporting presents relevant, up to date and
accurate information to management to assist in the operation and
control of the business. Like cost accounting the information provided is
based on functions and activities e.g. crew, technical supplies etc.
Just as a manager’s plans form part of the larger unit or corporate plan,
so the budget he prepares and the costs he incurs form part of the
overall corporate accounts and management information data of the
business. These are recorded and presented in a number of different
ways in the following accounts, statements and plans:
Balance Sheet: Is a statement of the assets, share holders equity and
liabilities of a company at a given moment in time. They are defined as
long and short term as appropriate.
For the purpose of this book it is sufficiënt to say that the effects of costs
eventually find their way through to the Balance Sheet, shown under the
heading of the “Profit and Loss Account”.
Profit and Loss Account or Revenue Account: Is a financial accounting
statement which shows the earnings and expenses (costs) of the company
for a given period.
Running costs are seen more clearly in this account although the
amounts need not relate directly to money spent during the period due
to the accounting “treatment” of certain expenses, i.e., when the money
is considered to have been spent.
Management Accounts or Reports: Show the manager the detail he
requires to control the department for which he is responsible. They
show the total costs of each cost centre for the period and the year to
date although, as in other accounts, the amounts accounted for will not
necessarily relate to money actually spent. For comparison purposes the
management accounts or reports will also show the budget for the period
and year to date and any variances between the two sets of figures. The
costs themselves can also be broken down into various components
showing sums actually paid, assumed to have been paid or, apportioned
as will be described later in this chapter.
Cash Flow Statement: Is a month by month statement of anticipated
actual earnings and expenditure over a given period, summarised each
month to show the high and low points of the actual cash situation. It
highlights irregularities in the flow of cash and gives warnings of when
there may be a shortage of cash, despite the fact that over the total
period earnings may exceed expenditure. Managers may be required to
supply data for these statements and in such cases the budget notes will
be of considerable value.
Budgets: These have been described in some detail in Chapter Two.
However, it is important to draw a distinction between the estimated
expenditure shown on a budget setting form and the Cash Flow
Statement, with which it is sometimes mistaken. The budget shows costs
expected to be incurred but which may not in fact be paid in the period,
while the Cash Flow Statement shows the actual movement o f cash.
For example, the Cash Flow Statement would show the cost of an
insurance premium when it is paid whereas the budget would show the
cost to the ship per month or quarter, i.e., spread over the period of the
insurance cover.
Because budgets form part of the total accounting system it is important
that their format aligns itselt with the format of other accounts.
Treatment of Costs: It is most important that the accounting treatment of
costs referred to earlier be consistent. Ship managers must have an
understanding of the way the costs are “treated” or dealt with, if they
are to relate the facts presented in management accounts to what they
know has actually happened. The treatment with which ship managers
are most likely to be associated are as follows:
The Prudence Concept: This is an accepted accountancy practice which
indicates how a prudent businessman would “treat” earnings and
expenditure. In essence the philosophy is that exceptional or uncertain
earnings should not be accounted for, i.e. considered as being earned,
until they have actually been received, but once defined costs are
incurred they should be accounted for even though not actually paid. It
is important to note that although the emphasis is on “prudence”, much
depends upon the type of transaction or business and the policy of the
company.
Accrued and Prepaid Expenses: While the Prudence Concept endeavours
to ensure that once costs are incurred they are included in the accounts,
even if not paid, another concept ensures that only those costs which
refer to the accounting period are included in the accounts. The resultant
allocations and apportionments are known as Accrued and Prepaid
Expenses.

(i) Accrued Expenses: These are costs which have been incurred in the
period but for which payment has not been made. Although there
may be some flexibility, in the main any such sums “accrued”
would be known fairly accurately, such as a bill agreed with a
repair yard but only part paid, the balance being due after the end
of the accounting period. As the outstanding amount is known
accurately it would be accrued accordingly.

15
 Example: Ship repaired during the 4th quarter of the year
$
On completion of repair costs agreed as 520,000
Agreed sum paid on leaving repair yard 120,000

Balance due in 3 months i.e. in next financial

year 400,000

But 4th quarter accounts show total repair costs 520,000

Prepayments: These are items such as rentals, property taxes and

insurance premiums which are paid in advance for a period which
does not align itself with the current accounting period. The total
sum has been paid but only part applies to the accounting period;
therefore only the appropriate proportion is shown in the accounts
and the balance is carried forward to other accounting periods.
Example: Insurance premiums paid on lst April for one year
Actual Cost $10,000

2nd Qtr accounts show 2,500 cost

3rd Qtr accounts show 2,500 cost
4th Qtr accounts show 2,500 cost

Total for year 7,500

Balance of the premium of $2,500 is carried forward and

shown in lst Qtr of next year’s accounts.

Provisions: are sums of money accounted for as costs in two principal

categories.
(i) Depreciation: this is a charge to the accounts to reflect the use of
an asset and its reduction in value over its useful life. As the
depreciation period is usually longer than the accounting period a
charge is made in each accounting period equal to the
proportionate reduction in value of an asset. The treatment of this
is very much a bookeeping exercise as the depreciation will, in
time, reduce the value to nil although the asset will still have a real
value which in the case of a ship is its scrap value. Depreciation is
a somewhat complex subject entering into the area of financial
accounting and is often associated with tax allowances. From the
point of view of the ship manager it is sufficiënt to have a general
idea of what it means when seen on a management accounting
report. The major asset treated in this way is the ship.
Amortisation: is similar to depreciation and is applied in the same
way. It only applies to a loss of value of an asset through time. as

16
 distinct from use, as in depreciation. It is used in accounting for
leasehold improvement charges in administration costs.
(ii) Allowance for a liability, the cost of which cannot be determined
with any accuracy: it is thus a sum which cannot be treated as an
accrual.
Reserve: Is a charge which cannot be classed as a provision. It is a sum
of money put aside for an anticipated purpose in the future. The action
of putting the sum aside in the financial accounts prevents its allocation
for other purposes (such as tax, profïts etc), and ensures its availability in
the future. However, it should be noted that shipping accountancy
practice today does not make so much use of reserves as in the past.
To give an example: ships used to be taken out of service for a special
huil and engine survey every four to fïve years. The cost of the work was
high compared with the other years and the time out of service long.
Because of the high cost of the survey a sum of money was placed in
“Reserve” each year in readiness for the next special survey. Two things
have changed this:
(i) The time out of service necessary to carry out special surveys has
been reduced considerably by the introduction of staged or
continuous running surveys to spread the survey of individual items
of huil and machinery over the period between the special surveys.
Today, when a special survey takes place, it is only necessary to
complete outstanding items which, for various reasons, have not
been surveyed earlier. This has resulted in spreading the costs over
the period and reducing the time out of service.
(ii) The uncertainty of shipping has resulted in a practice of letting
costs lie where they fall i.e. to face each year as it comes and
budget and pay for costs for that particular year. It is argued that it
is pointless to put money into reserve for a survey, or other
purpose, in four years time when the ship may have been sold by
then.

Stock concept: Is similar to that used for accrued and pre-paid expenses
in that unused stock in hand is iike a prepaid expense.
Whereas once the costs of crew and repairs are incurred, money is spent
in the sense that it has or must be paid out and cannot be retrieved,
stocks of unused consumable stores can be considered as a credit, i.e.
they are in place and unused at the end of the accounting period and
therefore, ready for use at the beginning of the next. To include them in
the current accounting period may give the appearance of very high
consumption and cost, particularly if the ship has only just taken on
supplies before the accounting period ends.
In theory the detail of all the unused stocks in ships should be reported
regularly and the value carried forward to the next period. In practice
this may create work which is disproportionate to the sums involved and

17
thus there should be a policy decision on stock to be treated in this way.
This should reflect the magnitude of the costs.
In businesses which have large stocks of materials, stock accounting can
be very complex due to the change in value of the stock which can occur
while the materials lie in storage. Applied to a ship this means that a
large quantity of lubricating oil bought near the end of one year and
carried forward to the next could increase in value due to a worldwide
increase in oil prices.
Shipping companies with a number of sister ships often keep stocks of
common items, particularly spare gear, in storage ashore and such stock
should also be treated in this way.
Victualling stocks should always be reported regularly as, apart from
their value, the information is required in order to calculate the daily
costs of feeding the crew. This will be explained in Chapter Seven.
Capitalisation and Capital Costs: The ship and items bought for its future
operations are generally “Capitalised” i.e. they are considered to be a
long term acquisition and therefore not something consumable. The
initial outfit of a new ship may include some items which are normally
considered to be consumables but are, by convention, included initially
as capital costs. These are such items as the chart outfit, the original
lubricating oil “charge” and items of spare gear not included in the price
of the ship. Modifications to the ship and its equipment at a later date
are also capitalised.
Capital items are shown as assets in the Balance Sheet; they are reduced
by the “cost” of depreciation at each accounting period until “paid for”
and considered fully used, but will still be shown as an asset at a nominal
or re-sale value. Most capital cost items are easily identifiable and their
treatment follows the gener al accountancy conventions. However some
items, such as training and management development, may or may not
be treated as a capital “investment” by companies arguing that such
expenditure has long term value. It is not usual to capitalise the cost of
sea staff training.
Here are a few more terms, and their alternatives, which the ship
manager may encounter:
Bought Ledger: — alternatively Accounts Payable Ledger, a record of
all items and services purchased by the company.
Sales Ledger: — alternatively Accounts Receivable Ledger, a record of
all “sales” by the company.
Nominal or Private Ledger: — alternatively General Ledger, (there are
other terms), a record of all assets, iiabilities, shareholders (or
stockholders), equity accounts.
General: It must be stressed again that the foregoing are only very broad
descriptions of accountancy practices and terms with which the ship
manager will come into contact. Those seeking further information
should read the many books on the subject, some of which are listed in
the bibliography at the end of this book. Accountancy is a very complex
subject and oversimplication can be misleading.

MANAGEMENT ACCOUNTING SYSTEMS

Anything as complex as accounts needs systems, and management
accounting is no exception. Reference was made in Chapter Two on
budgets to lists of cost centres and codes being kept in a manual. Similar
lists and codes for all management transactions — accruals, provisions,
supplies etc. are also kept in a manual and it is usual for the budget
data, being part of the system, to be kept in the same manual, usually
known as the Management Accounting System Manual (M.A.S.).

ACCOUNTS FOR THE FINANCIAL YEAR

In general, management accounts cover and are contained in a fïnancial
year, even though costs incurred may not be paid for until the next year
and, in the case of insurance claims, even later. This is dealt with by the
use of accruals and provisions, i.e. the costs having been incurred they
are accounted for in the books. When the accounts are finally settled any
differences between the actual cost and the accrued or provided amount
is borne by the current year. If the accounts department has been told of
all costs incurred by means of invoices, order forms etc, then the amount
of any adjustments should be small in most cases. Sums reclaimable from
insurance can usually be estimated with some accuracy, particularly if
specific sums have been spent, but in some cases, such as crew and
supplies costs reclaimable as a result of a deviation, the amounts are
often the subject of negotiations and thus cannot be estimated with any
accuracy.

INVOICES, ORDER FORMS

The accounts should provide a complete record of all financial
transactions which have taken place during the accounting period. They
can only be as good as the people who put the information into the
system i.e. the managers and their staff. To ensure this yet another
system is required. In essence this demands that every time anyone
orders anything e.g. spare gear, paint, a surveyor, or a repair it should
be recorded on a sequentially numbered form in quadruplicate,
preferably in different colours.
The top copy should go to the supplier as a request for the service. The
next copy should go to the accounts department to indicate that a cost is
being incurred. The next two copies should be retained by the person
ordering the service, one of which he should send to the accounts
department, preferably with the invoice or bill, once the service or

19
 supply has been received. He should retain one copy for his records.
This can be made more sophisticated with an additional copy to the
supplier, and so forth. However, the principal objective is that the
accounts department should know as soon as a cost has been, or is about
to be incurred. There are difficulties in that sometimes, in emergency, a
request for services such as a survey or a repair are made by telephone,
telex or cable, but this can be covered by attaching a note or copy of the
telex to an order form and distributing it in the usual way.
The importance of sequential numbering lies in ensuring that no order
and expense is missed and that everything is put into the accounts
system. If an order is cancelled for some reason it should still be put into
the system but as a cancellation.
All this may seem a lot of paper work, but if managers and accountants
are to know everything that is happening, (as they should), such
procedures must be established and adhered to.

Ship managers and accountants

The prime purpose of a ship manager is to manage and the prime
purpose of the accountant is to provide him with a service to assist him
in his management. However, it must be remembered that the
accountant provides a similar service to all managers and to the company
as a whole. He also provides an advisory and counselling service and
because of his training ensures that all the fmancial transactions are dealt
with correctly.
The manager should be given the fmancial information he needs to
control the department for which he is responsible, but his requirements
must relate to the constraints of financial conventions placed upon the
accountant and the requirements of the company as a whole. There is no
reason why these requirements cannot be reconciled providing a spirit of
mutual understanding, respect and co-operation exists between managers
and accountants. Each should have a broad understanding of the others
job. A point often forgotten is that the accountant with a staff is also a
manager with managerial responsibilities like other managers.

To summarise
The accounts with which ship managers are most closely associated are
Management Accounts embodied in a Management Accounting System
(M.A.S.).
Budgets form part of the M.A.S. as a base against which actual costs
are compared and these are shown in Management Reports.
Once a cost is incurred it enters the system, whether paid for or not,
and eventually finds its way through to the Balance Sheet via the Profit
and Loss Account.

20
The “treatm ent” of costs through accruals, prepayments, provisions
and reserves can cause statements of accounts or reports to appear to
be different to the payments that have actually been made.
Co-operation between managers and accountants is essential and to
this end ship managers should have an understanding of the
conventions and jargon of accountancy.
The accounts of a business should be a complete record of all financial
transactions. For this objective to be fulfilled meticulous record
keeping is required by all involved in costs.

21
Chapter Four

Arrangement and
relationship of ship's
costs

“The whole is the sum o fits p a r ts ”

A n cien t Arithm etic

The reasons for arranging ship’s costs centres into groups is similar to
that of other businesses, i.e. tradition, convention, convenience and
magnitude. In shipping the history of who Controls costs has played a
large part in the development of the present day arrangements of cost
centres.

The background
In the early days of shipping many small sailing ships were owned by the
shipmaster who sailed and traded them himself. If he was successful he
bought more ships and employed other shipmasters to command them
for him. Although these other shipmasters were employed by the owner,
and were thus accountable to him, they had a very large degree of
autonomy. Communications were very poor and the shipmaster had to
use his initiative and judgement, not only in how he spent the owner’s
money in purchasing goods and services, but also in obtaining cargoes
and thus earning money for the owner.
If the owner was very successful and acquired many ships he reached a
point where he, and by now his board of directors too, required someone
ashore to supervise the Heet and advise them on all marine matters. The
natural choice for this job was usually one of their best shipmasters and
thus the position of marine superintendent came into being. The position
carried considerable authority but poor Communications continued to
restrict control and still left much spending and earning authority with
the shipmaster once the ship was out of sight of the home port.
The advent of the steam engine and the iron and steel huil marked the
commencement of the development of more sophisticated ships and the
introduction of another position ashore — the engineer superintendent,
recruited from one of the ship’s chief engineers to provide
superintendence and advice on ship machinery. The introduction and
development of the cable and telegraph service and ship’s radio in this
period also improved Communications and thus increased control by the
owner.
Initially, the marine and engineer superintendents were responsible for
all costs in the areas for which they were respectively in charge. This
responsiblity extended on board the ships to the crew through the ship’s
master and chief engineer. Thus there were two distinct areas of costs,
deck and engine, although the scope of the deck costs was the larger,
covering everything that was not mechanical or electrical.
As ships and crews grew in size, the need to control the costs of food
resulted in the creation of yet another position ashore — the victualling
superintendent, later to be called the catering superintendent. As
accommodation increased with more officers and improved conditions the
responsibilities of the cook/stewards department on board also grew.
Their departmental needs increased and they also started to order paint
and request repairs. It is interesting to note that despite being a separate
department, the victualling department was more closely associated with
the marine department ashore than the engine department, because of
the traditional association between shipmaster and cook/steward. For this
reason victualling department paint and repair requirements were often
required to have the approval of the marine superintendent.
Despite the creation of two other superintendents amongst the shore
staff, the marine superintendent was still the principal advisor for some
years and his opinion was widely sought on charter parties, cargoes,
insurance and many other matters. However, as ships became even more
sophisticated and expensive and world trade more competitive, the need
for the specialised assessment of risks and the securing of business
resulted in the creation of two more departments — the insurance
department and the operations department.
The increased costs of crews, improved conditions of service and
complex wage packages, plus a growing awareness in industry in general
of the importance of the personnel function, resulted in the removal of
staff responsibility from the superintendents and placing it in the newly
formed crew department. This did not mean that the superintendents
were disassociated from the staff, as it was still necessary for them to
manage their departments through them. However, the day to day
organisation of crews — arrangements, records, training etc., was carried
out by the new department.
Although no new department was created, it is worthy of note that as
crew wages became more complex and ships became faster, demanding

23
the shipmaster’s increased attention to navigation in home waters, the
responsibility for wages was also transferred ashore into the accounts
department. In many cases the “company” men were placed on a regular
salary rather than wages associated with the voyage of a ship.
As crew costs increased through inflation and improved conditions of
service, shipowners were forced to seek greater efficiency in the work
carried out in order to reduce the numbers of men employed and costs in
general. Two new systems of work in ships resulted from this search, the
integrated crew known as “General Purpose and Interdepartmental
Flexibility” or IDF. These changes in crew composition were associated
with rationalisation ashore and resulted in two more departmental
changes.
One was the creation of a supplies department incorporating all stores,
furnishings and victualling activities previously dealt with by the marine,
engineer and victualling superintendents. In many cases this ended the
situation where the same item would be ordered by three separate
departments in the ship, involving considerable duplication of effort.
The other change was the merging of the marine and engineer
superintendent’s departments into the technical or maintenance
department which then dealt with all repairs, maintenance and new ship
building, although there are now trends for this last function to be dealt
with by separate specialist organisations. A t the time of these changes,
and again with increased sophistication of equipment, another specialist
superintendent appeared on thé scene — the electrical and electronics
superintendent.
Nowadays there are fewer marine superintendents and much of the
maintenance work for which they were previously responsible has been
taken over by the engineers in their role of maintenance superintendents
or technical managers. They too have not been immune to change, as
there is also a trend by some shipowners to employ ex-ship repair yard
managers and naval architects in their maintenance departments because
of their intimate knowledge of costs and costing practices.
There are also trends towards placing greater responsiblity for ship
management back on the ship; not just to the shipmaster, but to a team
management of senior officers with, in some cases, involvement of the
petty officers and ratings. This system requires a change in role of the
shore staff from directive to supportive. There are a number of problems
associated with this concept, not least being lack of continuity of staff
and this will be considered in Chapter Nine on administration costs.
Before progressing to the present departmental situation it is interesting
to note the further development of two of the aforementioned positions.
Marine superintendents: Their role is now less wide and they have
become more specialised, concentrating on navigational aids, safety and
anti-pollution and at the same time acquiring new titles such as marine
managers, inspectors etc. Although their numbers in the technical field
have decreased there is a trend for them to revert to the business role of
the old shipmaster and move into general management positions ashore.

The shipmaster: Is no longer involved in finding business for his ship and
his autonomy is greatly reduced through improved Communications. He
is now more a team leader, being chairman of the ship management
commitee and being closely involved with welfare, safety and training.
However, despite the change of emphasis in his work, once appointed he
is still in charge of the ship and whichever way the ship is managed, his
appreciation of the costs of running the ship help him do his job.

Arrangement of costs
However one considers the arrangement of the departments on the ship
and ashore, the relationships between them and responsibility for costs,
each of the large number of cost centres must be considered in preparing
the budget. There is no reason why there should not be just one “ship
budget” of many items, but as explained in Chapter Two it is more
convenient to deal with large quantities in small groups. For this reason
the shipping industry now tends to group the costs into five departments
which reflect the prime functions óf ship management and also relate to
the new organisations ashore and afloat.
The departments are as follows:
CREW alternatively PERSONNEL
TECHNICAL alternatively REPAIRS & MAINTENANCE
and/or DRYDOCKING
SUPPLIES alternatively STORES and/or VICTUALLING
INSURANCE alternatively RISK
ADMINISTRATION alternatively OVERHEADS

In many countries the ship’s staff are collectively referred to as “crew”

whereas in others the traditional differentiation between master, officers
and ratings (or crew) is made and some use the term mates and
engineers instead of officers. Although the term personnel is now
commonly used in many industries ashore and leaves little doubt as to its
meaning, the traditional “crew” is still the most commonly used term to
describe all who sail in ships and is used throughout this book.
In general, shipping people put the same costs into the same departments
apart from a few classic differences, such as lubricating oil which may be
in supplies or technical, and victualling which may be in crew or supplies.
These differences are not important providing all concerned know in
which department the particular cost is contained.
What is important is the recognition that none of the departments stand
alone. The way money is spent, or not spent, in one department can
have an effect on the costs of one or more of the other departments.

25
The relationship between the cost departments
Considering each department in turn and its effect upon the others:

CREW: The numbers, quality and “mix” i.e. the distribution of skills
within the crew, probably have more inter-departmental effect than any
other as follows:
Technical: Inefficiency and negligence by the crew, particularly at the
senior and skilled level, can result in accidents, breakdowns and a low
level of maintenance. This ultimately increases costs as more labour
has to be brought in to rectify matters, often at higher costs than the
crew. Insufficiënt crew or the wrong “mix" will also result in work
being done by shore workers and poor supervision at a senior level can
have a similar effect.
Supplies: The cost of victualling is directlv affected by crew numbers
and in some cases by the ratio of offïcers to ratings if the feeding
standards are different. In the same way the nationality of the crew
can also affect the costs of victualling due to differences in feeding
standards. A poorly supervised or inefficiënt crew can be wasteful in
the use of all supplies.

Insurance: Frequent claims made on the shipowner’s insurance policy

because of accidents caused by crew negligence or inefficiency can
cause an increase of premiums not only to the ship but to the whole of
the shipowner’s fleet. Crew of poor health and stamina can also affect
the cost of insurance if too many claims are made for expensive
medical attention and repatriation of crew members.
Administration: The effects of poor quality crew can increase the work
and therefore the cost of the technical, supplies and insurance
departments ashore. The crew department will also have an increased
work load, and therefore cost, due to the time taken in solving crew
problems, dealing with complaints from other departments, arranging
dismissals and replacements and doublé checking qualifications when
these are in doubt.

TECHNICAL: The expenditure and decisions taken on technical matters

can affect other departments as follows:
Crew: If the technical department do not ensure that adequate
maintenance is carried out, breakdowns will result involving the crew
in additional work and thus increased overtime costs. If the technical
department do not make arrangements for the maintenance of crew
facilities such as the galley stove or air conditioning, crew unrest is a
likely result and the costs of replacing crews will increase.
Supplies: Poor maintenance arrangements can result in high lubricating
oil' and fresh water consumptions.
 Insurance: Again, poor maintenance arrangements can cause
breakdowns, resulting in expensive repairs and increased premium
costs.
Administration: The effects of breakdowns through poor maintenance
organisation can be widespread as resultant delays will affect
arrangements made by other departments, often with increased costs
and workloads.
SUPPLIES: Deliberate purchasing of supplies below quality specification,
or lack of attention in ensuring that supplies specifications are met in
such items as paint, lubricating oils and food can affect the maintenance
of the ship and the performance of the crew.
INSURANCE: Inadequate huil and machinery insurance cover can result
in repair claims being refuted and the cost falling on the technical
department. In the case of serious accidents, crew and supplies costs can
also be affected. Inadequate medical insurance can result in increased
crew costs.
ADMINISTRATION: Inadequate administration ashore, both directive
and supportive can also result in higher costs in all areas. If the
establishment is inadequate it will be impossible to carry out the required
work load with the following effects.
General: Inadequate regulations instructions and policies can involve
all departments of the company in legal and other costs.
Crew: Poor planning can result in high travel costs and insufficiënt
attention to crew recruitment and selection can result in unsatisfactory
crews.
Supplies: Poor planning and consideration of the availability of world
supplies, prices and market conditions can result in unnecessarily costly
purchases. Rectification of errors in ordering supplies can be time
consuming and expensive.
Technical: Poor planning and instruction can result in costly
maintenance and repairs.
Insurance: Poor claims procedures, both ashore and on ships, plus
poor record keeping and control of claims, can result in “losses” or
higher costs in all departments and may well affect the insurance
premium costs.

To summarise
The present grouping of ships’ cost centres into five departments have
evolved through the development of the ship itself and changing
philosophies of control. It has now reached a stage where the groups or
departments are as much associated with activities or functions and areas
of expertise as with the departments in the ship or ashore.

27
 There are three important points:
No department or group of costs stands alone; each is related to the
other and the action or lack of action of one can affect the others to
varying degrees.
The department which has the greatest effect on the others is the crew
department.
Cost centres can be arranged in any way, but no matter which way
they are arranged, they must all be considered.

28
Chapter Five

Crew costs

As explained in Chapter Four, the term “crew” is used to describe all

who sail in ships and where further definition is required, the terms
“officers” and “ratings” are used. However, yet another definition is
required for this chapter: seamen tend to describe the time they serve in
a ship as a “voyage” although this term is somewhat ambiguous as it is
often used to describe a combination of loaded or ballast sea passages.
Here the word voyage is used in the former sense, as with the often
heard expression, “ he signed on for the voyage” .
Whereas some chapters on costs require preliminary explanation as to
their content “crew costs” are self explanatory, i.e. they are all the costs
of the crew with only two principal exceptions; “victualling” , which is
contained in the supplies costs, and the costs of insuring the crew,
contained in the insurance costs.

BASIS OF CREW COSTS

Crew costs are based on three related factors:
The manning scale prescribed for the ship.
The nationality or nationalities of the crew.
The conditions of service.
The manning scale: In the first place this is dependent upon the statutory
requirements of the government of the country of registry, particularly in
regard to the certification of officers. In the second place, the scale
depends upon any existing national or individual agreements between
owners and unions and the owner’s own policy as to the size and “mix”
of the crew.
The nationality of the crew: Is dependent upon the same requirements as
the manning scale although not all governments insist on the crew being
of a particular nationality.
The conditions of service: Are the rates of pay, leave, overtime and other
fringe benefits received by the crew. They are usually graded according
to the size or type of ship i.e. freighter, tanker, coaster etc., and are
often subject to minimum requirements set by governments, unions or

29
joint bodies representing both owners and unions. Minimum scales and
requirements are often supplemented by ship owners to attract higher
quality crews to their ships. If special systems of work are operated, such
as general purpose (G/P) or inter department flexibility (IDF) they are
supplemented by agreements negotiated with the unions.
The composition of the conditions of service of crews of different
nationalities and between officers and ratings can be quite different as a
result of traditions, union negotiations and the policy of individual
shipowners. For these reasons there can be wide differences between the
conditions of service of officers and ratings sailing in the same ship,
particularly if they are of different nationality. Comparison of crew costs
between countries and companies can be difficult and is best achieved by
examining the total cost for each position. This is because some
conditions provide large basic rates of pay but low leave and overtime
rates, while others provide comparatively low basic rates of pay but high
leave and overtime rates, together with bonuses in some cases. Thus to
compare basic rates of pay in isolation can give a completely false idea of
the true costs. The employer’s proportion of social security or national
insurance contributions for some crews can also make a significant
difference to the total cost.
Mot only can it be said that the conditions of service of no two countries
are alike, there are some which are very much more complex than
others, containing many components which must all be included when
considering the cost of the crew. As an example of the different factors,
the components for British officers, Indian ratings, Italian officers and
ratings, and Korean officers and ratings are listed on the facing page. But
even when the factors are common their application is rarely the same as
in the case of additional salary or wage scales for seniority or years of
service in particular positions. For example, some countries count
seniority from the moment the crew man first held the position, while
others only grant it from the moment the crew man holds the position
with the shipping company. There are also large differences in the
amounts of increases with service, the time between stage payments and
the extent or limit of the seniority scales from country to country.
From the foregoing it can be seen that companies employing various
types of crew with different conditions of service in ships in their fleets,
need a large number of cost centres listed in their M.A.S. Manual.
However, these costs can be grouped under Standard headings suitable to
all ships although they may have to be split into “officers” and “ratings”
for budgeting and accounting purposes if they are not employed under
the same conditions of service.
Although shipping companies generally tend to group crew costs under
the three main second category cost headings of “wages", “travel” , and
“other costs” , there is sometimes an underlying reason for this grouping
which reflects a more sophisticated approach to costs. This is the concept
of identifying them as “direct” and “indirect” costs. The philosophy is
 GENERAL CARGO SHIP

COMPARISON OF PAY COMPONENTS

British Officers (General Purpose, Company Employees)

Salary (includes basic pay, leave pay, subsistence and overtime allowances).
Productivity payments.
Limitation of hours payments.
Extra service supplementary payments.
Nights on Board allowance.
Weekend work in port payments.
Merchant Navy Officers Pension Fund contributions.
Company Pension Fund contributions.

*Indian Ratings
Basic wage.
Overtime.
Bonus.
Overseas Supplement.
National Holidays.
Leave and Subsistence pay.
Retention allowance.
Shipkeeping allowance.
Provident Fund.
Welfare Fund (ITF/ISF Funding).
Special Work allowance.

*Italian Officers and Ratings

Salary (inclusive of basic pay, contingency payments, pro rata Christmas and Easter
bonuses, weekend and holiday pay, subsistence, notice pay, foreign sailing bonus,
if applicable, and family bonus).
Overtime.
Retirement pay contributions.

*Korean Officers and Ratings

Basic wage.
On board allowance.
Overtime allowance.
Annual bonus.
Annual vacation allowance.
Vacation meal allowance.
Retirement allowance.
Special Extra Work allowance.

* If these crew men are not company employees, there are compensatory payments for termination
of service before the end of the agreed period if the termination is through no fault of the crew
member.

that once the ship is operational the wages and wage associated costs
have to be paid regardless of circumstances, while the other costs are, to
some degree variable, depending upon circumstances. In other words,
there is often a choice with indirect costs whereas there is no choice with
direct costs, other than changing the manning scale or the crew, or both.
Again, as with all costs, there is no rule about the way they should be
grouped and it is a matter for company policy whether to differentiate

31
between direct and indirect costs. Convention and convenience play a
part and the following arrangements of costs within the three groups is
fairly typical.
Wages: (Direct)
Basic pay
Overtime
Special work payments
Leave pay
Leave subsistence
Bonuses
Social security
Superannuation
Crew overlap
Travel: (Direct)
Rail, road, ship and air fares
Accommodation and meals
Travel subsistence
Baggage costs.
Other Costs: (Indirect)
Medical examinations
Medical treatment
Union payments
Manning agent’s fees
Cadet training
Levies
Training costs
Study leave and pay (for certifïcates of competency)
Standby pay
Recruitment
Although it is usual to allocate the costs of wages and travel directly to
the ship concerned, the treatment of other costs will vary from company
to company particularly in the case of training, study leave and standby
pay. These may be allocated to ships directly or added together and
apportioned to the Heet as a whole.
The three groups and associated accounting practices are now considered
in more detail.

Wages
The treatment of crew pay can be considered in two ways:
(a) For the casually employed crew
(b) For the continuously employed crew
Dealing with the casually employed crew is relatively straight forward. A
crew member is engaged for a voyage i.e. a period of time, and at the
completion of his employment his services with the ship and owner are
terminated. On leaving the ship he collects the balance of wages,
overtime, leave pay, bonuses etc, due to him after deductions have been
made for any payments made to him during the voyage, or on his behalf
such as income tax, union dues or his own proportion of any social
services contributions.
In the case of continuously employed crew members the treatment of pay
is more complex and it is as well to examine some of the basic reasons
and problems of employing crew in this way. From the shipowner’s point
of view it provides continuity; the employment of men who know his
policies and his ships and who are, generally, available when he wants
them. There are savings in recruitment costs and benefits in improved
care of his ships. From the point of view of the crew member there is the
benefit of regular employment with, perhaps, a company pension and
often regular payments into his bank account each month. At the end of
his leave he does not have to seek a new employer whose ways and ships
he does not know.
A problem to the shipowner is that if he has to dispose of a ship in a
hurry he may still be left with the staff on his hands. However, in
practice the movement of seafarers from company to company may be
such that the reduction of one ship may not pose a great problem to a
shipowner, as any surplus may be quickly absorbed if his crew
establishment or pool is below the required level. From the crew
member’s point of view he may feel tied to the shipowner and find his
career path restricted, although the career progression of seafarers
generally develops better by staying with one employer.
Should the shipowner decide to employ the majority of his officers
continuously, (and there is no reason why he should not employ ratings
in the same way), there are two ways in which he can deal with their
pay; the traditional “voyage” method and the “salary” method.
Voyage Method: The officer is paid in the same way as the casual
employee; i.e. paid at sea-going rates from the commencement of the
voyage and on leaving the ship collects his balance of wages, plus leave
pay, subsistence etc. When his leave is fïnished he is put on “standby” at
an agreed rate and may also be paid if sick or on training courses. This
standby pay may be paid directly by the shipowner or through an
industrial body to whom a levy has been paid to cover such pay.
In using this method some policy decisions need to be taken in regard to
the allocation of costs. Although the cost of pay for the voyage,
including leave etc., lies clearly with the ship concerned, the allocation of
standby, training and sick pay is not so clear. Such pay can be said to be
for the benefit of the whole fleet and should thus be apportioned to each
ship. However, it is sometimes allocated to an officer’s next ship.
Accounting for voyage pay requires a sound knowledge of the relative
conditions of service for the following reasons:

33
Accountants generally consider pay, leave and bonuses to have been
earned each month and the sums involved, if not paid, are accrued in the
company’s accounts. However, some conditions of service specify that
leave pay is conditional upon the crew member completing his period of
service, while other countries allow leave pay to be advanced during the
voyage.
Leave pay is generally paid at the rate of pay applying at the termination
of the voyage and is not apportioned over the voyage, even if there has
been a change in the rate. If there has been a change in the scale at
which leave is earned then the actual days will probably be apportioned.
Some governments stipulate that their nationals are not allowed to draw
more than specified amounts against their wages outside their own
country. This is to ensure that a large proportion of their wages, often
paid in foreign currency, is retained in their country.
Some conditions of service allow crew members to draw specific amounts
or proportions of their wages in local currency at ports abroad. Others,
for example, paid at U.S. dollar rates may require cash advances abroad
to be in U.S. dollars, causing difficulties with local currency regulations.
Many conditions of service allow crew members to send regular sums of
money home during the voyage and some pay an “ advance” on wages
before the commencement of the voyage. Such an advance is, of course,
subject to the crew man joining the ship.
Salary method: A salary “rate” is usually reached by taking the total pay
an officer would earn during a year’s service in a ship, inclusive of leave,
subsistence, bonuses etc., and then averaging the pay over the total
period of voyage plus leave. For example, if an officer’s earnings are as
follows:
Basic pay $2,000 per month at sea
plus 500 per month bonus
plus 600 per month in lieu of overtime,
and for each 3 days' service he earns 1 day's leave plus $5 per day
subsistence.
Then for one year’s service he will earn,
$
Basic pay 1 2 x :2,000 = 24,000
Bonus 12 x 500 = 6,000
Overtime 12 x 600 = 7,200
Leave pay 4 mths x 2,000 = 8,000
Leave subsistence., 120 days x 5 = 600

Total earnings 45,800

However, although this sum was earned during one year’s service, it is
for a period of service plus leave and thus covers a period of 16 months.
If the total of $45,800 is divided by 16 it will produce an average monthly
salary which when multiplied by 12 gives an annual salary in this case of
$34,350 per annum.
The above example shows a salary calculation in its most simple form.
Allowances for weekend work in port and public holidays are often
agreed with the union concerned on the basis of past voyages and
included in the calculation.
A particularly advantage of the salary method of payment is that officers
can be treated in exactly the same way as shore staff. Their pay is
constant, (apart from periodic adjustments), and they can take leave,
break leave in the middle, take sick leave, go on training courses etc.,
without any change in the method of payment and without any need to
accrue the leave pay. If they draw money from the shipmaster during the
voyage they can settle this by cheque at the time.

Note: Accountants do not always like this simplistic approach, preferring

to accrue for leave etc., during the voyage, and then credit regular salary
payments later. Perhaps this is because of a basic difference between
seafarers and shoreworkers, as the seafarer earns leave for an amount of
service and generally takes it afterwards, while shore workers take the
leave earned within their year’s service.

The Establishment: Whichever way the shipowner deals with pay he has
to decide the number of men in each rank he needs on his books, i.e. his
“establishment” , in order to keep his ships manned at all times.
This can be calculated with reasonable accuracy through experience,
statistics and consideration of the requirements of the service agreement
in respect of leave and official study leave. The shipowner will also need
to consider his staff training requirements in his calculations.
To give an example of the factors considered in such calculations as
related to three groups of Officers:
Junior & Middle Officers: Study leave requirements high, but not all
take study leave at the same time. Sickness incidence low.
Ist Mates & 2nd or lst Assistant Engineers: Study leave for
government qualifications included, although it could be assumed that
a proportion of these officers have already obtained superior
qualifications. Short but frequent company training courses. Additional
family leave requirements for marriage, children etc.
Shipmasters & Chief Engineers: Higher incidence of sickness and
compassionate leave. Occasional company training courses. No study
leave requirements.
Ali Officers: An allowance for time used in travelling to, from and
taking over a ship pius standby periods awaïiing appoincment.
 From the above it can be seen that a different set of factors need to be
applied to each group of officers in addition to the basic factor for leave.
Thus if shipmasters and chief engineers receive six months leave for
every twelve months served, there is a minimum requirement of 1.5 of
each rank for each ship. To this must be added the other factors which
may result in a figure of about 1.75. Diffïculties occur when the
establishment for two ships is 2 x 1.75 = 3.5 officers. As it is impossible
to have 0.5 of an officer the establishment should, theoretically, be
increased to four officers resulting in a surplus and additional 0.5 of an
officer’s cost. This is often avoided by officers taking less leave, and
being compensated by a cash payment. However, it does highlight the
fact that at certain levels of fleet size the numbers of officers for each
rank cannot match the number of ships exactly and additional costs can
be incurred if officers elect to take their full leave.
Before leaving this section it is worth noting that some companies have
achieved a solution to establishment and continuity problems, not only in
the company’s service but in the ships themselves by “pairing” senior
officers in the ships. In this system two shipmasters and two chief
engineers are appointed to each ship for a period of years. The officers
concerned each serve an agreed period on the ships, (say four months),
and then take an equal period on leave. This is arranged by the officers
taking less pay but having more paid leave. Using the previous example
of a basic establishment requirement of 1.5 persons for each rank the
cost of each rank is 1.5 x the salary for one year. If this cost is divided
between the two seniors of each rank, each will receive half the cost as
salary which is 1.5 -h 2 = 0.75 salary for the rank. It should be noted
that this is a very simple way of showing the concept and the figures
themselves are usually subject to negotiation.
Another system is for the second most senior officer, i.e. the lst mate or
2nd or lst assistant engineer, to take over from the shipmaster or chief
engineer respectively when they go on leave. They are paid the rate of
pay for the rank while holding the position, and when they go on leave
themselves their places are taken by their next in line in the chain of
command. This concept requires that officers hold certificates superior to
the position that they normally hold. Again there are advantages of
continuity in each ship, but an increase of costs equivalent to the
differences in pay for part of the time.

Travel
Travel costs have three basic components:
The cost of the travel itself which may involve a number of modes of
travel and the cost of excess baggage when flying to or from a ship.
The cost of accommodation while waiting to commence the journey
and during and after the journey.

36
 The cost of meals or payments in lieu of meals, i.e. subsistence, during
the travel period.
The cost of travel depends to a large extent upon the trading pattern of
the ship, the place or origin of the crew, the required frequency of crew
changes and the skill of the manager responsible for scheduling the
changes. Ideally all the crew should be changed at one time at their
home port, but unfortunately this is rarely practical as the technical
management usually require a phased change-over, particularly of senior
officers, to ensure continuity of operation. Additionally crew members
may leave the ship during the voyage for ill health or for compassionate
or other reasons and thus, in time, a number of the crew can be found to
have joined the ship at different times, making changes of large groups
of men more difficult.
Despite the difficulties, the crew manager will still endeavour to change
as many crew members as possible at the same time and as near as
possible to their place of origin. In this way he can obtain maximum
discounts for group travel and accommodation.
Co-ordination with the ship’s operators is very important if costly delays
to the ship or in the cost of men awaiting a ship’s arrival are to be
avoided.

Other costs
As stated at the beginning of the chapter, these are often considered to
be indirect and may be apportioned to the fleet if the owner has more
than one ship. This group includes the items listed earlier in this chapter
on which the following comments can be made.
Medical examinations and treatments: Covers all costs not covered by
insurance.
Union payments: Includes payments by the owner directly to unions as
registration fees or welfare fund contributions. They are often related to
the number of union members or crew sailing in the ship.
Clothing/Uniform: The supply of working clothes to crews has increased
through the years and crews originating from hot climate areas are often
issued with cold weather clothing. It is not unusual for catering staff to
be issued with tunics and there is also a trend to supply officers with
insignia and sometimes uniforms as well. For the purpose of this book
this cost is dealt with under “ supplies” as the arrangements for the
supply of clothing etc are usually made by the supplies department.
Manning agents fees: Some owners obtain their crews completely or
partially through agents who take on the general responsibilities of the
crew department at an agreed fee.
Cadet training: There are arguments that all who benefit from cadets as
future officers should share in their training costs. In some countries

37
shipowners are required to accept a certain number on their
establishment while others operate a penalty scheme or “ levy” which
must be paid into a national fund by shipowners who do not train cadets,
to compensate those shipowners who do train them. Training schemes in
some countries are very complex and expensive, involving the cadets in
long periods ashore in residential colleges.
Levies: In some countries shipowners group together to form a central
administrative, negotiating and training organisation. Such organisations
are paid for by applying proportionate charges or levies to the
shipowners who receive rebates if they contribute to the industry by
employing deck boys, cadets etc.
Training: Although ofhcers are required to hold certificates to hll certain
positions in the ship, some shipowners require them to undergo
additional training. Such courses include shipboard management, ship
handling simulation, safety & survival in addition to those courses now
proposed by IMCO, or national governments. The costs of these courses
with accommodation and travel can be high but the benehts to the
shipowner are considered by many to be worthwhile.
Study leave and pay: Some national agreements require that companies
pay for the costs of an ofhcer studying for his certihcates of competency
and associated certihcates. The amount of payment is dependent upon an
ofhcer’s length of service with the company, but continuously serving
ofhcers are kept on full pay for specihed study leave.
Standby pay: This is the cost of men awaiting appointment. A skilful
crew manager will endeavour to keep such payments to a minimum, by
appointing a crew man to a ship or sending him on a course immediately
his leave is hnished.
Recruitment: Whether or not it is the company’s policy to employ staff
continuously, costs are usually incurred under this heading through the
medium of advertising and subsequent interviewing and selection, or the
use of an agent, or joint industrial recruitment organisation. The cost of
direct advertising will depend on the availability of staff. In general it can
be said that the more stable the company’s establishment the less the
need to recruit and the lower the costs under this heading.

BUDGETING FOR CREW COSTS

Wages budget
Although the composition of wages is often complex, provided they are
methodically calculated the estimates produced should be one of the
most accurate of all the cost departments.
Just as there are two methods of payment of wages, there are two ways
of calculating the estimated costs. As previously stated, if ofhcers and
ratings are employed on the same conditions of service they can be
Z SHIPPING COMPANY SHIP

Budget Year: Department: Crew

Currency: Nationality

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr Qtr Qtr Qtr

3000 Wages

3110 Basic Pay

3120 Overtime
3130 Leave pay
3140 Leave subsistence
3150 Bonuses
3160 Special payments
3170 Social security
3180 Superannuation
3190 Overlap

Total wages

3200 Travel — — — — —

3210 Rail/road/air
3220 Accommodation/meals
3230 Travel subsistence
3240 Baggage

Total travel

3300 Other costs — — — — —

3310 Medical exam's

3320 Medical treat.
3330 Union payments
3340 Manning agents
3350 Cadet costs
3360 Levies
3370 Study leave etc.
3380 Standby leave etc.
3390 Recruitment

Total other costs

Total crew costs

Assumptions:
Trading:
Currency:
Union negotiations:
Crew travel/changes:
Other:

39
 calculated together, but if the components are different they are best
dealt with separately.

VOYAGE METHOD
If using this method it is preferable to design a Standard form for use in
the calculation, an example of which is shown on page 42. When using
this form the current cost of one of each crew category can be calculated
for a month and multiplied by the number for each category in
accordance with the manning scale of the ship.
To these figures are applied any anticipated adjustments to pay and other
costs and estimated currency changes if the currency of the crew’s pay is
different to that used by the shipowner in his accounts. Thus two or
more sets of figures can be obtained and entered in the appropriate
quartely columns of the budget setting form.
It is important to note that the basic pay rates used in the calculation
should reflect the levels of seniority and qualifications of the crew as
follows:
Seniority pay scales: In some conditions of service the range of seniority
payments is quite large. The best estimate for basic pay in each rank is
obtained by considering the actual seniority of the officers in each rank
in the establishment and taking a mean of their seniority pay.
Qualification pay: In a number of countries there are different pay scales
for the qualifications held in each rank and in such cases it is best to
consider the prevailing situation in the establishment e.g. if most of the
3rd mates are uncertified, then the rate of pay for an uncertified 3rd
mate should be used in estimating.
Note: Although the pay of most crews is reviewed or negotiated annually
and occasionally biannually at prescribed dates it is important to note the
Italian Government “flat rate” “contingency” or “cost of living” award
made quarterly to all crew members. The rates are cumulative and
incorporated in the wage scales when they are renegotiated.
The estimating of other cost centres of the wages group are dealt with as
follows:
Overtime: A large proportion of this is regular or Standard i.e. normally
earned by the crew as a result of routine watchkeeping, working at
weekends by catering staff and others similarly employed. The remainder
is variable and is mainly earned through working on maintenance and
operational work and during periods when hours are classed as overtime
regardless of the number of hours worked.
Past records are of considerable use in providing a base for the number
of hours to apply to each position, although consideration should be
given to any unusual use of overtime in the past or anticipated in the
future.

40
It should be noted that the length of the working week often differs from
country to country, also the overtime rates for particular times or duties,
such as weekend, or night work, tank or hold cleaning, lifting pistons,
cleaning boilers etc. may be at proportionately higher rates. Many senior
officers have fixed. payments in lieu of overtime and sometimes this
applies to the whole crew.
Special work payments: Are usually for designated work in holds or
tanks or in the engine room. This is either a special rate of pay per hour
or a lump sum shared amongst the crew members participating in the
work. It is usually treated as overtime for accounting purposes. In some
cases payments are made for weekend work in port and for times when
crew members are restricted to the ship although not actually working.
These payments may be included under this heading, or under their own
special cost centre.
Leave pay and subsistence: Is usually clearly defined although the pay
itself relates to the rate of basic pay for each rank or rating while the
subsistence is a fixed amount.
Social security: Can vary considerably but is essentially based on rates
imposed by the government of the country of origin of the seamen.
Superannuation or pension: Can be either a national seafarers scheme
and/or, a company scheme. It is sometimes a percentage of basic pay or
a stated amount.
Bonuses: Are usually related to the time served in a ship as a proportion
of wages or a set sum for each position.
Union contributions: Although not a cost to the shipowner, some unions
arrange that the shipowner collect their union dues from their members.
It will thus be shown in the company accounts.
Overlap: Is an allowance made by the shipowner in the cost estimates for
times when two crews are virtually working for the same ship e.g. one
crew is on board and the other crew, or part of a crew, are in transit to
or from the ship. The amount is dependent upon the trading pattern of
the ship and the port of origin of the crew.
SALARY METHOD
As company men employed in this way are continuously paid at Standard
rates, the calculation of the estimate is relatively easy. The same
consideration must be given to anticipated changes in the conditions of
service during the budget period and allowances made for likely currency
changes. Similarly the treatment of seniority and qualifïcations is the
same. The cost per rank is obtained simply by multiplying the salary and
salary associated costs, (social security, superannuation etc), by the
establishment factor, e.g. 1.75 for a chief engineer in the example used
earlier.

41
 Although from a budget preparation point of view the salary method is
the easier calculation, it should not be forgotten that the salary
composition itself is sometimes complex as changes in the conditions at a
national level need to be reflected in the salary. Allowances must still be
made for overlap unless this has been built into the establishment factor.

Travel budget
Assumptions play a large part in estimating this cost and all the criteria
stated under this heading earlier in the chapter must be considered,
including currency changes and inflation.
The calculation can only be based on assumptions that the ship will be in
a particular area when the full crew or part crew is due to be changed.
Thus the assumptions, based on experience and such information as is
available from the operators, should state when and where the crew is
expected to change e.g.

Crew change assumptions

1. British/India Officers ( — 6 months service)
2. Hong Kong Chinese ratings ( — 1 year service)
3. Ship trading Far East/Middle East
4. Assume all ratings changed at Hong Kong, April. Assume all
officers changed twice to U.K. from Hong Kong and Dubai,
staggered, retaining 50 percent of officers during changeover.
As can be seen, each ship requires an individual calculation of these
costs and the costs of accommodation and subsistence must be dealt with
in the same way.

“ Other costs” budget

Past records and future policy play a large part in the estimation of this
group of costs. If there is no change in policy or in the number of men
employed then the previous year's costs, adjusted for inflation, will
probably provide an adequate estimate.

Budget setting form

A typical budget setting form for officers and crew on the same
conditions of service is shown on page 39.

Choice of crew
As stated at the beginning of the chapter, the nationality and size of
crew are often decreed by the country of registry, and therefore the
shipowner must adhere to the requirements of the country if he wishes to
retain that particular registry.

42
Some countries do not state the nationality but only the qualifïcations
and certificates which must be held by certain crew members. Apart from
certain key staff, not many countries state a minimum crew requirement
and this, more often than not, is decreed by operational requirements
such as berthing and unberthing, watchkeeping and feeding.
The influence of the International Transport Federation (ITF) has been
such that ships trading to certain parts of the world such as North
Europe and Australia can find themselves paying ITF minimum pay-rates
regardless of the country of registry of the ship, the crew nationality or
the other conditions of service. The ITF apply their requirements to any
ship whose beneficial ownership country, country of registry and
nationality of crew are not one and the same. The ITF “scales” are
decreased for ships trading only in the Far East to assist employment of
crews from those areas. By agreement with the International Shipping
Federation, ship owners who have traditionally used crews from these
areas now make payments to a national seamen’s welfare fund rather
than pay them increased wages, which would cause imbalance in the
economy of the country concerned. However, as some of the older
national fleets decrease in size, such traditional manning by non-nationals
is gradually being phased out.
This raises the matter of supply of crews: as the fleets of the older
maritime nations decrease, so the number of their nationals making a
career in seafaring decreases and thus there are less men available even
to transfer to the fleets of other nations. In the same way, as crews of
particular nations become popular by virtue of lower costs, so they too
become short in supply. Thus the shipowner may be completely free to
choose the crew he wants but unable to get them.
The final factor is quality: the standards set for obtaining qualifïcations
and training within the industry are of prime importance, but so also is
the calibre of the crew. It is only through careful selection followed by
prudent supervision that the ship manager can be sure that he has the
crew he needs. The level of wages alone seems to have little hearing on
quality as even highly paid seamen can be of poor quality and vice versa.
Thus, the shipowner’s choice is not as great as it would seem although he
will naturally endeavour to engage the least costly crew possible. But,
however much he has to pay for the crew he still has to ensure that what
he gets is good. If he is able to obtain a good crew at the lowest possible
price within the parameters described then he should do his best to
retain and develop them, as to do otherwise will eventually increase his
costs as described in Chapter Four.
The number of crew, or manning scale depends upon the technical
requirements and the policy of the company as will be described in
Chapter Six.

43
 Ship M o n th ly C re w Costs ( C rew )

Currency of Crew Agreeraent ......

Overtime Leave
Basic
Salary Per Est.
Rank/Rating Flour Total Days Pay
Hours

Master

Chief Officer

Second Officer

Third Officer

Radio Officer

Chief Engineer

Second Engineer

Third Engineer

Electrical Officer

Bosun

Able Seaman

Ordinary Seaman

Fitter

Oiler/Fireman

Chief Steward

Chief Cook

Second Cook

Galley Boy

Steward

Total

Notes
Date of wage negotiations or agreed increases:
Estimated changes in conditions:

44
 D ate

Cost converted to
operating currency

Social Bonus Total Cost No.

Security Pension per
Overlap per in Total
and Cont's. Category
Category Rank
Insurance
 To summarise
The key to understanding and budgeting for crew costs is DETAIL.
There are so many different types of wage “packages” and associated
systems of implementation that anyone responsible for crew costs must
have a thorough knowledge of the relative conditions of service.
With this knowledge, plus good records and carefully considered
assumptions, reasonably accurate estimates of costs can be produced.
Company policy regarding the employment of crews, the methods of
payment and the treatment of accounts needs careful consideration
followed by clear definition.
When comparing crew costs considerable care needs to be taken to
ensure all component factors are considered.

46
Chapter Six

Technical costs

General
The technical department’s costs cover all costs associated with the
maintenance and repair of the ship to the state required by the owners.
Generally, this means keeping the ship fully operational for the
maximum number of days possible in the year, but it can also cover lay
up, modifications and the sale or purchase of the ship. If operational. the
level of maintenance and repair must conform to statutory and
classification standards, but beyond this the level of maintenance and
repair depends upon the company policy at the time.
Ideally a ship should be maintained to an optimum level at all times i.e.,
it should conform to regulations, maintenance should be continuous such
as to avoid breakdowns and the ship should have a reasonably smart
appearance. Unfortunately, the economics of the shipping industry are
all too often reflected in the levels of repairs, maintenance and
appearance as more or less money is avilable. Insufficiënt maintenance
can be a short-sighted policy as the incidence of breakdowns will
inevitably increase, but when cash is in short supply long-sight usually
suffers from shortage also.

THE COSTS
Technical costs involve the costs of labour, skills, expertise, parts,
materials, tools and equipment.
The labour and skills:
These come from:
The crew.
The shipyard and ship repairers.
Additional crew from time to time.
Contract labour (riding crews) sailing in the ship.
Experts sailing in the ship or attending in port.
Consultants and surveyors.
The shore staff of the shipping company.
Some of the work in which these skills are utilised can only be done in
port and some of that work alongside in a specially fitted ship repair
yard. Other work can be done at sea or in port as management chooses,
but the amount of work done by the crew itself will depend upon the
size, quality and mix of people on board the ship.
The labour and skills are utilised in four distinct but related ways:
Operating: Actually running and manoeuvring the ship and equipment.
Monitoring: Assessing the performance of the ship and equipment.
Maintaining: Examining, overhauling, renewing and protecting,
preferably on a planned and systematic basis.
Repairing: Putting right damaged or worn structure, parts and
equipment, either temporarily or permanently.
The operational activities are essentially carried out by the crew, the
monitoring by crew and shore staff and occasionally experts, and the
maintenance and repairs by crew or shore staff depending upon the type
of work and availability of manpower as explained.
The crew are the only people under the direct control of management
and the way in which their available skills are utilised for maintenance
can have an important effect on technical costs. It must be borne in mind
that the prime functions of the crew are to run and operate the ship and,
whenever possible, to restore the ship to an operational state as quickly
as possible if something goes wrong. Time available for maintenance can
be minimal unless the manning scale is geared for the crew to do such
work to any appreciable extent.
Regardless of the manning scale, a crew's availability for maintenance
can be severely restricted by weather conditions, (cold, heat, humidity,
gales), standby conditions in fog and approaching and leaving port,
watch keeping and occasionally sickness. The advent of the automated
and partially automated engine has improved this situation by freeing
engineers and engine ratings from watchkeeping away from land, thus
allowing them time to carry out more maintenance than with a manned
engine.
Howe ver, regardless of who does the maintenance work, the prime
objective of such work is the avoidance of breakdowns with resultant time
out of service or “ off hire” , and the maintenance of operational
efficiency.

Parts and Materials:

Without the parts, known as “spares” or “spare gear” or materials, i.e.
supplies, maintenance and repairs cannot usually be effected. The high
costs of some spares and materials makes over-stocking in ships a
needless expense, but lack of availability and high delivery costs if sent
by air freight, can cause even higher costs particularly if a ship is delayed
awaiting such spares. This will be considered in more detail in Chapter
Twelve on stock control.

Tools and Equipment:

Just as maintenance and repairs cannot be carried out without spares and
supplies, neither can the work be carried out without the proper tools.
Work studies of shipboard maintenance and repairs have been known to
have found men standing around waiting to share a hammer. There is no
excuse for a shortage of low cost, frequently used tools in a ship. The
purchase of higher cost equipment obviously needs careful consideration
but if it saves time and helps to progress maintenance it should either be
purchased or the work left to be done in a repair yard or special
workshops, where such equipment is available.

Instructions, training, methods and progress

Indirectly associated with costs are the instructions of management to the
crew and, in some cases, to other people involved in the ship. From the
point of view of technical costs, proper operating instructions and
guidance should be given whenever possible as malpractices can often
result in costly repairs in all parts of the ship.
Correct operational procedures, safety and accident prevention are
associated with proper training in running the ship and its equipment. It
is, therefore, most important that management identifies the needs of the
crew and ensures that they are adequately trained. Although in some
countries the national qualifications required for seafarers have widened
their scope to include courses on radar operation, fire fighting and tanker
safety, there are still a number of areas where specialist training is
required in the best interest of the crew and ship, such as turbo blower
maintenance and particularly to efficiënt operation of ship’s systems e.g.
the manual operation of automated equipment.
Studies of work practised in ships have resulted in a number of
improvements, not only in the tools and equipment for carrying out
maintenance and repairs, but also in the methods of doing such work.
This has reduced the time involved and thus increased the amount of
work which can be done. Studies of the number of running hours
required before overhaul together with careful and scientific monitoring
have also reduced the frequency of overhauls. Special huil coatings have
reduced the frequency of dry docking and there is constant research into
improving the reliability of ships, in the hope of further reductions in
maintenance and repair costs. The effect of these advances will be
considered in greater depth in Chapter Sixteen.

49
 Outside factors affecting costs
Whereas crew travel costs are affected by the distances the crew have to
travel during crew changes, so technical costs are affected adversely by
situations which prevent maintenance work being carried out in the ship
resulting in the work being done ashore, often at higher cost. To give a
few examples:
Ships which trade continuously through wet and windy climes will not
be able to carry out as much maintenance around the decks as ships
trading in fine weather regions.
Ships with a quick turn around in port such as container ships, Ro-Ro
ships, ferries and tankers will not be able to carry out as much engine
maintenance in port as general cargo ships in the liner trade.
Deck work on tankers can be restricted because of the gas situation in
the tanks.
The cleaning of tanks or holds will reduce the man hours available for
maintenance.
Ships trading in areas where union activity is intense may experience
difficulty in carrying out repairs and maintenance by crew while the
ship is in a repair yard.
The operator’s urgency for the ship, necessitating overtime work in a
ship repair yard with consequent increase in costs.
Other factors which can have a large bearing on costs are as follows:
Ships trading in areas where shore labour earnings are relatively high
on an international scale will cost more for work carried out ashore.
Currency fluctuations and inflation in the areas to which the ship is
trading, or from which spares are purchased, can also have a
significant affect upon the technical costs beyond the control of the
ship manager.

COST CENTRES AND GROUPS

Technical cost centres can be virtually the same for any ship with the
exception of a few specific costs associated with the purpose of the ship,
for example, the tank washing equipment in tankers and the refrigeration
equipment and piping in reefer ships.
However, the magnitude of costs for the same cost centres can vary
considerably e.g., the cost of tank anodes will be higher in a tanker than
a general cargo ship; spare parts will cost more in a motor ship than in a
steam ship; tank top damage will be greater in a bulk carrier through the
use of grabs than a container ship, and ships which discharge cargo into
lighters at anchorages can expect greater huil damage and corrosion
through rust than ships which usually lie quietly alongside a berth.

50
The grouping of technical costs is based more on tradition, convenience
and staff function than on magnitude. For example charts, safety,
infestation etc., may be grouped under “marine” if this area is in the
charge of a marine superintendent or inspector. The arrangement of
costs from a typical MAS manual is shown on page 52. This shows an
arrangement of costs in ten second category groups as follows:
Huil: All structure, decks, fittings, lifeboats, derricks etc.
Engine and Electrical: All machinery and associated equipment.
Radio and Navigational Aids: All electrical and electronic equipment
under this heading.
Spare Gear: The costs of huil, engine and electrical and radio and
navigational aid spare parts.
Marine: Charts, safety equipment, lifesaving equipment not attached
to the ship, disinfestation.
Surveys: The cost of surveys.

Note: there is a trend for some classification societies to allow properly

qualified and experienced ships personnel to carry out some specified
surveys on their behalf.
Consultants: This covers a wide area of expertise brought in to solve
problems, or to supplement existing shore staff, etc. It includes riding
crews and also the expenses of technical shore staff directly
attributable to a specifïc ship. The apportionment of other costs will be
explained in Chapter Nine on administration budgets.
Registry: The costs of survey fees, licenses, registration fees etc.,
associated with the registry of the ship.
Accommodation-interior: The costs of all interior repairs to
accommodation including hard furnishing but excluding soft furnishings
(See Chapter Seven — Supplies).
Modifications: Covers changes in the structure or equipment of the
ship to comply with changes in legislation or the trading of the ship.
This is usually “capitalised” and thus there is a need to separate it
from other costs. When a number of modifications are taking place at
the same time it may be necessary to have a number of items under
this heading e.g. loadline change, IMCO/pollution, SAFCON,
installation of heating coils etc., in order that the shipowner can assess
what are, in effect, the costs of such changes.

Recharging
The re-charging of costs, although not a budget item is of much
importance in technical costs accounting as costs incurred may ultimately
be re-claimed through insurance or capitalisation
 Z S H IP P IN G C O M P A N Y

MANAGEMENT ACCOUNTING MANUAL

M.A.S. Codes — Department: Technical

Ship Code: Refer to Ship Code List

Head Code: 4

2nd Category 3rd Category Uncoded Items Included

Item Code Item Code

Huil Tank piping, derricks.

4110
Decks/fittings lifeboats
Heating coils 4120
Huil 4100 Tank washing equipment 4130 Rental and maintenance
Anodes 4140 Tank and huil
Dry doek costs 4150 Tank cleaning
Refrigeration fittings etc. 4160 Ducts and insulation

Main engine 4210

Engine and electrical 4200 Auxiliaries 4220
Refrigeration 4230

Radio and Rentals 4310

navigational aids 4300 Maintenance 4320
Renewals 4330

Engine 4410
Spare gear 4400 Electrical 4420
Radio 4430
Navigational 4440

Charts 4510 Supplies and service

Marine 4500 Safety equip. 4520 Life saving
Disinfestation 4530
Liferafts 4540 Overhaul and renewal

Surveys 4600 Classification 4610

Other 4620

Safety 4710
Engine 4720
Consultants 4700 Work study 4730
Other 4740 Superintendents travel
expenses

Registry 4800 Surveys 4810

Fees 4820

Galleys 4910 Equipment (not

Accommodation 4900 electrical)
Other 4902 Plumbing. floorcovering

Safety 9100
Anti-pollution 9200
Modifications 9000 Work study 9300
Operational 9400
Classification 9500

NOTE: As modifications are usually charged out they are in a separate Code Series.

52
BUDGETING FOR TECHNICAL COSTS
Because of the number of factors affecting technical costs, budgeting for
them is as much a skill as a Science. The manager bases his estimating in
the first place on the work he knows or anticipates will have to be done
within the budget year. This will be based on reports from the ship,
discussions with the ship’s senior officers, his own observations during
ship visits, known repair lists, the planned maintenance Schedule and
surveys and examinations which must be carried out, if no extensions are
required or extensions cannot be obtained. It also depends upon the
expected “life” of the vessel.
Having the details of the work before him he then has to draw on past
records, experience, (his own and others), and information available in
his department such as actual dry doek and repair costs or quotations,
updated to take account of inflation and currency changes. He then has
to consider:
Who will do the work.
When and where will the work be done.
What spares and replacements will be required.
Whether the rate for the job is total or per hour if the work is to be
done by shore labour and if so, how many man hours are required and
whether skilled or unskilled labour will be required for specific work.
Associated difficulties in carrying out specific work such as staging,
tank cleaning.
What will the exchange and inflation rates be at ports of the world
where the work may be carried out.
The estimate of when and where the work is to be done is a matter for
discussion with the operators at the time of preparing the budget and co-
ordination later. Unfortunately, except perhaps in the liner trades, it is
often difficult for the operator to say when and where it will be most
suitable, for the ship to be taken out of service. Thus in the first instance
a “guesstimate” of the trading pattern has to be made. The timing itself
may be immaterial to the operator except when the market is rising or in
the case of the reefer trade, at the height of the season, when the
operator will wish to avoid taking the ship out of service.

The best place to carry out repairs is obviously that where the work can
be done best, in the fastest time and at the lowest price. It is also an
advantage if the crew can work alongside shore workers. The importance
of the choice of port and repairer cannot be overstated; good work-shop
facilities coupled with staff experienced in the work required are vital to
the successful completion of a repair. In the same way, availability of air
service is important if spares need to be air freighted quickly.
Unfortunately, the places where this combination of factors exist are
constantly changing as a result of economie conditions, even in different
 parts of the same country. Quality work does not alway go with
cheapness and it is as well to bear in mind that when market conditions
are poor, shipowners tend to flock to the lowest cost areas for essential
repairs. Thus, although costs may be low, the out of service time may
increase considerably if the ship has to wait for a repair berth. On the
other hand, ship repairers in high cost areas may reduce their costs
below the norm if they have to fïnd work for staff on their payroll.
Owners of VLCC’s have an additional problem in the shortage of docks
capable of taking their ships.
While on the subject of the varying costs of repair yards it is worth
noting that as standards of living improve in low cost areas so union
activity and standards of safety increase, resulting eventually in an
increase in costs. The costs of safe staging for inaccessible work is a
prime example of this.
Before considering budgeting for the cost groups two general
assumptions must be made which are important to the foundations of the
technical budget:
Planned maintenance: It is assumed that the maintenance of the ship is
planned in some way either formally or informally, in other words that
the manager knows what he intends to do. This will be considered in
more detail in Chapter Sixteen.
Spare gear control: Although this will also be considered in more
detail in Chapter Twelve, for the purpose of this section it is assumed
that levels of spare gear have been set and thus budgeting is based on
replacements in association with usage through planned maintenance.
It is also important to consider the place of breakdowns, and other
incidents such as collisions, stranding etc., in the budget. If planned
maintenance is properly carried out and the crew efficiënt and properly
trained, then breakdowns and other incidents resulting in damage to the
ship should be minimal. But they cannot be totally eliminated and it is
for consideration whether an allowance should be made in the budget for
such matters. As the costs can range from nil to the constructive total
loss of the ship, it is impossible to put any cost to breakdowns etc.,
particularly as in the case of serious breakdowns and incidents the bulk
of the costs should be covered by insurance. A similar argument can be
applied when budgeting for out of service or off-hire time resulting from
breakdowns and incidents. This point will be considered again in Chapter
Thirteen on insurance costs.

Huil
The general guidelines for budgeting for technical costs apply. Of prime
importance is whether or not the ship will be dry docked and if so,
whether opportunities will be taken during the out of service time to
carry out protective maintenance of the interior of the ship.

54
Estimates will not only include the costs of work to be done but also the
various fees and charges for the use of repair berths and dry docks,
berthing and unberthing, (tugs, pilots etc.), the provision of services and
tank cleaning. In the case of tankers the removal of oily slops can be an
expensive and time consuming business required before “hot work” can
be carried out in tanks.
Experience and records should indicate the number of anodes, both
internal and external, that are required and in the case of tankers,
whether their position in the tanks will require staging. Alternatively,
they may be placed on board for fitting by the crew or riding crew at sea.
If the ship is to be dry docked, close liaison is required with the supplies
department to ensure that they budget for the necessary paints and
coatings as these are usually a supplies cost and not supplied by the ship
repair company. In a tanker, pipework renewals will be of importance.
Again, experience will be a guiding factor in estimating renewals of
wasted pipes associated with age and corrosion. In a reefer ship,
insulation and ducting repairs will be carried out as opportunities occur
or necessity demands

Engine and electrical

Again the gener al guidelines apply and as for huil, time out of service for
dry docking and other repairs is usually fully utilised. In motor ships,
routine overhauls require more frequent time out of service and this will
also be utilised to carry out other engine work which can only be done
while the main engine is stopped.

Radio and navigational aids

This equipment may be leased or owned and in either case is often
covered by maintenance agreements so that budgeting is relatively easy.

Spare gear
Knowledge of surveys and planned maintenance should provide sufficiënt
information as to requirements to keep the spares to the required stock
levels. The cost of the spares may be considerably inflated if, through
delays in manufacture, the spares cannot be shipped by sea and have to
be air freighted to the ship. Managers often need to plan considerably in
advance for spares due to the time required for delivery.
It is noteworthy that some managers consider spares in two groups,
replacement i.e. required as a result of routine maintenance such as
gaskets, washers etc., and renewal such as piston rings, liners etc. This
differentiation is not considered significant.

55
 Marine
The costs of charts and other nautical publications and their corrections
and replacements can be high and this is often placed in the hands of a
chart service agent leaving the navigation officer to make only current
|i corrections. In the past it was normal for a navigating officer to be
responsible for this but with less time at sea, and unfortunately
sometimes less qualified and dedicated officers, owners often consider it
! prudent to use a service for a Standard fee.
Other items which are sometimes included in this group are liferafts
which have to be sent ashore for servicing periodically and disinfestation
and safety equipment. In general, these costs are relatively low and past
records and information readily available will assist in budgeting.

Surveys
Again, the general guidelines apply and apart from emergencies, the
manager will know the surveys required and have a good idea of the
costs of surveyors’ fees.

Consultants
The level of employment of “outside” expertise is very much a matter of
company policy. However, if it is policy to use such people then past
experience will provide an indication of the cost involved. Riding crews
can well be included under this heading and estimates of their costs will
also be in accord with experience and perhaps, specific work plans.

Registry
The same comments for surveys apply.

Modifications
Can only be estimated on the basis of known requirements. They are
usually the subject of tenders and quotations and, if capitalised, may not
even form part of the running costs although they will be seen in the
accounts.

Accommodation —- Interior
Inspection reports and repair lists are the best guide, as these costs vary
considerably from year to year.

Some anomalies in technical costs

From a purely departmental cost point of view, the question of which
department bears the costs associated with technical work, raises some
interesting points. For example, work which does not have to be done by

56
a repair yard, may be done by the crew in which case the labour cost
falls upon the crew department. If the same work is done by shore
labour, even if sailing in the ship, the cost is borne by the technical
department.
The costs of spares and equipment are borne by the technical department
but supplies used in the maintenance of the ship are borne by the
supplies department.
The distribution of costs between departments is not vital as it is the
total cost of running the ship which is the main consideration. However,
the effect of technical costs on other departments again highlights the
inter-relationships, particularly between crew and technical. The manning
scale policy should be based upon the costs of the crew, the technical
department’s needs and the relative cost of satisfying those needs by
shore labour. In this respect “out of service time” must be considered as
once a ship is taken out of service for maintenance or repairs it ceases to
earn, thus any work which can be done by crew, or shore labour, while
in service is beneficial.

Completing the budget setting form

Having produced the costs it is important to note the assumptions used
as described in Chapter Two.
In the case of technical costs it is preferable, for record purposes and for
the information of other departments to state, in broad terms, the major
surveys and work to be carried out. The period of the year when such
work is expected to be put into effect should also be stated.
For example:
Quadrennial Cargo Gear Survey: Feb: During cargo operations if
cranes used.
Dry Doek & Tail Shaft Survey: Sept: 6 days.
SOLAS Survey Oct
during dry doek period
Load Line Survey Oct
Of importance to the operators is the estimated time out of service, not
only for large items of maintenance but for routine maintenance,
particularly with a motor ship.
Thus, for example, it may be stated:
“Total time out of service 15 days” (seven days dry doek May, four
periods of two days main engine routine overhauls).
The technical department is by far the largest single cause of out of
service time and although crew and supplies departments can cause out
of service time, invariably they are able to arrange their activities at the
same time as cargo operations or technical work.
A typical budget setting form is shown on page 58.
 Z SHIPPING COMPANY SHIP

Budget Year: Department: Technical

Currency: Sheet 1

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr. Qtr. Qtr. Qtr

4100 Huil — — — — —

4110 Huil, decks, fittings

4120 Heating coils
4130 Tankwashing equip.
4140 Anodes
4150 Drydock costs
4160 Refrigeration ftgs.

Total huil

4200 Engine and electrical — — — — —

4210 Main engine

4220 Auxiliaries
4230 Refrigeration

Total engine and elect.

4300 Radio and nav. aids — — — — —

4310 Rentals
4320 Maintenance
4330 Renewals

Total radio and nav.

4400 Spare gear — — — —

4410 Engine
4420 Electrical
4430 Radio
4440 Navigational

Total spare gear

4500 Marine — — — — —

4510 Charts
4520 Safety equipment
4530 Disinfestation
4540 Life rafts

Total marine

4600 Surveys — — — — —

4610 Classification
4620 Others

Total surveys

4700 Consultants — — — —

4710 Safety
4720 Engine
4730 Work study
4740 Other

Total consultants

(Continued)

58
Z SHIPPING COMPANY SHIP

Budget Year: Department: Technical

Currency: Sheet 2

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr. Qtr. Qtr. Qtr.

4800 Registry — — — — —
4810 Surveys
4820 Fees

Total Registry

4900 Accommodation — — — — —
4910 Galleys
4920 Other

Total accommodation

9000 Modifications — — — — —
9100 Safety
9200 Anti-pollution
9300 Work study
9400 Operational
9500 Classification

Total modifications

4000 Summary totals — — — - —

4100 Huil
4200 Engine and electrical
4300 Radio and nav. aids
4400 Spare gear
4500 Marine
4600 Surveys
4700 Consultants
4800 Registry
4900 Accommodation
9100 Modifications

Total technical

Assumptions:
Trading:
Currency:
Surveys etc. during period, times out of service, port/ports dry docking/repairs, dates due:

Technical costs — summary

Cost centres can be virtually the same for all ships but with different
emphasis according to ship type.
Trading pattern, availability and current popularity of adequate repair
yards can have a large effect on technical costs.
The amount of routine maintenance carried out by the crew depends
upon the manning scale and climatic and trading conditions.

59
 Co-ordination of technical work with the operators, crew, supplies and
insurance departments is essential.
Planned maintenance and spare gear control are important factors in
budget preparation.
The prime objective of technical maintenance is to keep the ship
operational for the maximum time possible, at maximum efficiency
associated with the owner’s long term plans for the ship.

60
Chapter Seven

Supplies costs
The content of this chapter needs little explanation; the term “Supplies”
covers all consumable stores including victualling, i.e. food. It also covers
semi-consumable items such as crockery, linen, soft furnishings, cooking
utensils and hammers.
Again the cost centres are grouped as much for convenience and
functions as for magnitude of costs. As described in Chapter Four, items
of common usage, such as paint, are now supplied to the ship in bulk
and the arrangement of the costs of such items into second category
groups reflects the ship department which has responsibility for ordering
for the ship as a whole. Thus paint is included in “Marine Stores” and
normally ordered by the lst mate for all departments in consultation with
the chief engineer and chief steward, the only exception being dry doek
paints which are usually arranged by the shore staff. The chief engineer
orders all lubricating oils and greases and the chief steward does likewise
with all cleaning materials.
Supplies costs can be arranged into any number of groups but the groups
which follow are fairly typical. Ships carrying passengers will probably
require additional groups to cover such items as cutlery and bed linen
separately because of their high costs in those ships.
Cost Group Responsibility for ordering
Marine Stores, including all
paints, ropes & wires and J lst Mate
Fresh Water.
Engine Stores, including all
greases, packing etc. | Chief Engineer
Lubricating Oils.
Stewards Stores, including all
cleaning materials, stationery,
linen, cutlery, laundry and soft
furnishings.
Victualling. ” Chief Steward
Recreational.
Clothing.
Handling Charges.
Bar and Canteen.

61
General
Apart from actual stock control, which will be considered in Chapter
Twelve, the whole approach to supplying ships has become very much
more sophisticated in recent years, not only in the items purchased but in
the way they are purchased and supplied.
Technological advances have resulted in sophisticated cleaning materials
and equipment instead of harsh methods used in the past which often
created a need for painting. New protective coatings and lubricants have
also brought benefits of greater durability. However, sophistication often
brings problems of interaction or incompatibility with other materials and
great care needs to be taken by those arranging supplies to ensure their
suitability to the marine environment and to other products on the ship.
Thus there is a need for consultation with the technical department
before any new type of item is supplied to a ship. In the same way ships
need to be advised on the use and storage of any supplies likely to cause
complications or damage such as Chemical cleaners, gas cylinders etc.
Inflation and the rapid increase of costs of supplies particularly those
derived from crude oil, such as lubricating oils, mooring lines, paints
etc., increased the need for purchasing “strategies” designed to get the
best quality at the lowest price. Such strategies are particularly necessary
for ships trading between areas where the cost of living is high to areas
where good supplies are limited and expensive and manufactured goods
are virtually unobtainable. Inevitably ships in such trades have relatively
higher supplies costs and it is not unusual in such situations for the
Supplies Department to arrange regular shipments of large quantities of
supplies by sea, in containers, from areas of lower costs. Like spare gear,
some stores need to be ordered well in advance particularly if they are to
be shipped over long distances and this requires efficiënt forecasting of
the ship’s needs.
The factor which makes supplies different to the other costs departments
is the very large number of items covered; washers, screws, electric light
bulbs, etc. Every conceivable item necessary for running the ship must
be considered and it is not enough to just say “screws” , as the type and
size must be specified. To reduce and contain the numbers involved and
ease the considerable task of ordering stores it is not unusual for
companies to standardise supplies items as much as possible and to pre­
print stores order books listing all the regularly used items and their
sizes. Although the individual items in such a list are too small to be
identified as cost centres, they can be grouped under cost centre
headings.
Inevitably items will be required which are not listed and which may
require patterns and specific measurements if despatch of the wrong
items is to be avoided. Ship staff need positive advice on this and stores
purchases abroad, if costly purchases and high air freight charges are to
be avoided.
To examine the second category cost groups in more detail:
Marine stores
Safety: Includes all items associated with the safety equipment certificate
requirements; lifeboat stores, life saving equipment, firefighting
equipment, pyrotechnics etc. As can be well understood, this is one area
of stores which must be always complete and articles with stated expiry
dates must be renewed before the due date regardless of apparent
condition.
Paints: In addition to routine maintenance painting by the crew, dry
docking and major refïts involving huil and hold painting will require
large quantities of paint which are ordered in consultation with the
technical department ashore and the paint suppliers to ensure
compatibility of the coatings and that supplies are available at the port
where the work is to be carried out.
Cargo equipment: Must conform to the Factories Acts and other similar
national regulations. This cost group is large in cargo ships while on ships
such as tankers only covers equipment associated with storing, the
gangways and accommodation ladders and access and lifting equipment.
Certification of supplies under this heading is an important factor.
Ropes, cordage and canvas: Includes all ropes from mooring ropes and
wires to the lacing of boat covers. Mooring ropes and wires associated
with cargo gear are also covered by certificates.
Deck stores: Include deck tools and painting equipment, flags etc., and
various non-designated items.
Fresh water: As a budget item this has reduced in size in recent years
due to installation of fresh water generators in ships. However, it can be
a large item during dry docking and survey periods.

Engine stores
Chemicals: Includes Chemicals used for refrigeration, degreasing, tank
cleaning and in the maintenance and operation of machinery.
Gases: Includes C 0 2, Freon, Acetylene and other gases.
Electrical: Covers all electrical “consumable” items such as electric light
bulbs and other electrical parts such as neon tubes, light shades, plugs
etc., not generally considered spare gear.
Engine room stores: Includes the many miscellaneous items required for
the operation of machinery: packing jointing, greases, testing equipment,
tools, fastenings, abrasives etc.

Lubricating oil
Close liaison with the technical department ashore is required when
ordering lubricating oils. Care must be taken in considering and
 observing makers’ instructions as to grades of oil to be used for
individual items of equipment and the availability of some grades of oil
in certain parts of the world. It is preferable not to change brands
without first checking the compatibility of the oils.
The purchase of lubricating oils will be considered in greater depth in
Chapter Thirteen, however, it should be noted that availability and world
price differentials need careful consideration when arranging supplies.
It should also be noted that if a ship has a multiplicity of lubricating oils
for equipment, the need for so many types should be questioned, as
often manufacturers of equipment are flexible in their requirements
although they may initially specify a particular brand and grade. It will
be appreciated that the ordering of a large number of brands and grades
of oil can be costly and creates work.

Steward’s stores
Cleaning: Includes all materials used in maintaining the cleanliness of the
ship, such as detergents, soaps, fumigators etc.
Stationery: There are two basic types; company printed stationery such
as forms, indents, reports etc., and Standard stationery such as note
books, pencils, typewriter ribbons, typing paper etc. It is usual for there
to be a separate Standard ordering form for company stationery as this is
normally supplied direct from the company’s office ashore.
Accommodation & galley: Includes the following three cost centres:
1. Table and cabin linen (table cloths, sheets, towels, etc),
2. Crockery and cutlery (knives, forks, cups, glasses etc),
3. Cooking and serving utensils (pots and pans etc).
Laundry ashore: The costs under this heading can vary considerably, as
in some ships a laundryman is carried who launders all the ship’s linen,
while in others the soiled linen is sent ashore, often at high cost.
Alternatively in ships with appropriate equipment one of the crew will
carry out the task for extra payments. This, like the technical costs is
another example of the costs of one department reflecting on another,
i.e. crew costs increase relatively with the carriage of a laundryman but
supplies costs reduce, apart from the soaps, etc. used in the laundry.
Even technical costs are involved if laundry equipment is fitted in the
ship.
Soft furnishings: Includes carpets, curtains, loose covers, mattresses, etc,
and is the one area of supplies costs which can vary considerably with
time. In a new ship there may not be any costs under this heading for
some years, and then a gradual increase as replacements are made.
Note: Hard furnishings include chairs, tables, cabinets etc, and these are
usually considered to be a technical cost.

64
Victualling: Can be arranged in three distinct ways, although from the
point of view of accounting, budgeting and bookkeeping the same cost
centre can be used.
The three ways are:
1. A daily allowance is paid to the crew, either directly or through the
master or chief steward, and they purchase their own food and
make their own catering arrangements.
2. The company pays a victualling agent a fixed amount per man per
day and he arranges all victualling on a world wide basis. This
arrangement usually requires the steward or cook/steward to be
an employee of the agent.
3. The company provides all victualling.
Although the system of the company arranging the victualling probably
provides the greatest control in terms of cost and quality, the other
methods have advantages in a fixed cost which helps budgeting etc., and,
in the case of small companies keep administration costs to a minimum.
Except where the crew provide their own food, there is usually a scale of
minimum quantities of food laid down by government regulations which
must be adhered to. In many cases there are additional food
requirements for trading in certain parts of the world and additional food
allowances on holidays and feast days, while others receive a daily issue
of wine.
A number of shipowners find it preferable to provide a better level of
feeding than is possible with the minimum food scales laid down and set
their own standards.
Maintainence of these standards has been helped by the development of
deep frozen and freeze dried foods such that nowadays the trading
pattern of the ship has less influence on feeding standards than in the
past.
Another interesting development has been in regard to bread: In the past
one of the cooks had to bake the bread for the whole crew while the ship
was at sea. Nowadays large quantities of bread can be taken on board
and deep frozen for future use, thus reducing and in some cases
eliminating in many trades the need for a baker in ships. Both these
developments require large refrigerator facilities but this is taken into
consideration during building.
One of the problems with victualling costs is the number of extra meals
which have to be provided. These can vary considerably as a result of the
trading pattern of the ship and the company’s conditions of service and
may be required for any or all of the following categories of people:
Company officials visiting or sailing in the ship.
Pilots and port officials.
Agents, surveyors and other official visitors.
 Wives and children of crew members.
Riding crews.
Business visitors.
Cargo supervisors and tally clerks at anchorage ports.
These extras can increase the total victualling costs and even affect crew
costs as a result of extra overtime worked. In consequence, the division
of the total victualling cost by the number of crew can give a misleading
indication of the victualling costs and, therefore, the likely number of
extras must be carefully considered when budgeting. Records of the total
number of meals prepared should be maintained in order to obtain an
indication of the costs “per head, per day” .
Nowadays there is much less anchorage work and the demands of port
officials for meals in the saloon have decreased. Many companies have
strict rules regarding their own shore employees eating in ships
particularly those with reduced manning, as apart from the cost, the
reduced catering staff do not have the capacity to deal with such extras.
The “ extras” which do remain as a substantial factor are those of wives
and children and occasionally riding crews. The number carried will
depend upon company policy but in some ships can account for a
significant additional cost.
Waste can be a cost factor in victualling even when good quality food is
supplied to the ship. In this, ship catering is no different to hotel and
home management and is a matter of good housekeeping. Adequate
training of the catering staff, preferably in a professional shore
establishment, together with up to date advice from the supplies
department ashore can do much to reduce losses through waste.

Recreational
With smaller crews and less time in port there has been a growing
awareness of the need to provide the crews with means of entertaining
themselves. The traditional games of each country such as table tennis,
darts, cards, mah jong, etc are now usually provided. There was a time
when the boots and clothing for football were also provided, but this has
disappeared as ships today are, generally, not long enough in port to use
such equipment.
One of the great advances in crew entertainment was the sound film
projector although the cost of the equipment and supply of film on a
world wide basis was not cheap. The advent of video equipment has
supplanted the projector and considerably enlarged the scope of this type
of entertainment allowing the television to be used for local transmissions
in port and to show video taped films and sports programmes, etc. at
sea. It also has another very important side benefit, the ability to show
training films in ships, thus educating the whole crew and, to some
degree, reducing the cost of crew training ashore.
The supply of reading materials such as libraries, paperback books,
magazines and newspapers is also of importance to crew morale and
these are arranged through various organizations, crew agents or directly
by the supplies department.
Because the recreational items are often arranged in different ways, it is
usually convenient to have three cost centres in the recreation group:
games, visual entertainment and reading material.

Clothing
The high cost of transporting crew’s personal belongings by air, tradition
in regard to supplying Indian or Pakistani crews with cold weather
working clothing and the growing requirement to provide protective
working clothing has resulted in a variety of items of clothing being
supplied to the crew by the shipowner. These can range from safety
helmets, working gloves, safety goggles, boiler suits, refrigerator coats,
to officers’ epaulettes and uniforms, hat insignia and even heavy coats for
bridge watchkeeping officers.
This cost group can be a single cost centre or can contain a number of
cost centres as required by the shipowner e.g. protective clothing,
uniforms, saloon clothing etc.

Handling
One of the common remarks of seafarers when they see the costs of such
commonly used goods as soap powder in the ship’s canteen is that “it
could be bought cheaper in the supermarket” in the town. This is often
true but makes no allowance for the cost of transporting the goods to the
ship, often at distant berth or at anchor. When the distance is great the
cost is often shown separately and, as indicated earlier in the chapter,
the tendency to transport supplies over long distances often involves high
costs even though they are incurred in the expectation of overall savings.

Canteen and bar

This covers the supply of alcoholic and soft drinks, cigarettes and
tobacco and may extend into basic toilet and clothing articles.
Traditionally it is often referred to as the “Bond” from the days when
the majority of the items obtained were free of Customs duty and thus
had to be locked and sealed in a “bonded” storeroom in port. Like
victualling, the costs of this item can be dealt with in three ways:

The Captain’s Account known as the Captain’s Bond: With this system all
purchases and sales are handled by the master for his own account, with
the company’s authority. The company has no financial involvement
except, perhaps, to advance the captain a sum of money initially to
establish the bond.

67
 The Contractor’s Bond: This operates in the same way as the Captain’s
Bond and is usually associated with a victualling agent or contractor
services.
The Company Bond or Canteen: Involves the company in expenditure
although the costs are usually retrieved through sales to the crew. Few
companies expect to make a profit on this item and are content to cover
their costs, including handling charges and losses through breakages or
damage.
Essentially this item is not a cost but is included as the items have to be
supplied. The accounting system will allow for expenditure under this
cost to be “re-charged” to balance sums debited from the crews’
accounts.
In the past it was usual for the senior offkers to have a separate supply
of goods for entertainment and to provide gifts to port officials but
nowadays they usually draw such items as they require from the canteen.
It is usual for companies to set a limit on the amounts apart from
exceptional circumstances in regard to gifts to port officials. Again costs
under this heading are usually re-charged to the operators of the ship.
Thus there can be two cost centres under this heading; “Crew” and
“Entertainment” .

Modifications
Includes all costs associated with any changes in the ship which are likely
to be capitalised. Although such supplies items are likely to be small they
can be incurred when, for example, after a work study and G/P
implementation fitted carpets are laid to reduce washing interior decks.
From the point of view of capitalisation there is a need to quantify the
costs involved under this heading. They will, of course, be minimal in
some ships but the shipowner should retain this cost centre.

BUDGETING FOR SUPPLIES COSTS

In the main, budgeting for supplies costs depends very much on past
records of consumption and costs, adjusted for anticipated inflation and
currency factors. The basic assumption is that the consumption of
consumable items in a ship is relatively constant. However, there are
exceptions as follows:
Crew: If there is a change in the nationality of the crew and/or the
manning scale, there will be a change in victualling, accommodation
and galley costs.
Trading pattern: If the trading pattern of the ship is expected to
change there can be a significant change in all supplies costs.

68
Z SHIPPING COMPANY SHIP
Budget Year: Department: Supplies
Currency:
M.A.S. Item lst 2nd 3rd 4th Total
Code Qtr Qtr Qtr Qtr

5100 Marine stores — — — — —

5110 Safety
5120 Paints
5130 Cargo equipment
5140 Ropes & wires
5150 Deck stores
5160 Fresh water

Total marine stores

5200 Engine stores — — — - —

5210 Chemicals
5220 Gases
5230 Electrical
5240 E.R. stores,
packing

Total engine stores

5300 Lubricating oils

5400 Stewards stores — — — — —

5410 Cleaning
5420 Stationery (company)
5430 Stationery
5440 Accom. & galley
5450 Laundry supplies
5460 Laundry ashore
5470 Soft furnishings

Total stewards
stores

5500 Victualling — — — — —
5510 Crew
5520 Others

Total victualling

5600 Recreational

5700 Clothing

5800 Handling

5900 Canteen/bar

9200 Modifications

Total supplies costs

Assumptions
Trading Currency/inflation
69
 Drydock paints: If the ship is to be drydocked during the budget
period there will be a significant increase in the paint costs compared
with a year when the ship is not dry docked.
Lubricating oil: Consumption can fluctuate as a result of problems with
the main engine and auxiliaries. So any budget for this commodity
should be checked in quantitative terms with the technical department.
Information as to fluctuations of world prices of commodities such as
paint and lubricating oils is an important adjunct to past records.
An example of a typical budget setting form is shown on page 69.

To summarise
Supplies covers a very wide range of items.
Supplies are ordered by the principal users in ships and cost centre
groups are arranged accordingly.
Supplies costs depend upon availability or costs of goods and thus the
trading pattern of the ship. They can be particularly affected by
currency fluctuations.
Supplies usually need “strategies” and careful planning to ensure they
reach ships by the most economie means.
Two major cost centres are lubricating oil and victualling and
consumption of both these items needs careful attention.
Most supplies are ordered by the ship's staff except for dry doek paints
etc.
Supplies budgeting is generally based on past consumptions with
currency and inflation factors applied. Therefore past records are
important.

70
Chapter Eight

Insurance costs

This chapter is about the costs of marine, war and liability insurance as
they apply to the running costs of ships. Like accountancy, this type of
insurance is a very complex subject and for a greater understanding of
the subject reference should be made to more comprehensive books on
the subject, some of which are listed in the bibliography.
The insurance department of some shipping companies often lies outside
the sphere of the ship manager, primarily because the nature of its work
is both legal and financial and because decisions as to the amount of risk
the company should take are usually made at a corporate level in view of
the magnitude of the sums involved. Wherever the responsibility lies, the
costs of the insurance are usually included in the running costs of the
ship. Once the insurance is arranged, a close working relationship
between the insurance and the ship management departments is
essential, to ensure that whenever possible risks are avoided and that
underwriters are promptly put on notice of possible claims and that
legitimate claims under the policies are properly progressed.
Ship insurance is arranged to provide the shipowner with:
Protection against physical loss or damage
Protection against liability to third parties
Protection against loss or interruption of earnings
The first two are virtually mandatory for a number of reasons,
particularly international statutes, government legislation and mortgagees
requirements, which all impose a requirement for insurance. Self
insurance, except for very large companies, is usually not feasible
because of the necessity of depositing bonds and tying up large sums of
money to ensure adequate reserves to pay claims.
Protection against loss of earnings is a matter of choice by the
shipowner, but many consider it prudent to protect themselves to a
greater or lesser degree. Self insurance for this risk is possible but also
usually uneconomic and, again, it is preferable to have an insurer bear
the risk of substantial interruptions to the company’s cash flow.
 Arranging insurance
Protection against loss or damage
Apart from a few countries which insist that ships registered under their
flag insure with local companies, most insurance arranged under this
heading is obtained under free market conditions in the marine insurance
markets of the world in London, North America, Europe and Japan.
Except for war risks, there are very few scales or tariff rates and world
insurance markets gauge their requirements on the basis of prevailing
conditions, underwriting results and commercial judgement. Competition
plays a large part in premium leveis; if underwriting capacity expands,
rates are forced lower than they should be, but as losses erode premium
reserves, capacity shrinks and rates return to realistic levels, particularly
if a number of heavy losses are sustained in a short period of time.
Generally, marine insurance is arranged through brokers and in some
markets, such as Lloyd’s of London, the underwriters will only deal
through recognised brokers. Thus brokers fill an important role between
shipowner and underwriter, receiving commission from the underwriter
while acting for the shipowner in seeking the best insurance for him and
advising him during the course of the period of insurance.
Just like charter parties, insurance policies are contracts which have been
developed and legally tested in the countries of each of the major
insurance markets. There are many similarities and just as many
dissimilarities, such that the shipowner needs to take considerable care
when placing insurance, to ensure that his exposures to risk are properly
covered to the fullest extent possible. This is particularly so when, in
seeking the best possible rates, the insurance is spread over a number of
markets. In this, a broker should guide the shipowner, advising him on
the reliability of the markets and drawing his attention to omissions or
reductions in the protection offered and seeking ways to provide the
insurance appropriate to his needs.
In arranging the insurance the broker’s first step is to find a lead
underwriter or “Leader” , specialising in the particular type of insurance
required, and who is willing to quote a rate for a proportion of the
insurance. If this is acceptable to the shipowner, the broker has to
complete the cover by approaching other underwriters who may be
willing to follow the lead of the lead underwriter. The insurance may all
be placed in the same market or spread over other markets, in which
case additional insurance may be required to cover any omissions, or
reductions or variations as referred to earlier. When spread in this way
the placing of each type of insurance should be co-ordinated so that
terms and conditions will be consistent throughout the policy. If this is
not done, disputes amongst the underwriters can occur to the detriment
of the shipowner’s claim. It will be appreciated that in trying to
standardise the insuring conditions in all markets, the costs may differ in
each market.

72
Obviously, most shipowners endeavour to obtain maximum protection at
the lowest possible price but they should always bear in mind the quality
and reputation of the underwriters and the benefits of a long standing
association with them. These are usually found in the ready acceptance
of facts provided by the shipowner and the prompt settlement of
legitimate claims, all of which can save the shipowner time and money.
Unfortunately, such benefits are unquantifiable and new insurance
opportunities with attractive low rates can be very tempting, until market
capacity shrinks and the owner is forced to look elsewhere for his
protection, and, perhaps, has to accept second rate security from
unknown underwriters if his budget is restricted.

Protection against Liability

In the main, this insurance is obtained through the Protection and
Indemnity Associations, or P & I Clubs. It is also, usually, arranged
through a broker although some shipowners deal directly with the clubs.
These clubs were originally formed by groups of shipowners for their
mutual protection, to cover risks for which there was no other cover e.g.
when underwriters would only give cover for three-fourths of the
shipowner’s liability to third parties for loss/damage resulting from
collision with another ship. There are a number of such clubs in different
parts of the world serving shipowners on a world-wide basis. They are
non-profit making organisations whose charges are, in the first place,
based on their own rating structures. The charges are supplemented by
additional contributions or supplementary “calls” to cover excessive
losses which are shared amongst the members. Upward adjustments to
the club’s rates will result from a shipowner’s poor claims record and
specifïc risks associated with a particular ship type or trading pattern.
Adjustments will be made for the club’s loss record as a whole, to
compensate for currency fluctuations, inflation etc., and to cover the
club’s own re-insurance costs. This re-insurance is arranged for the
members as a whole to protect the club’s exposure to major losses etc.,
and again the costs are affected by the type of vessels entered in the
club.

Protection against Loss of Earnings

This insurance is also obtained on the open market from underwriters
specialising in that type of insurance, and again, is usually arranged
through a broker.

THE COST OF INSURANCE

Protection against loss or damage
As stated at the beginning of the chapter, there are few guidelines and
tariffs and most insurance rates are established through market forces.
However, in the first place the shipowner must have an insurable ship,
i.e. a ship worthy of being insured. The more worthy in terms of

73
 condition, age, management, flag, crew, type of trade etc., the easier it
will be to obtain a leader’s acceptance at a reasonable rate.
When assessing the rate to charge for huil and machinery insurance, the
leading underwriters consider many factors. Although they all have their
own methods of rating, there are a number of recognised aspects which
will influence them to a lesser or greater degree. They are most
influenced by the ownership and its management record, the vessel itself
and particularly its deadweight tonnage; its value in relation to its gross
register tonnage and deadweight, area of trading, flag, classification and
dimensions are also important. The dimensions and deadweight are used
together in calculations which the underwriters make to determine the
“size” of the ship and on which they base a proportion of the premium.
Underwriters charge for uncertainty and therefore a highly innovative
“prototye” ship will usually attract a higher premium than a “proven”
conventional ship. Most of these factors are beyond the shipowner’s
control and he must accept that if he has a ship of a particular type,
engaged in a particular trade etc., then the insurance rates will be
weighted accordingly.
The principle factor over which he does have control is the provision of
good management and through this, well-trained and proficient crews.
He is assessed in this by his overall management record — i.e. a record
of good and claims free operation and this will be reflected in the
underwriters rates and conditions. A good record is an important
negotiating point and will usually have the effect of reducing or at least
stabilising the owner’s insurance costs. Unfortunately, the provision of
good management, particularly proficient crews, does not yet appear to
have sufficiënt recognition through lower rates to encourage some
shipowners to increase their efforts in this area.
One factor which considerably affects the cost of insuring a ship is the
value or values placed upon it. This is a complex subject in its own right
and again, students wishing to know more should refer to the books and
papers listed in the bibliography. Briefly, ships used to be insured for
their market value or replacement cost, but difficulties in assessing such a
value led to the introduction of a valuation clause in insurance policies.
This necessitates agreement between insurer and assured on the value of
the ship before the policy is issued.
When approaching the question of ship valuation, a basic principle of
insurance must be borne in mind which is, that insurance is not a vehicle
for speculation, i.e., claims recoveries are limited in principle to actual,
provable losses. The obvious reason for this is that exaggerated values
would give rise to fraudulent claims. Subject to this principle, the
shipowner’s valuation requirements are affected by circumstances: on the
one hand he may require a high value in order to finance the
replacement of his ship if it is lost, or because he has a particularly
lucrative charter. If mortgaged, the mortgagees will probably require that

74
the ship be insured to cover whichever is highest, the outstanding loan
plus accrued interest, or the market value of the ship.
On the other hand, the ship may be old and have a low second hand or
scrap value, and in this case the shipowner may wish to insure it for its
lowest possible value, with correspondingly low premiums. But as the
ship is usually insured for the cost of repairing damage to the ship, up to
the constructive total loss (CTL) value, this factor has a large bearing on
the value to be agreed, as repair costs can be disproportionately greater
than the value placed on a ship and the underwriter may be faced with
paying out for a CTL. For this reason it will be found that below certain
levels the underwriter will insist that either the value is increased or he
will charge much higher premium rates to take into account costs for
particular average and the total loss risk which is so much greater in an
older ship.
Alternatively, when taking account of the risks involved in older
tonnage, some underwriters may only be prepared to cover the ship for
certain named perils and not on an “All Risks” basis. In such cases a
restricted policy such as a “Free of Particular Average Absolutely” ,
policy is arranged.
In order to seek a solution to the valuation problem, satisfactory to
insurer and assured, two levels of value can be placed on a ship. This is
usually arranged by fixing a lower value for total loss than for liabilities.
The result is a lower overall premium for less value in the huil and
machinery (H & M) portion of the policy, but with adequate insurance
for excess liabilities etc., when taking the ship’s sound value into
account.
Other insurances are available against the total loss of the ship and
related expenses. These insurances are governed by circumstances and
requirements and must comply with disbursement warranties, which
restrict the amount of additional coverage which can be taken out against
the total loss of the ship. Again, this is an important part of a complex
subject and further reading is required for a complete understanding.
Another factor affecting H & M insurance rates is the “deductible” , i.e.
a fixed amount or a percentage of the amount insured which must be
reached on damage claims before the insurer will start to pay out. There
are a number of ways in which deductibles are applied to proportionate
claims for different parts of the vessel and each accident and again,
reference should be made to the books listed in the bibliography, for
more information on this part of the subject. From the point of view of
the running costs, the deductible is important because of the contribution
which has to be made towards the costs of damage repairs.
The shipowner can usually increase the deductible and thus obtain a
reduction in the premiums. This is a form of “self insurance” , but the
shipowner may arrange a separate insurance for all or part of the
deductible if the sum involved is sufficiently large and the terms are
suitable. At times, underwriters may impose mandatory increases in
deductibles to take account of inflation or the owner’s “record” where
there are no allowances for premium increases in the policy.
Once the values, cover, deductibles etc., have been decided the
Underwriter calculates the premium or premiums from his rating notes
which it is unlikely that the owner will see in detail. Not all markets
follow the same basis of calculation and those which re-insure much of
their insurance liability may also reach their premium requirements
differently. Thus, although examples of premium calculations can be
found in reference books, the calculation of a particular premium may,
in actuality, be quite different, and in any case the result depends upon
the underwriter’s “ rate” .
Protection against liability
In the first place, P & I Club premiums are calculated by applying the
club’s “call” rates to the GRT of the ship. These call rates are based on
the overall claims of the club members during the current and preceding
three complete years, but excluding the current year if a bad result is
shown. The calls are supplemented by additional calls as required as
claims are finalised. The supplementary calls are made when required,
usually annually. These are based on an insurance year two or three
years earlier, depending upon when the years are “closed”
The rates may be increased to reflect the member’s particular loss
record, i.e. a loss ratio of premiums to claims, averaged over the
previous record period. Although brokers usually resist such increases
strongly, particularly as some accidents may be out of the control of the
owner. Like underwriters, the clubs also take into consideration a
number of factors before including a ship in their membership. These are
principally; the areas of trading, cargoes to be carried, flag or registry,
nationality of crew and particularly the record of the owners and
managers. The owner has more influence over these factors than those
considered by underwriters in H & M insurance.
Deductibles are also applied to P & I Club policies but the application
varies considerably, depending upon the club, nationality of the owner
and other factors. Some deductibles are applied to single voyages rather
than to each accident.
Protection against loss of earnings:
Loss of Hire: the annual premium cost is calculated by multiplying the
daily sum insured by the number of “off hire” days allowed by the policy
in any one year. To this figure is applied the underwriter’s percentage
rate. There is always a “deductible” to take account of repairs, such that
the insurance would not be paid until an agreed number of davs “ off
hire” have elapsed.
Loss of Freight: the cost is calculated in accordance with the value of the
“collect freight” which would be lost if the cargo was not delivered as a
result of the cargo and/or the ship being a total loss.
Other Insurances
War Risks: Protection is provided through specialist underwriters in the
case of Huil and Machinery and through the P & I Clubs in the case of
crews. This is one of the few areas of marine insurance where there is a
Standard market rate for premium calculations and in the London market
a War Risks Committee sets scheduled rates to which underwriters
usually adhere. The rates are usually applied to the value of the ship
used for the Huil and Machinery policies.
Annual War Risk policies afford world-wide protection except for
specifïcally excluded areas which are considered by the underwriters to
be unstable or dangerous. Cover can be purchased for those areas at
higher premiums depending upon the prevailing circumstances and
market forces. As world conditions change, so underwriters add or delete
such areas and cover for breaches of the War Risks trading warranties
can be reinstated at amended terms and rates, depending upon the
circumstances. As can be expected, the rates are likely to be very
expensive, particularly when hostilities are taking place and will be
borne, probably, by the operators.
Strike Insurance: Is arranged through special Strike Risk Clubs and
premium rates are applied to the daily sum insured as in the case of Loss
of Hire Insurance.
TOVALOP (Tanker Owners Voluntary Agreement Concerning Liability
for Oil Pollution): This protection against liability for oil pollution is
usually covered by the P & I Clubs as part of their Standard protection
against liability for oil pollution. They also provide for the shipowner’s
evidence of financial responsibility demanded by some countries to
ensure that ships are covered if found liable for pollution damage.
Crew Insurance: The statutory regulations of some governments require
that their seamen be given protection against illness, injury and death
through a government scheme or schemes. This can overlap with some
P & I insurance and in such cases the protection is arranged in close co-
ordination with the P & I Club e.g. S.M.I.S.B.A. in the case of an
Italian crew.

BUDGETING FOR INSURANCE COSTS

As will have been realised, there are very few cost centres in the
insurance department and four will sufhce:
Huil and Machinery (H & M) i.e. loss and damage
P & I i.e. liability
War Risks
Loss of Earnings
The MAS manual may have facilities for transferring costs to and from
other departments involved in claims.
 Unlike other cost departments, the approach to insurance budgeting
depends more upon the current required value of the ship, the market
conditions and the owner’s record than on past costs and detailed
estimates. In the case of liability insurance, it also depends on the
performance of the P & I Club. Essentially, the costs are determined
each year by negotiations. Even currency change forecasts will only
affect the budget if the premiums are wholly, or partially, paid in a
different currency to that used by the shipowner.
The negotiations are usually carried out by the insurance broker with the
underwriter and the P & I Club, who will consider the factors described
earlier in the chapter before quoting rates.
Premium rates are quoted on an annual basis and negotiations usually
start about two to three months before the due date. This is fixed at the
20th February each year for many of the P & I renewals, but may be any
time for the H & M renewal, although shipowners endeavour to arrange
the renewals for the whole fleet on the same date.
The renewal dates rarely coincide with the company’s budget year and
the ship manager or insurance manager will need to consult with the
broker for indications of new rates and the supplementary calls position
when preparing his budget.
The payment of H & M premiums is complex and depends upon the type
of insurance and the market involved. Discounts are usually given even if
the premiums are arranged by deferred payment on a quarterly basis and
these discounts increase if the payments are made by cash in advance.
P & I premiums are usually paid in two instalments each year and are
not subject to discounts. A number of P & I Clubs which renew their
policies each February make their supplementary calls each August.
An example of an Insurance Budget setting form is shown on the facing
page.

Budgeting for losses

When considering insurance budgets, there arises the question of
whether or not allowance should be made for “losses” and if so, whether
this should be reflected in the budget of the other cost departments.
Although the bulk of any loss will usually be borne by the insurer, the
cost of the deductible is usually borne by the shipowner, except in a total
loss situation. If it is decided that an allowance should be made for
deductibles, then it also has to be decided whether they are items for the
insurance budget or for the department concerned e.g. the technical
department in the case of machinery accidents.
It can be argued that the deductible is a form of self insurance and
should, therefore, form part of the insurance budget. However, as one
never knows whether or not there will, or will not, be an accident or

78
Z SHIPPING COMPANY SHIP

Budget Year: Department: Insurance

Currency:

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr Qtr Qtr Qtr

6000 Insurance
6100 Huil & machinerv
6200 P &I
6300 War risks
6400 Loss of earnings

Total insurance

Assumptions
Trading:
Currency/inflation:
Other:
Deductibles

claim, it is considered best not to budget for such unknowns. But as with
all budgets, consistency is the key word and the treatment of this matter
should be a company policy matter and followed by all departments in
the same way.

Reserves for supplementary calls

It was stated earlier in the chapter that P & I Club supplementary calls
are usually made three years in arrears. Although this does not directly
affect the budget, as each supplementary call can be considered to be
paid in the year the call is made, it is important to remember that if a
ship is sold, the supplementary calls will continue to be made for the
next two or three years. Shipowners, should, therefore, make a reserve
for such calls from the proceeds of any sale. Alternatively, the owner
may “buy out'’ of his liability for future supplementary calls through a
“ Release Call” but this method is usually more expensive than awaiting
the calls in the usual way.

Prevention is better than cure

As mentioned at the beginning of the chapter, there must be co-
ordination and co-operation between the insurance and ship management
departments if losses through breaches of warranty, i.e. non-adherence
 to the terms of the policy, are to be avoided. This could be a very costly
matter particularly when non-compliance automatically terminates the
coverage. Ship managers should understand the requirements of the
policy and work closely with the insurance department in adhering to the
terms, particularly in such areas as sea-worthiness and safety.
But there is more to the ship manager’s position in relation to insurance
than adherence to the policy terms. Not only is he in the best position to
be able to advise the owner on new or recurring risks, he is also in the
best position to prevent them and this is the best method of all of
protecting the company’s assets. He can do this by implementing safety
procedures and other techniques, such as planned maintenance, to
reduce breakdowns and possible accidents. But the area over which he
has the greatest influence from the point of view of insurance is the crew,
as the greatest single cause of accidents is “human error” . Although this
factor can never be totally eliminated, it can be considerably reduced by
careful selection of the crew, considering their experience and
qualifications, and their further development through training and
motivation.

To summarise
Insurance costs vary with the competitiveness of the world insurance
market.
The number of cost centres is small and good budgeting depends more
on the opinion of the broker than on past records and calculated
estimates.
The value placed on the ship has a large bearing on the cost of the
insurance.
The owner’s good record is important in obtaining reasonable
insurance premiums rates.
Human error is a prime cause of the need for insurance protection.

80
Chapter Nine

Administration costs

“There are no overheads, only contributions”

“Administration” or “Overheads” are the names given to the costs of

providing a base or central point from which the shipping company is run
or administered. The function of the shipping company’s administration
is split into two distinct but related parts; the corporate, which directs
the company as a whole and makes long term plans, and the ship
management and operations which deal with the day to day management
of costs and earnings as described in the Introduction.
All costs in a company must be borne or allocated somewhere and
ultimately they all find themselves in the balance sheet as described in
Chapter Three. However, in the early stages the costs of administration
are usually allocated separately to corporate management, ship
operations and ship management, unless the company is very small when
they may be considered as one cost.
It is the ship management portion which is charged to ships as part of
their running costs and this will now be examined. It will be recalled
from Chapter Four that the ship management department provides
direction and support for the crew, technical, supplies and insurance
functions. People with expertise in these functions are necessary once
anyone becomes responsible for the management of a ship. They do not
have to be directly employed by the shipowner and in a one or two ship
company the owner may find it uneconomical to employ his own experts
and will hire the expertise when and where he needs it. This has the
advantage of keeping staff costs low and avoiding staff liabilities. It also
keeps the office space requirements to a minimum. A further advantage
is that arrangements with hired persons can usually be terminated very
quickly if necessary.
Just like crew, there are advantages in having one’s own experts
constantly at hand, who are known and form part of the permanent team
both ashore and in the ships. But the problem of direct employment of
such experts in a small company is that the company, having recruited an
expert for each function, may not be able to afford adequate support
 staff, resulting in the “expert” carrying out basic clerical tasks and thus
under utilising his talents and skills.
There is little doubt that in the past many traditional shipping companies
of the older maritime nations often had too many administration staff.
But competition and low earnings forced many of the old ways to be
discarded and the management of those companies is now very much
more efficiënt with greatly reduced shore staff. However, just like the
crews of ships, there is al ways the question of the point at which staff
levels become too low and the lack of manpower actually causes
problems and thus inefficiency. The same can be said in regard to the
quality of staff in ships; if the ship’s staff are not of high quality, then
more shore staff will be needed to supervise their activities. Thus the
whole ship management administration function is a matter of balance
between ship and shore staff to achieve an optimum result, i.e.,
maximum efficiency at lowest cost.
Regardless of the administration policy of the company, some of the
functions of ship management may al ways be best dealt with by others.
This is particularly so in the case of the crew if they are from another
country. In such cases a shipowner may well find advantage in
contracting the whole responsibility for crewing to an agent, who is on
the spot for recruitment, selection, and travel arrangements, etc.
Victualling arrangements may also be contracted to an agent or to the
master or the crew as mentioned in Chapter Seven.
Thus the shipowner has the choice, of managing the ships completely
with his own staff or contracting out some or all the ship management
functions. Whichever way he decides, the costs and responsibility are
ultimately his and even if he contracts out the whole of the management
function he will still need to satisfy himself that he is getting value for
money i.e. not only economical running costs for his ships but good
management with all the short, medium and long term implications of
that term.
Obviously if the functions can be carried out more cheaply and
conveniently by a reliable contractor or consultant a shipowner should
seriously consider arranging for someone else to do the work for him.
But there usually comes a point, particularly when a fleet starts to grow,
when the shipowner will consider having his own, “in house” , staff.
However, personal preferences may still prevail and the shipowner will
adopt a policy with which he feels most comfortable.
Finally the shipowner has to decide where he wishes to locate his base or
office. Apart from the fact that it may be necessary to have an office in a
particular country for registry purposes, the choice of country, town, port
or city often seems to be based as much on personal preference and
tradition as on economie logic. This is particularly so today when
Communications are generally very good and often there is no functional
reason for the office, particularly the ship managment part, to be in the

82
centre of a large city with high office costs and associated high staff costs.
If the shipowner is actually operating the ships himself, there is often a
commercial need to be in the centre of the shipping sector of a city and
to some the need for a “front office” is either personally, strategically or
commercially important. Again, like the matter of contracting out, this is
often a matter of choice, although it should be noted that the economics
of the shipping industry have forced many shipowners to take a hard
look at their administration costs and ask themselves whether they have
to have expensive, centrally located offices, when the costs could be
halved elsewhere.
The administration functions and costs will now be considered as if the
shipowner carries out all the functions with his own staff, but it should
be borne in mind that even if he does contract out some or all of the
functions, the costs will still be incurred on his behalf.

The functions
The prime functions of ship management administration are:
Ship support
Record keeping
Accounting
Communications
Ship support: As explained in Chapter Four, the question of how much
responsibility is placed in the ship is a matter for company policy, but
regardless of the degree or place of management, ships need shore
support and this is a prime role of the shore base. Crews must be
recruited, trained, changed etc., supplies must be ordered, arranged,
and technical maintenance must be planned and arranged and spare gear
ordered; and insurance cover must be placed and accounts of all financial
matters must be kept.
But support is not just the arranging, and planning ordering of crew,
parts and repairs etc. It is also the formation and issue of adequate
regulations, instructions, advice and guidelines to ships. Apart from the
“legal” requirements for adequate company regulations, ship staff need
proper instructions, advice and information on a whole range of matters
from safety, changing international regulations, new equipment and even
the correct use of detergents. The way in which such documentation is
presented is very important and requires skilled staff to ensure that
everything issued is easily assimilated and kept up to date.

Record keeping: The value of keeping proper records cannot be over

stressed. Apart from the company’s own requirement for performance
monitoring, maintenance, insurance claims, crew records accounts, etc.,
in any sort of litigation there is usually a need to show that the company
has managed and supported the ship in a professional manner and good
records can usually provide the necessary evidence.
 Accounting: This subject was covered in Chapter III and it is only
necessary to add that sufficiënt staff must be employed to keep an up to
date set of books and provide management with the information it needs.
Communications: Although this is more a service than a function, the
need for a good system of Communications between ship and shore is
essential in a well run shipping company. Some methods of
Communications are more expensive than others and it is important for
the ship manager to provide concise instructions on when and how
Communications should be made.

THE COSTS
The cost centres of administration can be grouped as follows:
Staff
Travel
Entertainment
Occupancy
Communications
Printing and stationery
Professional charges
Other charges
Depreciation and amortisation
The cost centres composing these categories are shown on the example
MAS manual page on page 87.
These can apply to the whole cost of maintaining an office and staff, but
it is usual to account for the costs by department or ship whenever
possible. Some costs can be allocated directly to the department
concerned while others have to be apportioned and it is this which makes
administration costs different to the other cost departments. Whereas all
the costs in the crew, technical, supplies and insurance department can
be charged directly to the ships concerned, administration costs have to
be allocated in a number of ways as shown in the opposite diagram.
From this it can be seen that occupancy costs are incurred for the
company office as a whole and only a proportion, based on the space
occupied, is charged to the ship management department.
Travel and Communications are charged directly to the ship while the
remainder are charged directly to the departments and apportioned to
the ship as will be explained in more detail at the end of the chapter.
The composition of each of the groups is not complicated:

Staff: Covers all ship management staff salaries and associated costs as
listed on the sample MAS manual page. It is important to note that if
staff turnover is high the costs of recruitment will also be high
particularly if recruitment agencies have to be involved.

84
Typical apportionment of administration costs

Travel: Is self-explanatory but it should be noted that it is usual to

separate the costs involved with company cars and those incurred by
employees using their own cars for company business.
Entertainment: Again this is self-explanatory, but it should be noted that
in some countries there are different tax allowances for entertaining
foreigners as distinct from nationals of the country where the base is
established.
Occupancy costs, Communications, and professional charges: Are also
self-explanatory as listed and are incurred by most companies once an
office is established. As previously explained, the rent, rates and office
services charges may be a proportionate share of the total office costs.
Other charges: Includes small cost centres which do not readily fit into
the other groups. Care is necessary to avoid this group being treated as a
“Miscellaneous” dustbin.
Depreciation: Depreciation covers the decreasing book value of company
cars and equipment as described in Chapter Three.
Amortisation: Covers the decreasing book value of leasehold
improvements, such as fittings, decorations, etc., as referred to in
Chapter Three.

85
 Budgeting for administration costs
Budgeting for administration costs is usually based on past costs
increased for inflation, provided there are no changes in staff or
occupancy, etc. As always, each item must be considered and likely
changes applied to past records.
Changes in the number of staff will obviously change the staff costs, as
will moving office to larger or smaller or more or less expensive
premises. Local taxes, light, heat, Communications usually increase with
inflation but rents are usually fixed for a number of years but can alter
considerably at the time of re view, depending upon the property market
situation at the time. Consultation with professional advisors and
examination of other property rental details will help in estimating any
likely changes in this cost.
The production of an administration costs budget is usually relatively
easy providing all facts are considered systematically and there are no
major changes. However, apportionment of the costs can be a
contentious issue within a company, or group of companies, if one
company or department provides a particular “service” for the others.
This is often because the company or department to whom the service is
provided considers they can obtain the same service more cheaply
elsewhere. This if often a valid point and departments providing such
services should always keep it well in mind when making charges for
their services.
Similar arguments can be raised when apportioning ship management
department costs to ships. The department costs of staff and their
associated costs such as occupancy, printing, stationery etc., can be
divided equally amongst all the ships of the fleet, apart from costs such
as Communications and staff travel which are allocated directly to each
ship. However, this method is often contested, particularly if the fleet
consists of ships of different sizes, as it is argued that the costs should be
apportioned accordingly to the size of the ships.
Such thinking is usually applied to ship management contracting charges
but can be questioned in a company managing its own fleet of mixed
ships of various types and sizes. This is because almost the same effort is
required in managing a small ship as a large ship; the same surveys, the
same types of stores, the same types of spares and often similar size
crews are needed regardless of size. The principal difference between the
management of small and large ships is usually one of magnitude of costs
rather than effort e.g. more paint, larger and thus more expensive parts
etc. The greatest difference in terms of effort is during surveys,
drydocking and repairs when much more supervisory manpower is
required as, for example, in a VLCC compared with a 12,000 ton
deadweight general freighter.
When considering management “effort” an interesting phenomena often
noted by ship managers is that ships which trade away from their home

86
 Z SHIPPING COMPANY

Management Accounting Manual

M.A.S. Codes — Department: Administration

Ship Code: Refer to Ship Code List

Head Code: 7

2nd Category 3rd Category Uncoded items included

Item Code Item Code

Salaries 7110
Overtime 7120
'Social Security 7130 State pension
Company pension 7140
Staff 7100 Staff Insurances 7150
Recruitment 7160
Training 7170
Re-location expenses 7180

Car allowance 7210 Staff’s own cars

Travel 7200 Company car exp. 7220
Travel 7230 Company car petrol

Entertaining dom. 7310 Domiciled guests only

Entertainment 7300 Entertaining for. 7320
Entertaining Staff 7330 Foreign guest only

Rent 7410
Rates 7420 Water rates
Services 7430 Heating and cleaning
Occupancy 7400 *Fitting out 7440
Equip. rental 7450 Maintenance
Office Insurance 7460

Telephones 7510
Tel. recoverable 7511
Telex 7520
Communications 7500 Telex recoverable 7521
Postage 7530
Postage recoverable 7531

Printing and Printing 7610

Stationery 7600 Stationery 7620
Photocopying 7630

Legal 7710
Professional Audit 7720
Charges 7700 Medical 7730
Estate agents 7740

Subscriptions 7810
Other charges 7800 Charitable 7820
Publications 7830
Refreshments 7840

Depreciation Dep motor 7910

and Dep. equipment 7920
Amortisation 7900 *Amort. property 7980
if not includcd in 7440

87
Z SHIPPING COMPANY SHIP

Budget year: Department: Administration

Currency: Sheet 1

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr Qtr Qtr Qtr

7000 Staff — — — — —

7100 Staff
7110 Salaries
7120 Overtime
7130 Social security
7140 Company persion
7150 Staff insurances
7160 Recruitment
7170 Training
7180 Re-location exps.

Total staff

7200 Travel — — — — —

7210 Car allowance

7220 Company car exps.
7230 Travel

Total travel

7300 Entertainment — - - - -
7310 Ent. domiciled pers.
7320 Ent. foreign pers.
7330 Ent. staff

Total entertainment

7400 Occupancy — — — — —

7410 Rent
7420 Rates
7430 Services
7440 Fitting out
7450 Equipment rental
7460 Office insurance

Total occupancy

7500 Communications — — — — —

7510 Telephones
7520 Telex
7530 Postage

Total Communications

7600 Printing and stationery — — — —

7610 Printing
7620 Stationery
7630 Photocopying

1 Total print/stry.
Z SHIPPING COMPANY

Budget Year: Department: Administration

Currency: Sheet 2

M.A.S. Item lst 2nd 3rd 4th Total

Code Qtr Qtr Qtr Qtr

7700 Professional charges — — — — —

7710 Legal
7720 Audit
7730 Medical
7740 Estate agents

Total prof. chgs.

7800 Other charges — — — — —

7810 Subscriptions
7820 Charitable
7830 Publications
7840 Refreshments

Total other charges

7900 Depreciation and amortisation — — — — —

7910 Depreciation: Motor
7920 Depreciation: fittings
7930 Amortisation: property

Total dep. and amort.

7000 Summary totals — — — — —

7100 Staff
7200 Travel
7300 Entertainment
7400 Occupancy
7500 Communications
7600 Printing and stationery
7700 Professional chgs
7800 Other charges
7900 Depreciation and amortisation

Total administration

Assumptions
Inflation:
Location:
Staff:
Equipment:
 port usually seem to require less support from the base office than ships
which call frequently at their home ports. It is presumed that this is
because crews draw on their own resources when they are far away but
when near the base tend to refer decisions on repairs, etc., to the shore
management.
The apportionment of the ship management costs should be a matter of
company policy and if all ships are much the same size then the matter is
easily resolved by spreading the costs equally. However, if the resultant
costs are higher than the “going rate” for contract management, the
shipowner should carefully consider the reasons for the differences. As
always in such situations, comparisons are not simple. This is particularly
so in a moderate sized shipping company where the ship management
staff provide services other than management, such as research and
development (R & D) and advice and supervision on the building of new
ships, which is often difficult to quantify as it is usually carried out at the
same time as their other work. In such cases it is probably best to apply
the “going rate” of management to each ship and allocate the balance of
the ship management actual costs to R & D or New Building. If the
difference is too large then a re-assessment of the management structure
should be carried out.
The costs of corporate management, such as directors, presidents, vice
presidents, etc., must also be borne somewhere, but these costs are
usually charged later in the accounts structure. The provision of
accounting services may be partially allocated on a departmental basis
and the remainder on a corporate basis. In larger companies accountants
may be attached directly to the ship management department.
An example of an administration budget settling form is shown on pages
88 and 89.

To summarise
The shipowner has the choice of whether to subcontract all or part of
the ship management administration functions, or carry them out with
his own staff. In either case, the responsibility is ultimately his.
The location of the shore base can have a significant effect on the
administration costs.
The ship management administration functions are essential to the ship
and business.
Apportionment of costs can be a contentious matter and requires a
clearly defined policy.
Management effort does not necessarily increase with the size of the
ship.

90
Chapter Ten

Summary of costs
departments

The cost centres having been considered in detail and arranged into
departments it remains for the total costs to be added together to
produce the costs of running the ship i.e. the “Running Costs” . They can
then be presented to senior management in a concise form and also to
the operators for inclusion in their voyage costs calculations.
It is at this stage that an allowance for the ship’s depreciation and any
interest charges are often added to the running costs, although these are
outside the control of the ship manager. The interest charges are the
costs of bank loans or mortgages and the depreciation charges are those
referred to in Chapter Three.
The presentation of the running costs now takes on a very simple format
as shown on the budget setting form on page 92. A general summary of
assumptions and time out of service may be noted on the form.

Daily running costs

To this point, all the costs have been considered on an annual basis to
coincide with the financial year, although in order to recognise changes
that can take place within a year, the budget is usually estimated and
shown in “quarters” . But the operators usually need to know how much
the ship costs to run per day because they make their calculations on a
daily basis and this figure is obtained by dividing the quarterly costs by
the number of days in the period, or by the number of days available or
“in service” in the period. Thus if the costs for a quarter are estimated to
be $250,000 then on the basis of a 92 day quarter, the daily running costs
would be $2,717 per day. But if it is estimated that the ship will be out
of service for four days of that quarter, then the service days will be 88
and on that basis the daily running costs will be $2,840 per day. In either
case the figure will, of course, be an average over the quarter. If it is
preferred, the calculation can be made in exactly the same way for a
 Z S H IP P IN G C O M P A N Y S H IP

Budget Year: Ship Management:

Currency: Summary of
Running Costs

General Assumptions
Trading:
Currency/'Inflation
Time out of Service Days.

* If not included in departm ent totals.

year, but if there is to be a significant increase in the costs in a particular

quarter, it can be argued that the calculations on the basis of quarterly
costs is more realistic. This is particularly so should the anticipated
increase in costs be so large that the shipowner decides to sell the ship.
In that case the use of running costs based on the total estimated costs
for the year would be quite wrong.
In the main, the method of calculating the daily running costs according
to the service days and quarterly costs seems to be more correct, as there
is then a proper balance between earnings per day and real costs per
day.
It is important to note that initially the daily running costs are based on
the budget figures. These should be adjusted from time to time to reflect
the actual costs and any foreseen changes to the budget figures. This
aspect will be considered in more detail in Chapter Eleven.

Principal requirements
This brings to a close the second section of the book but before moving
to the third section it is worthwhile highlighting the principal factors
associated with all costs and cost processing.

92
The number of costs centres: This is the manager’s choice. He can have
as many or as few as he needs. “Need” is the operative word and the
level of need will depend upon the size and type of organization. There
is no point in having a large amount of detail if no one has time to
examine it. But at the other extreme, he cannot expect to be able to put
his finger on problem areas easily unless there are some details. However
many or few details are shown in the budget and MAS, the budget itself
has to be built on detail otherwise something will be forgotten.
Policy and consistency: For a system to be developed there have to be
some ground rules i.e. some clear understanding as to the way the
company and ships are to be managed. Once these rules or policies have
been decided and the systems developed, they should not be altered
without careful consideration as to do so will cause confusion.
It is important to keep in mind that there are many ways of arranging
and naming ship costs centres, and each employee prefers the names he
was trained with. The names and groupings are unimportant: it is not of
great importance whether victualling is placed in “Crew” or “Supplies”
or in a department on its own. What is important is that everyone in the
company should know how victualling costs are dealt with.
Inflation and currency: The effects of these two must not be
underestimated and together with the trading anticipations should be
Standard “assumptions” in budget preparation.
Past records: Examination of past records is of considerable help in
estimating costs but care should always be taken to ensure that factors
used in the past and present are the same and if not, that appropriate
adjustments are made. Just as no two ships are the same, neither are two
voyages or two years in a ship’s life alike.
The unquantifiables: Some costs and their effects cannot be quantified.
Safety, training and quality of crew are the three principal areas where
management decides as much by conviction as by figures. These factors
will be considered in more depth in Chapter Sixteen.
Having considered the ship’s costs and their arrangement and estimation,
the next stage is to control the costs to achieve the intended results.

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 Chapter Eleven

Control

“I know what I can m easure”

L o rd Kelvin

The Bath Analogy

There is a fairly well known analogy often used to describe control which
is worth repeating: if someone decides they want a bath X centimetres
deep and at a temperature of Y degrees centigrade, they usually turn
both the hot and the cold taps on at the same time. Personal experience
with baths and that particular water System will teil them whether to turn
the hot tap fully open and whether or not to do likewise with the cold
tap. After the bath is about a quarter of the required depth they will test
the water temperature and if not to their liking they will adjust the flow
of water from one or other of the taps.
Once in the bath further adjustments may be made; either because a
little more depth is required in which case some more water would be
added, or because the water is too deep, in which case some water would
be let out. If after some time the water cools, hot water may be added to
raise the temperature and if that increases the depth too much, then
again, some water may be let out.
This, in essence, is control. It is having a plan, putting it into action and
then continuously monitoring and adjusting it to achieve the objective,
often to suit changing needs. In business, and in ship management in
particular, the objectives or goals are two-fold; the goal of achieving the
plan and the goal of achieving the budget. To achieve the one without
the other is unsatisfactory, as not to carry out the plan is likely to have
adverse operational effects, while to achieve the plan at an excessive cost
will also have an adverse effect on the profitability of the company.

Feedback
Control can only be exercised with information or “feedback”. Without
information no manager can know what is going on and to a ship

94
manager with ships far away, this is doubly so. Unless he knows what is
going on he is not really in charge. Of course, a manager must be
selective about what he needs to know, as too much information will bog
him down such that he will be overworked and unable to do his job
effectively. Information for information’s saké should be avoided at all
costs. The manager’s skill lies in ensuring that he gets the information
necessary to exercise control, but no more.
At its best, control starts before events occur, by the establishment of
Systems and procedures. Systems and procedures which are clearly
defined, easy to use and particularly, easy to operate by all those
involved. This requires definition of the methods of recording,
transmitting, monitoring, storing and analysing the information. It also
requires definition of the authorities and responsibilities of those
involved.
The information on costs is dealt with by invoices and accounts as
described in Chapter Three, which are fed into the management
accounting System to produce management reports. Information on the
progress of the plan itself is obtained through performance reports,
maintenance reports and work lists, stock reports etc.
But for control to be really effective there must be involvement of the
people concerned. This way control starts from the time of making
decisions, whether on board the ship or ashore, and continues through
every phase, not only in regard to the work of the plan, but also in
regard to the costs. To achieve this managers must be involved in the
accounts processes as only they know what has been done and only they
should have the authority and responsibility, for approving payment.
Equally important, they should be responsible for coding the bills so that
costs are allocated to the right cost centres. Managers often consider
coding to be a chore but it is the best way for them to maintain their
knowledge of costs and at the same time ensure that costs are allocated
correctly.

The report
Having put the cost information in the MAS, the next stage is its
arrangement into a meaningful format for presentation to the various
levels of management as described in Chapter Two; comprehensive detail
for those directly responsible and summarised costs for more senior and
corporate management.
Whether in detail or summary form, management reports should provide
the following basic information:
The name of the ship.
The cost department.
The period and the date.
The items in plain words and MAS code numbers.
and for each expense item:
The actual amount.
The amount accrued.
The amount of pre-paid expenses.
The total of actual accrued and pre-paid expenses.
The budget for the period.
The variances for the period i.e. the difference between the total and
the budget.
The cumulative total.
The cumulative budget.
The cumulative variance.
Variances can be shown in money terms, or as a percentage difference
between the budget (100%) and the total costs. They should be shown as
being “better” or “worse” than budget, as to use positive and negative
signs alone can be confusing especially in a company where the same
terms are used for earnings e.g. a negative sign less than budget can be
good for the ship management department, but the same sign would
have the opposite meaning for the operations department.
In industries where cost centres are arranged into groups of similar
magnitude, the expression of variances in percentage terms can be
meaningful, but as explained in Chapter Two, ship’s costs are not
grouped in this way and where costs are of different magnitude the use
of percentages can be misleading. As will be appreciated, a 5% variance
of £100,000 is much more significant than a 10% of £20,000. For this
reason it is preferable to express variances in ship management reports in
money terms.
In many industries it is usual for management reports to be presented
monthly and this is particularly valuable if profit is sensitive to small
changes in costs or earnings. In shipping such frequency is not usually
practical due to the considerable time lag generally experienced in
obtaining accounts and fluctuations in some costs due to changes in
timing in executing parts of the plan. If monthly reports were required a
considerable number of accruals would have to be made and staff would
spend an undue amount of time seeking reasons for variations which may
not, in the long term, exist. Thus, unless there are strong reasons to the
contrary, ship management reports should be made quarterly.
As mentioned before, close co-operation is required between managers
and accountants to ensure that the best information possible is fed into
the accounts System. All concerned should be aware of the cut off date
for input and the target date for presentation of the reports. The time
required for processing the data will depend upon the system used but
should not usually take longer than two to three weeks. Of much
importance is agreement between managers and accountants on accruals
which should never be made without the concurrence of the manager
responsible for the department costs.
Reviewing the report
Having received the report, the first thing the ship manager will do is
look at the total. If it is better, i.e. less than budget, he will feel a
mixture of relief and content and there will be a tendency to accept the
figures as they are. If the total is worse than budget, he will scrutinise
the figures with great care, probably hoping that there has been a
mistake and that the figures are in error. These reactions are natural, but
of course there is more to a review than the initial feelings of the
manager.

In reviewing the report three points must be borne in mind:

That although a department or group total is on target, there may be
wide variations in the items composing the total which off-set each
other to give an apparently satisfactory result.
That errors are just as likely to have been made if an item is shown as
better than budget than if it is worse than budget.
That items may be better than budget only because the plan on which
the budget was constructed has been delayed. If the plan had been
completed on Schedule the item may have exceeded the budget.

For these reasons the only effective way of reviewing a report is to

examine it systematically, item by item. This is not as difficult as it
sounds as the eye quickly becomes accustomed to noticing significant
variances from the budget. Personal experience with constructing the
budget, incurring costs and coding accounts will greatly assist the
manager in this task.

Reasons for variances

Having examined the report the department manager should make a
short note on the reasons for significant variances, whether better or
worse than budget. This can be presented to top management, but is also
of use for the manager’s own records for reference at a later date. The
preparation of the note raises the question of what the magnitude of the
variance should be to be considered significant. In large corporations
where many cost departments are of similar financial size, it is possible to
state an arbitary figure of, say 4%, above or below which management
are required to give explanations of variances. However, as shown earlier
in the chapter, where the cost departments are of various sizes, a
percentage figure is not suitable and it is preferable to set financial limits.
The limit above or below the budget will depend upon the sensitivity of
the costs in relation to the earnings of the ship. A large sum may be
acceptable if there is a good profit margin, but a small sum will be
required if the ship is in a break even or loss making situation.

97
 Action
Having received and examined the reports and reported on significant
variances, the next step is to consider what action, if any, needs to be
taken:
If a variance is worse than budget because anticipated expenditure has
occurred earlier than planned within the budget year, there will be no
need to do anything as the matter will correct itself in the total costs for
the year. If the variance is better than budget because of a delay in a
planned expenditure within the budget year there will also be no need to
do anything because, again, the matter will be self adjusting.
If a variance is worse than budget because of a greater expenditure than
planned, then a way must be sought to reduce costs elsewhere. If
successful, no further action will be required.
But:
if a planned expenditure for the next budget year takes place in the
current year;
or,
if a planned expenditure for the current year is delayed until the next
year;
or,
if a greater expenditure than planned cannot be compensated by a
reduction elsewhere;
or,
if a planned expenditure is cancelled or is less than expected;
then;
the overall costs for the year will be at variance with the budget and all
concerned should be advised of the situation and this is done by issuing a
“forecast” .

Forecasts
It will be recalled from Chapter Two that the “Budget is the Budget” ,
and that any change in that philosophy is likely to cause confusion. The
forecast allows the budget to remain inviolate but at the same time shows
that the final figures for the year may be different.
The forecast can be described as:
“the current estimate of the actual costs of a unit or department for a
budget year, based on actual results to date and estimates for the
remainder of the year”.
It is more accurate than the budget as it combines actual results with up
to date information plus the information on which the budget was
constructed. Bearing in mind that the budget is usually produced three

98
month’s before the beginning of the budget year, forecasts are usually
presented shortly after the commencement of the first, second and third
quarters of the year.
Forecasts are adjusted at each quarter as control is exercised or events
occur beyond the control of the manager. The fact that the budget stays
the same throughout provides a base to which the forecasts are referred.
An example of the way in which forecasts work is shown on page 100. In
this example it can be seen that although attempts were made to keep
the budget on target, it was exceeded. However, through the forecast
System management were aware of the situation from an early stage.

The work plan

It is important to bear in mind that while the financial results are being
considered an examination will also be carried out into the factors which
produce the costs. Planned maintenance schedules will be examined to
see if they are on target, supplies consumptions and overtime usage will
be checked and manning levels will also be reviewed. Although it is
usually difficult to express variances for many of these except supplies
and overtime in percentage or other terms, the achievement or non-
achievement of work targets is significant and should be examined and
corrective action taken if necessary.

The measure of control

In addition to the levels of information required by management as
described earlier in the chapter, there is the need to define the depth of
information required by managers for control at the department level.
Shipping companies vary in the amount of information they think is
necessary. It may be considered sufficiënt to have just five groups of cost
information; crew, technical, supplies, insurance and administration, into
which the relevant costs are placed without further segregation. This
would reduce coding to a minimum and make book keeping and
management reporting easy. Alternatively, it may be thought preferable
to use the second category costs alone, again making life relatively easy
for those involved. This is usually acceptable until something goes wrong,
and costs need to be analysed to get to the root of the problem. It is
then that the value of a larger breakdown of costs can be appreciated in
the speed in which the source of the problem can be identified.
Even so, care must be taken to ensure that there are not too many
categories and analyses producing too much information. Sophisticated
systems need servicing even though they identify ailments whose
treatment can save costs. Coding and analysis takes manpower and
equipment and if there are insufficiënt staff to digest the information
provided, the effects can be adverse as staff are overwhelmed with paper
 Department: Technical

Budget for year $500,000

Date Budget Actual Cumulative Cumulative Forecast

Qtr. Qtr. Budget Actual for year

30th Sept. — — — — 500,000

Ist Jan. — — — 510,000

31st Mar. 60,000 80,000 60,000 80.000 510,000

30th June 260,000 50,000 320,000 130,000 510,000

30th Sept 60,000 300,000 380,000 430,000 520,000

31st Dec. 120,000 90,000 500,000 520,000

N o te s .
3 0 th S e p t ( P r e v i o u s y e a r ) Budget prepared.
I s t J a n u a r y . Indications cost increases over budget allowances. Forecast increased.
3 1 s t M a r c h . A ctual increased over budget but no further change for year indicated.
3 0 th J u n e . M ajor work delayed to 3rd quarter but indications costs will increase further. Forecast
increased.
3 0 th S e p t e m b e r . M ajor w ork took place, higher costs as anticipated.
3 1 s t D e c e m b e r A ttem pts m ade to reduce costs but despite reduction (30,000$). Costs exceeded budget
as forecast.

and the work which it produces. Because of this, careful consideration

should always be given to the amount of information produced by a
system and, particularly, to how it is used.
Between the extremes of too little or too much information should lie a
happy medium of sufficiënt information, both financial and operational,
for the manager to keep his fingers firmly on the pulse of the important
matters, allowing him to exercise control where it is most effective.

Actual control
One of the interesting facets of control in relation to ship management is
how little control some managers have for the areas for which they are
apparently responsible.
Colonel Urwick once said that:
“Responsibility and authority are co-terminus”
and in an ideal management situation this should be so. Unfortunately,
in shipping this is not always the case, perhaps because of the complexity
of the necessary ship/shore organisation or because of tradition. There
have been attempts to resolve this problem in recent years, some fairly
successful, but there are a number of factors which preclude complete
authority and thus responsibility must also be limited.
To illustrate this point with a few examples:
The ship’s master is “responsible” for the ship and crew and yet he has
no say in the manning scale, conditions of service and salary increases
and only a minimal control over the overtime, as much of it is fixed or
regular.
The chief engineer can only authorise emergency repairs by shore
repairers as most other repairs have to be authorised by his shore base.
He makes no decisions as to when and where the ship will be dry docked
and even his planned maintenance Schedule is usually arranged for him.
The chief steward only has limited authority to purchase food and other
supplies abroad due to purchasing strategies arranged by the shore base.
The ship manager ashore only has authority to spend to his budget and
even then is affected by many factors outside his control such as board of
directors’ decisions, changes of policy, operator’s requirements, national
employer’s and unions agreements.
Of course, ship managers are not alone in this situation which occurs in
many industries. It is not insurmountable providing everyone concerned
understands the limitations of their authority in relation to the total
responsibility for the ship and all work to a common purpose — the
optimum utilisation of ship, crew and shore staff.

To summarise
To control requires:
Information
Systems and policies
Definition and understanding of responsibilities and authorities.
Co-ordination between all concerned in the management of the ship.
Real control can only be exercised by people who are in charge.

101
Chapter Twelve

Stock control

An awareness of the value of stock is important in any business. Too

much lying idle is Capital tied up, not being used; too little can create
delays and innumerable problems. Some stock kept too long will
deteriorate, while other stock bought at an opportune moment or place
will apreciate in value. In some cases capacity to carry the stock will be a
determining factor in deciding the quantities that can be purchased.
All these factors apply to ships; those which trade worldwide have
opportunities and problems in purchasing as has been discussed in
Chapter Seven on supplies. For example, lubricating oil can often be
purchased more cheaply in one part of the world than another and ship
managers often take what advantage they can of this, limited by the
capacity of the ship’s storage tanks. Food stuffs can often be purchased
more cheaply in some places but again, storage and “shelf life”, i.e. the
length of time before the goods will start to deteriorate, are limiting
factors. Some items of spare gear can be expensive, have a long delivery
time and can only be available from one or two sources. All these factors
have an important effect on the costs of running ships and money can be
saved or wasted by a company’s policies, or lack of them in this area.
As shown in Chapter Eleven, stock control is based on information, but
not only the information obtained through reporting and monitoring
systems. It is also information obtained through physical checks from
time to time which are required to ensure that the quantities of stock are
as recorded. To carry out such checks effïciently it is important that all
store spaces are well designed and the stock properly organised by the
staff concerned.
Although the basic principals of stock control apply equally to spare gear
and supplies, there are a number of different aspects, particularly in the
levels of stock, such that it is preferable to examine them separately.

Spare gear
The importance of holding the correct stocks of spares has already been
noted in Chater Six. The levels of stocks of spares which should be
carried are based upon three factors:
 1. The classifïcation societies' requirements.
2. The builder’s or manufacturer’s recommendations.
3. The ship manager’s experience.
In fleets with two or more sister ships, and ships with certain similar
items of equipment, decisions on rarely used items are often resolved by
having a central stock at a convenient place from which despatch can be
arranged quickly if the need arises. This applies particularly to propellers
and tail shafts and also to pistons, cylinder heads, etc. In ships with a
Standard type of engine, or other machinery, the ship manager may
decide to hold stocks at a supplies base until needed to avoid high
transportation costs.
There is always a certain amount of risk attached to the level of spares
carried, and skill is required to minimise the risk while keeping costs to a
minimum. A record of spares usage of similar equipment plus builders'
recommendations will usually indicate the spares most likely to be
required over a given period. However, in addition to the likelihood of
certain spares being required the ship manager has to consider the effect
if a particular spare is not on board, even if it is not likely to be
required. In some cases the lack of a particular spare is much more
serious than others, for while some parts can be fabricated by a
reasonably well equipped workshop, others can only be provided by the
original manufacturer or his licensee and then, sometimes, after a very
long wait. Thus the decision on stock levels of spares is partially based
on the likelihood of the spares being required and how often, the
availability of the spares and the seriousness of the outcome if a spare is
not on board even though the requirement is likely to be infrequent.
Therefore, the first thing a ship manager must do is decide the level of
stocks of spares he wants to keep in each ship. In this there may be a
safety margin which would allow stocks of some items to fall below the
required level, although preferably, once an item of spare gear is used it
should be replaced as soon as possible, while considering the costs of
transportation. In general, the levels of stocks of spare gear should not
be exceeded for the reason of tying up Capital needlessly.
It is relevant at this point to mention an understandable but nevertheless
dangerous practice of keeping used spares. Because ships spend long
periods away from land and access to spares, it is understandable that a
used but undamaged spare should be kept for emergencies. The danger
of this practice is that it can give a false impression of the number of
spares on board when a physical check is made. Ideally such used spares
should be either re-conditioned or completely replaced. If they must be
kept they should be kept separately from the unused spare gear and be
clearly labelled to indicate their condition.
Spare gear control also needs a system. At its best it is implemented
when the ship is new, as the older a ship becomes the more difficult it is
to list and identify the items on board and to assess spares requirements
unless detailed records have been kept.

103
 Like all Systems it should be kept as simple as possible. Ideally it should
be based on a record form giving details of the spares with a matching
renewable inventory form to record the movement of spares. The detail
form should give details of the equipment to which the spares apply, e.g.
manufacturer’s name, drawing numbers, sizes, etc. This is followed by
details of the parts and their code numbers. Most importantly the form
will show the number of spares of each type to be carried and where
they are stowed. The details should be maintained in duplicate, one copy
in the ship and the other in the shore base. The matching inventory form
will also be maintained in the ship and ashore and will show the
quantities at the beginning and end of each check period and the
quantities supplied during the period, thus allowing an assessment of
average usage of each part. Once a part is used the shore base should be
advised immediately so that steps can be taken to arrange for a
replacement or reconditioning of the used spare as soon as possible. This
is very important because of the time required for obtaining some spares
and the need to plan deliveries in the most economie way.
The carriage of some items of spare gear is like an insurance policy; they
may never be needed through the life of the ship, but if they are needed
the fact that they are readily available will save a considerable amount of
operational time.
An examination of the costs of spare gear in any ship, particularly a
motor ship, will show the high proportion of technical costs borne by this
cost centre. It is for these reasons and the cost implications of items not
being available when required, that ship managers should place
considerable emphasis on the control of stocks of spares.
Regular maintenance will use more spares of the replacement type
mentioned in Chapter Six but should reduce the amount of breakdown
maintenance and thus the number of irretrievably damaged parts. As
mentioned in Chapter Three, major items and initial stocks of spare gear
are usually capitalised, but thereafter are considered to be a technical
cost.

Supplies
One of the major differences between stocking supplies and spare gear is
the “shelf life” of some supplies. Whereas most spares, if adequately
protected, will last for many years, some major cost supplies items,
particularly food and paint, will deteriorate with time. Like spare gear, it
is important to establish stock levels of supplies but these will often
depend upon the storage capacity for the particular item as well as its
shelf life.
As mentioned in Chapter Seven, the levels of stocks of supplies in ships
in some trades will also depend upon the purchasing strategies of the
company and for this reason the maintenance levels of supplies is not as
critical as those of spare gear. Whereas spare gear levels are maintained

1Ü4
whenever possible, supplies levels will only be maximum at certain times,
i.e., where purchasing is most economical or where transhipment of
supplies can best be arranged. Of course, there will be levels below
which replenishments will have to be made, even in an expensive area,
but in such cases only minimum quantities should be ordered. When
replenishing supplies, care should be taken to use the oldest stock first to
avoid deterioration. As with spare gear, the stock levels should not be
exceeded without good reason. Again like spare gear, a record system
should be arranged to make checking and reporting as simple as possible.
The same system of a detail form with a matching renewable inventory
page should form the basis for the system.
Physical checks of quantities of supplies in ships are usually made on a
quarterly basis to provide a value of supplies remaining on board as
referred to in Chapter Three, and to assess the actual consumption of
commodities as referred to in Chapter Eleven. These are then referred to
consumption targets for principal items which are based on past
experience, and which aid the staff concerned in keeping to their budget.

Summary
Stock levels of spare gear and supplies should be laid down and
instructions issued as to replenishment of such stocks.
A system of physically checking stocks should be arranged to show
quantities remaining at given dates and consumptions over given
periods.
Stock control requires good “housekeeping” i.e. clean and organised
storerooms.

105
 Chapter Thirteen

Purchasing, quotations
and tenders

Achievement of the best possible price for goods and services is a

principal part of a ship manager's job. Except in emergencies this is best
done by seeking quotations from suppliers of both goods and services
and carefully evaluating the tenders or prices offered. There are a
number of different factors involved in obtaining the best possible prices
for goods and services and it is preferable to consider them separately.

GOODS
Discounts on the posted or list prices of goods can usually be obtained
on supplies which are purchased regularly or in significant quantities.
This is because suppliers prefer guaranteed sales and are usually
prepared to pass some of the benefïts of such sales to the customer. But
the two criteria are regularity and quantity. ff a ship calls regularly at a
particular port and the ship manager is prepared to agree to use only one
particular supplier over a given period, then a discount can usually be
obtained. This is, of course, on the basis that the ship manager is
satished with the posted prices, service and quality of the goods in the
first place.
In the same way, discounts can be obtained for bulk purchases of such
items as paint and lubricants by direct purchase from the producers. In
such cases the amount of discount will depend upon the quantity
purchased during a given period and obviously there can be benefïts
when purchasing on a fleet basis. But in making arrangements for
supplies at agreed discounts with producers care needs to be taken to
ensure that:
The commodity is available world wide or at least in all the areas to
which the ship or ships are expected to trade.
Consumption will reach the levels on which the discounts are based.
The prices and discounts of all the products from the same supplier are
balanced, i.e. there are no “loss leaders” with low costs of some

106
 products offset by unduly high costs of other products in the same
brand range.
The price lists and discounts apply on a world wide basis. If they do
not, then consideration must be given to whether the ship or ships will
be able to uplift the bulk of the commodities in the cheapest areas, or
zones in the case of lubricants.
The quality of the products is the same regardless of the area of
supply.
For the foregoing reasons it can be seen that a very careful evaluation of
the facts needs to be made before entering into any agreement for bulk
purchasing. When the decision has been taken the reasons should be
carefully recorded for reference and control purposes.
A side benefit of bulk purchasing is the technical support of the supplier.
All major paint and lubricant companies have large technical staff
continuously researching improved products and they will help to solve
customers’ operational problems as a free service. The degree of service
offered varies and is difficult to quantify in financial terms, but its value
to the ship management technical and supplies staff can be considerable.
Obtaining discounts for the supply of goods is part of the business of
purchasing and, as mentioned in Chapter Seven, there are times when it
may be preferable to purchase goods at low cost and good discounts and
transport them to the ship rather than buy them at high costs elsewhere.
All these factors will normally be taken into consideration when
preparing a budget.
The discounts and prices shown on invoices should always be checked
carefully against agreements because the suppliers clerical staff may not
always be aware of the discounts which are usually arranged at executive
level.

SERVICES
Wherever a service is required a ship manager will want to know two
things: how much will the service cost and how long will it take to
provide or, alternatively, when will it be finished.
The supply of services for which quotations are usually sought fall into
these categories:
New building
Modifications
Repairs and maintenance
Other services

New building
An agreement between a shipowner and a ship builder to build a ship is
usually a compromise between what the shipowner wants, the price he is

107
 prepared to pay, and what the ship builder can give him for that price.
The delivery date and financial terms also play an important part in the
compromise.
In the first place the shipowner defines the broad essential parameters of
the proposed ship or ships to selected shipyards in the form of an
enquiry and an invitation to tender. Some yards will be known to be
cheaper than others and some will specialise in a particular ship type, but
it is usual to offer the speciflcation on a fairly broad front as shipbuilding
market conditions are constantly changing and the most preferred yards
may have full order books and be unable to quote for the ship.
Alternatively, the more expensive yards may wish to quote at a low level
if business is bad. On receipt of the enquiry the shipyard will then
respond with an outline speciflcation of the ship they would offer
together with the cost and delivery date.
At this point it is important to bear in mind that a substantial part of the
cost of a “one off” or individual ship lies in the design of huil and
engine. If the shipowner is able to adapt his requirements to the
speciflcation of the yard based on their Standard design, where the basic
design costs have been spread over a number of ships, the price will be
less than it would be if the owner insists upon a ship to his exact
requirements. For this reason a compromise is the usual solution for
ships used in general trading. For the same reason the cost of a special
ship will decrease in cost if more than one is built.
After evaluation of all the tenders and specifications discussions will take
place between the shipowner’s representative and the representatives of
the yards presenting the most attractive propositions.
The shipowner will then select the most suitable in financial and technical
terms and will issue a “letter of interest” to the yard.
The shipyard will then compile a detailed speciflcation comprising
general, huil, machinery and electrical sections for approval or
amendment during the lengthy discussions which will follow between
them and the owner’s staff.
It is at this stage that the skills of the whole ship management
department, backed by consultants if necessary, are called upon to
examine the speciflcation in depth. Although new building specifications
follow a fairly Standard pattern they are necessarily large and careful
examination is a lengthy business.
Apart from checking to ensure that their requirements are met in the
detail of the speciflcation, great care needs to be taken to identify the
“extras” or “owner’s supply” items and particularly, the “extras” of
omission i.e., items which are assumed to be included as normal practice
but may be omitted in a particular yard and will cost much to adjust
later. These must be clarified in order to ensure that all the owner’s
requirements are met and that items that are for owner’s supply are
clearly identifled and agreed. Thus the shipowner should know well in

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advance the total price of his ship and there should be no surprises on
delivery. As mentioned before, correcting matters during and after
building can be a costly business and the skill of the ship manager and
his staff lies in ensuring that the specification is satisfactory regarding the
design of the ship and its equipment and is such that the ship will carry
out the work for which it is intended.
Most ship managers will have a written and mental check list which they
will put into use when examining the draft specification and they will
know the dangers of assuming that items are included even if they are
not specified. They will know the danger of terminology like “builder’s
usual practice” and will endeavour to have more definitive quality
Controls included in the specification. A yard which may have had a good
reputation for quality in the past may have been forced to reduce its
standards to meet market conditions and thus quality should not be
assumed.
After completion of the discussions the shipyard will produce a summary
of extra costs and credits to the owner and further negotiation will then
take place to agree any adjustments to the tender price.
The shipyard will then produce an amended specification — the “contract
specification”—incorporating all matters agreed with the owner during
the discussions. This contract specification forms the basis of the ship
building contract and is signed by both parties when agreed.

Modifications
Modifications usually result from legislation, as in the case of anti-
pollution requirements, or changing operational requirements which can
cover a wide range of work from changing the engine to altering the
length or even the depth of a ship. They may also result from the need
to correct the ship structure or machinery as a result of faults in the
design which may or may not be covered by the builder’s guarantee.
The owner’s requirements in regard to modifications need to be very
precise and the outline specification may require considerable detail
unless the shipyard is experienced in the particular modification, in which
case the owner’s specification may be brief and the shipyard will provide
the detail. In the case of large, complicated, modifications the shipowner
may feel it worthwhile to employ a specialist consultant unless he has
staff with the necessary knowledge in his employ. Again careful
examination of the draft specification is essential.
As with newbuilding, outline specifications will be sent to yards capable
of carrying out the work and geographically suitable to the shipowner.
Much will depend upon when the yard can accept the ship and how long
the work will take, as some larger modifications can mean the ship being
taken out of service and absorbing much of yard’s work force for a
considerable time.

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Repairs and maintenance
In this area the ship manager must not only know what he wants but
must be able to specify it clearly in such a way that extras will be kept to
a minimum. He must be able to define the work required and when this
is not possible, then at least he must be able to define the skills required
to be able to obtain rates for carrying out certain types of work. He may
also have constraints placed upon him as to how long he can take the
ship out of service although this may be outside his control.
His experience and past records will, of course, be of considerable
assistance to him as many of the requirements will be Standard such as
for the provision of services, the routine examination of machinery and
in dry docking and painting the ship. However, unless he has specific
detail, it is in the areas of steelwork renewals, and machinery parts and
repairs that care will be required as ship repairers are unlikely to quote
on uncertain work. Thus he will need to seek yard prices per unit,
length, ton of steel and man hour prices, etc, such that he will be able to
exercise a degree of control on the costs while the work is in progress.
It is worth noting that much of the wording and phraseology is usually
fairly Standard, adopted to suit a particular owner’s requirements. The
preparation of specifications, although lengthy and repetitive are greatly
assisted today with the use of word processors.
Having prepared the specification it is sent to selected yards in ports
which the ship can feasibly visit and which the ship manager is confident
can handle the work to be done. Although it is tempting to send the
specification to all yards capable of dealing with the ship to sound the
market, this practice does not make for good relationships between ship
managers and yards. To a yard which wants the work, responding to a
large specification involves a lot of work and it can be discouraging, to
say the least, if it is feit that the ship manager did not have any intention
of sending the ship to the particular yard in the first place.
The distribution of the specification is not particularly difficult as most
repair yards have representatives or agents in all the major shipping
centres and the ship manager need only give it to them to send to their
principals, usually by telex.
In due course the quotations will be received and the ship manager's skill
is again called for in evaluating the data. This is not always easy as
despite a clear invitation to quote in a specific way, each response will
usually be different; some costs will be combined and others will be
omitted or stated in a different way. The ship manager will have to bring
all the costs to a common base by making allowances or seeking
clarification from the yard, before he can assess the best offer. The
amount of time quoted for the jobs from each yard will also have to be
given careful consideration as the saving of a few operational days may
well outweigh higher costs.
Other services
In addition to major services provided for ships there are a number of
small services offered which may be available in just one port or country
or on a world-wide basis. These include the maintenance of fire fighting
equipment, the monitoring and organisation of safety systems in ships,
the servicing of life rafts, fumigation and pest control, chart and nautical
publications maintenance, electronic equipment and furnishings. All
these can usually be provided on the basis of an exclusive service for
which prices can usually be negotiated.

General
When seeking quotations the ship manager will need to state a date
when quotations are to be received and should also request that the
quotations contain the following information:
Working days: The quotation should state the number of ordinary
working days required to complete the work specified i.e., without
overtime and excluding public holidays. The ship manager will also need
to know the gross time for the job, i.e., inclusive of public holidays.
Should it be necessary to work overtime if will be advantageous for him
to know the effect on the costs and the resultant time savings. In the
case of building a new ship the completion date is all important, although
advice of the commencement date is usually required for initial payments
to be arranged.
Payment terms: These should also be included in the contract or
specification and will usually reflect the shipowner’s fïnancial standing
and reputation and current credit terms. Terms can range from full
payment before sailing to a discount for immediate payment or part
payment followed by a payment of the balance of the account within
three or even six months.
Yard availability: Is an important factor for both yard and shipowner. In
the case of newbuilding, planning is such that the yard will be able to say
with reasonable accuracy when they can build the ship. In regard to
modifications and particularly repairs and maintenance, much depends
upon the ship’s movements and the requirements of other shipowners. A
certain amount of flexibility is often required up to the moment of
actually putting the ship into the yard and for this reason it is usual,
particularly in the case of dry docking, to maintain negotiations with
more than one yard until the ship's movements are firm.
Guarantees: Time is usually of such importance that whenever possible
ship managers endeavour to include guarantees that the work will be
completed within a specified period or by a specific date. This can often
be arranged for straight forward work such as shipbuilding, specific
modifications and routine drydocking, but is usually impossible where the
extent of the work is unknown. In any case, under normal conditions it is

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also in the shipyard's interest to complete the work as quickly as
possible. Any guarantee will be associated with penalty payments should
the ship be delayed but the yard may expect a bonus clause should they
be able to complete the work ahead of Schedule.

Guarantees of equipment: Are usually handled directly with the

manufacturers of the equipment but other shipyard work is usually
covered by the yard’s Standard phraseology of “good workmanship”.
Although bad workmanship is sometime difficult to prove, a yard’s
reputation is based on its workmanship and thus yards are usually
prepared to put right anything that can be directly attributed to them,
but not to the extent of covering a ship’s loss of earnings due to resultant
delays.

Control: Experience has shown that a single person should be in overall

charge of the shipowner’s interests once work has commenced and no
work should be put in hand without his authority. Although the person
may well be assisted by a number of people trom the ship, the shore
base and the yard, the importance of one person being in charge is vital
if misunderstandings are to be avoided and costs controlled. The only
exceptions to this will be in the case of repairs covered by insurance,
when the underwriter’s surveyor's approval may need to be sought
before certain work or action can be commenced.
Preferably the person in charge should be in attendance throughout the
duration of work. This supervision is not only important from the point
of view of quality control but is also important in agreeing and
negotiating charges for work which could not be specified until after the
ship’s arrival at the yard.

The account
As accounts should be based on work done, agreement on this is vital
before any accounts are settled. In the case of newbuilding and
modifications the price will have been agreed beforehand and all that is
required is agreement that the work has been accomplished to the
shipowner’s satisfaction within the terms of the contract.
In the case of repairs and maintenance, agreement on the work done and
charges should be reached immediately after the work has been
completed to avoid disputes at a later date. Charges for many of the
items will have been fïxed as far as possible in the original quotation but
agreement will have to be reached on quantities of materials used, stage
work, renewals and man hours etc., as appropriate. It is at this point that
the expertise and negotiating ability of the person in charge is vital and
which can at least assist in containing the costs.
 Chapter Fourteen

Economies and cutting

back

“The rule is, jam tom orrow and jam yesterday — but
never jam today”
Lew is Carroll.

Ideally, it should be impossible to reduce costs, “cut back" or make

economies, as a ship should be managed in such a way that there is no
"fat” at any time. However, some iminediate reductions in spending can
usually be made in most organisations, but the degree or amount
depends upon the state of the organisation beforehand and consideration
of the effects of the economies after making the reductions. If an
organisation has been run badly then greater efficiency will undoubtedly
bring improvements, but if an organisation is already being run efficiently
then any action will, eventually, have an adverse effect if the reduction is
prolonged.
Shipping has always be a cyclical business and as long as world trade is
based on free market concepts it will presumably remain so. On the
downward curve and bottom of the cycle the equation of Earnings —
Costs = Profits (or Loss) comes under close scrutiny and as little can be
done about earnings, attention inevitably focuses upon costs in the hope
that they can be reduced and thus improve the result.
In view of the different factors involved in considering how to effect
economies in an inefficiënt and an efficiënt shipping company, it is best
to consider the two types of organisation separately.

The inefficiënt shipping company

Most of the causes and effects of inefficiency in the various departments
have already been mentioned in Chapter Four and in other parts of this
book, such that it is now only necessary to consider the corrective actions
which can be taken to improve efficiency and bring about reductions in
costs. Unfortunately, some of the Solutions are a matter of long term
action and in times of crisis will not have an immediate effect on the

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costs. A very approximate time scale is shown against each course of
action as an indication of the time required to implement improvement
procedures, but this is only a guide to the magnitude of correcting the
matter and much depends upon the determination of senior management
to grasp the problem and take effective action. It is also important to
note that many of the Solutions are, initially, costly and although cost
estimates cannot be given, the areas which will be involved are also
shown.
Crew: Changing to an optimum manning scale together with an
improvement in the quality of the crew, their training and leadership,
both on board and ashore, will result in a more “productive” crew,
reducing waste and maintaining the ship to a required level through
effective use of all resources. This heading, includes the favourite area
for attack — overtime, where proper supervision will reduce undue
overtime and will ensure effective use of such time.
Time to implement through changing the crew and, or, developing new
Systems of work and Controls etc: minimum six months, probable time
twelve months.
Initial cost areas: Crew recruitment and training, transportation during
crew change, establishment of control Systems. Possible Work Study
(Chapter Sixteen).
Technical: Reduction of breakdown repair work through planned
maintenance and the reduction of spare gear costs through a control
system. Time to implement planned maintenance and spare gear control:
minimum six months, probable time twelve months.
Initial cost areas: bringing ship to a planned maintenance level and the
design and installation of planned maintenance and spare gear control
systems.
Supplies: Avoidance of waste and expensive purchasing through stock
control and purchasing policies will reduce costs. Reduction of the use of
lubricants through improved machinery efficiency and a reduction in
quantities of paints and other coatings used through planned
maintenance.
Time to implement through installation of stock control and purchasing
policies: three months. Installation of planned maintenance and crew
training: minimum six months, probably twelve months.
Initial cost areas: as for technical
Insurance: Seeking better value for money for insurance is a possible
area for reducing costs but care is required as indicated in Chapter Eight.
A principal area for improvement lies in claims procedures to ensure that
maximum claims are made and met promptly.
Time to negotiate new Insurance depends upon the date of renewal of

115
 the policies. (See Chapter Thirteen.) Time to implement an improved
claims System: three months. Initial cost areas: Office staff recruitment or
training.
Administration: The number and quality of staff employed, their training
and leadership together with the costs of the office premises and the
ancilfary expenses are all areas where improvement can be made in an
inefficiënt company. However, it should be noted that the improvement
of systems and Controls in the other areas may require more staff, but
there should be an overall benefit.
Time to implement through an Organisation and Methods study, seeking
new premises, making staff redundant or recruiting new staff: minimum
six months, probable time twelve months.
Initial cost areas: Consultants’ fees, redundancy or early retirement
payments or new recruitment fees, equipment, and perhaps costs
associated with moving office (See Chapter Nine).
General: From the foregoing it can be seen that there are a number of
ways in which cost reductions can be sought in an inefficiënt shipping
company, but all require initial expenditure and much time to
implement.
It may well be that in a worsening shipping market that considerable
effort and cost may be put into reducing costs only to find that when the
reductions are effected, even further reductions are required.

The efficiënt shipping company

It is assumed that all the procedures referred to earlier have been taken,
that there are optimum manning levels with people of the right quality
both ashore and in the ships and that systems have been installed to
obtain the utmost efficiency and control, and that most importantly, staff
ashore and afloat are “involved” in continuing efficiency. Despite all
these efforts, ways have to be found to reduce costs as quickly as
possible in an endeavour to keep the ship or ships in service, the only
alternative being to sell the ships or lay them up.
The ways in which costs can be reduced in such a situation, the effects of
such actions and the time required to implement these in each area are
as follows:
Crew overtime: Reduction in the proportion of overtime which is not
“fixed” by regulations is possible, but will result in less maintenance
being carried out and a lowering of crew morale as their anticipated
earnings decrease. Time to implement about one month.
Crew travel: Less frequent crew changes may be possible if crew
agreements allow, but this should be weighed against the cost of
increased bonus payments for longer service and the effects of lowering
crew morale.

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V

Time to implement: depends upon the dates of next scheduled crew

changes.
Technical: Reduction of the amount or frequency of maintenance is the
prime area for short term cost saving. Surveys and dry dockings can be
delayed, huil painting can be less frequent and in a previously well
managed ship there will be little adverse effect in the short term. This is
the crucial factor; the length of time before the amount of unscheduled
or breakdown maintenance starts to increase over the planned
maintenance and technical management is forced to operate in a
“management by crisis” environment. Coupled with this will be a
reduction in overall efficiency of the ship and its equipment: the ship’s
huil will become foul because of the additional time out of dry doek, and
speed will fall and fuel consumption will increase.
With increased breakdowns will come an increase in the use of spare
gear and a reduction of overall performance will result in higher
consumption of fuel, lubricants and fresh water.
The ship’s appearance will deteriorate and although this does not
essentially effect the mechanical performance of the ship, “appearance”
is an important factor in any commercial situation, and can have an
adverse effect upon charterers or shippers, port authorities and
government bodies.
Supplies: There is usually little than can be done about the consumption
of lubricants in well maintained machinery and plant but the consumption
of paints and coatings can be reduced in line with a crisis policy of
reduced painting, bearing in mind the effect on appearance and long
term maintenance.
To reduce consumption of cleaning materials can have a detrimental
effect on hygiene and can also be a safety hazard if insufficiënt
detergents, etc. are provided to remove accumulations of oil and dirt.
Again, insufficiënt cleaning materials will result in a dirty ship with
adverse effects.
A reduction in standards of feeding will have an adverse effect upon the
crew and in any case may be limited by regulations and agreements. It is
probably unwise to take any cost effective action in this area.
Apart from a reduction in consumption of paints, little can be done in an
efficiënt supplies department except to reduce the levels of stocks carried
at any one time. Stock reduction is only a “one time” solution and in the
long term may be counter productive, as the purchasing policies and
strategies cannot be fulfilled and crisis purchases have to be made at
higher costs.
Insurance: The only way to reduce these costs is to reduce the insurance
cover. This can only be done in those areas where the shipowner has a
free choice, and depends upon the additional risk he is prepared to take
by a reduction of his protection.

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Administration: In an efficiënt ship management department very little
can be done without loss of control. In the short term entertainment and
travel costs can be curtailed and purchases of office equipment can be
delayed but if procedures for these items were at the right level in the
first place, delays will eventually have an adverse effect, particularly in
travel associated with control and ship support.
It is with control and support that the ship manager finds himself in a
dilemma in a crisis. On the one hand he wants to reduce staff while on
the other hand he needs more staff as he tries to find ways to reduce
costs. He also has to work more closely with the accounts department to
produce additional financial information.
General: In a well run shipping company there is very little that can be
done to reduce costs other than delay matters which eventually take their
toll. It is not easy to put a time limit on this, particularly without
defining the actual reductions in the prime factor — i.e. maintenance. A
broad indication is six months, after which there would be a gradual and
inevitable reduction in performance with an increased risk of breakdowns
and eventually an increase in costs and earnings losses.
It is probable that these steps will be taken during a period of difficult
trading, but if the market does not improve and costs alone cannot
improve the situation against poor earnings then the only alternative to
bearing the losses is to sell the ship or lay it up.

Lay-up
This is the final solution where, instead of shelving matters within the
ship, the ship itself is shelved, i.e. is taken out of service until times are
better. There is a well known expression in shipping circles that “once
laid up, always laid up” and this is often true, as many ships laid up are
never again put into service by the same owner. This is because when
losses are small an owner may risk keeping a ship in service, in the hope
that the situation will improve. But he will not take the risk of bringing a
ship out of lay-up in such uncertain times. However, much will depend
upon the degree of lay-up and it is as well to examine three broad types
of lay-up, short, medium and long term and the factors involved.
In doing this it must be remembered that once a ship is laid up earnings
cease completely and thus costs must be reduced significantly for the
savings to be achieved.
The most significant savings will be in the crew and the consumption of
all supplies associated with them and the running equipment, particularly
lubricating oils. Maintenance costs involving ship repairers will usually
cease and considerable reductions in the insurance premiums will be
obtained. Probably the only area which will remain unaffected, at least
initially, will be the administration costs which are geared to a number of
ships and thus a reduction of one ship alone will not be reflected in a
saving in the shore base costs.
Considering these reductions as they affect the three types of lay-up:

Short term: In this situation the operators hope the market will soon
improve and thus the ship manager has to keep the ship in a state of
readiness at minimum cost.
To do this with any degree of success the ship must be placed at a safe
berth such that underwriters will accept that there is a decrease in the
risk. Ideally the ship should be in fresh water to eliminate fouling,
although this is rarely possible.
As the main engine and other machinery and equipment have to be kept
in a state of readiness of about a week’s notice, it is essential that the
systems are flushed, and machinery turned over or operated for short
periods at regular intervals. As it is hoped that the ship will soon return
to service, opportunity is taken to carry out as much survey and
maintenance work as possible with the minimum number of staff.
In this situation a decision will have to be made by the ship manager as
to the most effective numbers and skills to retain in the ship. Provided
the ship is well secured, the majority will probably be engineers
supported by sufficiënt ratings. There will be very few deck staff, and
only sufficiënt catering staff to feed and take care of the skeleton crew.
All services, i.e. heating, lighting, sanitary etc., will be maintained.
Supplies will be required, although to a lesser degree than usual. The
consumption of spare gear will depend upon the amount of maintenance
carried out.
The time required to place the ship back into service will depend upon
the time to return the machinery undergoing maintenance to working
order and to arrange for seagoing crew to join the ship.

Medium term: Security of berth applies again but in this situation the
ship manager has to consider the possibility that the ship may well be
laid up for months rather than weeks.
Maintenance may well be continued and engines and machinery will need
to be flushed and turned from time to time, but with a greatly reduced
crew, or perhaps no crew at all and only regular visits by maintenance
staff. Support services will probably be shut down and any crew living on
board will probably be supported by shore power and other facilities.
Security against theft and fire will need to be maintained.

Long term: Here, more than ever, security of berth is paramount, and if
the ship is ever to return to service, a considerable amount of
preparatory work is essential. Machinery and systems must be
systematically prepared, holds and tanks must be cleaned thoroughly,
cathodic protection arranged and the ship made thoroughly secure

119
 against theft either by maintaining a security watch or completely sealing
all entries to the ship.
Long term lay-up thoroughly carried out through dismantling and
hermetically sealing and de-humidifying can be very effective but this is
an expensive process.
Ideally there will be no crew or consumption of any supplies or spare
gear, and once laid up there will be no technical costs. Insurance costs
will be considerably reduced, particularly because there will not be any
crew on board and risks will be minimal.
General: It can thus be seen that the costs associated with laying up a
ship depend very much upon the intentions or hopes of the shipowner.
In the short term situation the costs of lay-up and return to service are
usually low. Some support staff have to be retained but there is an
advantage of continued maintenance.
In the medium, and particularly the long term situations, much greater
consideration must be given to preparatory work and in the same way
there will be much more work associated with bringing the ship out of
lay-up, necessitating dry docking and overhauling machinery. Thus
although once the ship is laid up the costs are minimal, the preparatory
and reactivation costs can be considerable. If, to save costs insufficiënt
preparatory work is carried out, even greater costs will be incurred when
the ship is returned to service.
It has been stated that there will be little change in the administration
costs through the lay-up of one ship and the staff will still be there to
support the ship if, and when, it is returned to service. Unfortunately,
the same cannot be said of the crew and many of them will have been
asborbed into the crews of other ships such that there may well be a
problem of finding another crew quickly when the ship is returned to
service. In a company with a large fleet finding a crew is relatively easy,
but in a small company with only two or three ships finding a crew in a
hurry can be difficult unless some of the staff have been retained. Again
this raises a problem of costs.
Laying up a ship requires a considerable amount of,thought and planning
and only a few of the principal factors have been considered in this
chapter. The way in which the lay-up is planned is very much a matter of
judgement based on known facts at the time. It often happens that the
longer the ship is laid up the more likely it is that the facts will change
and a ship manager will be well advised to consider that the ship will be
laid up much longer than the first estimate.

The scientifïc approach to reducing costs as applied to ships

If, say, a 10% reduction in costs is required in any organisation the areas
which should be considered for action are those of highest cost, where
action will have the greatest effect. Unfortunately, very often the action

120
taken is in the lowest cost departments where the overall cost effect is
least and yet can have a detrimental effect upon the staff. This can be
exemplified in an office where:
Staff costs are 60% of the total administration costs; occupation costs
25%; communication costs 10% and other costs are 5%.
If the postage account is only one tenth of the communication costs,
cutting this bill in half will have a minimal effect on the total budget, but
will frustrate the staff who must communicate with others as a necessary
part of business. But a 12% reduction in the staff or occupation costs will
have an effect of reducing the total costs by 10.2% — marginally more
than required.
It would be good if this philosophy could be applied to a ship but,
unfortunately, as has been shown in Chapter Four the cost departments
are so inter-related that to attempt to apply the greatest effort on the
largest cost department, usually crew, will usually cause an increase in
the other cost departments. Thus, any reductions in the ship cost
departments should be considered in total and not just on the crew in
isolation.

Summary
Cost reductions are most likely to be achieved in inefficiënt shipping
companies and ships.
In efficiënt shipping companies and ships the only effective action
which can be taken is to delay or reduce maintenance in the short
term. To continue this action for a longer period will ultimately
increase costs.
The cost and time for implementation should be carefully considered
before action is taken.
If sufficiënt reductions cannot be made the shipowner must either bear
the loss, lay-up or sell the ship.
If a ship is laid up costs continue in proportion to the method of lay-
up — the shorter the term the greater the costs. The longer the lay-up
the less the costs but the preparatory and reactivation costs increase
with the length of the term.
Although it is generally sensible to seek cost reductions in the area of
highest expenditure, i.e., the crew, regard should be taken of the
effect of such reductions on the other areas which will probably
increase as a result, particularly in an efficiënt ship with an optimum
crew.

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 Chapter Fifteen

The effects of ship

management and
operations on each
other's costs

As has already been seen, no ship management department exists in

isolation and the same applies to the relationship between the ship
management and operations parts of the shipping company. The “costs”
part of the equation “Earnings - Costs = Profit/Loss” covers
operational costs as well as running costs and the way in which the ship
is managed can affect both the operational costs and the earnings, thus
influencing the whole equation. In the same way the operational
requirements can have a direct effect on the running costs. Essentially
the causes of these effects are different: it is usually, but not always,
failure of the ship and staff to perform as required which leads to
increases in the operational costs and decreases in earnings, while it is
mainly unexpected changes in operational requirements which cause
increases, or decreases, in running costs.
Because the activities of these two parts of the company are so inter-
related an understanding of each other's problems with active co-
operation is essential if the overall costs are to be minimised, and
earnings maximised. This applies whether the shipping company’s
operators operate the ship themselves or charter it out. For the purpose
of this chapter it is assumed that they do run the ship themselves but
essentially the effects on each other are the same if the ship is time
chartered to another operator. If the ship fails to perform it may be
placed off hire and lose earnings or at the least incur extra costs for the
actual operation such that the charterer will not wish to hire the ship
again.
It is always important for the ship manager to keep in mind that one of
his prime functions is to provide the ship for the operator to use as he
wishes, whether this be at fast or economical steaming or laid up, fast

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turn around in port or standing by waiting for orders. In the same way
the operator has to keep in mind that in order to keep the ship as he
requires the ship manager must carry out maintenance and other support
functions which can necessitate the ship being taken out of service,
making unscheduled calls at ports to change crews, collect supplies and
spares, etc. if this is the most economical way of arranging matters and
does not unduly interfere with the operations.
The ways in which these two parts of the shipping company affect each
other’s costs will now be considered in detail:

Ship management and the ship

The main engine and Auxiliaries: Inefficiency will reduce power, resulting
in higher fuel consumption and/or less speed. This will result in higher
fuel costs and loss of earning time. Breakdowns will cause delays and
also loss of earning time.
Cargo handling equipment: (Derricks, pumps winches etc.) Inefficiency
will result in higher fuel consumption and slower cargo operations.
Breakdowns will cause delays and loss of earning time.
Cargo preparation: Improper preparation of holds, tanks or
compartments for the carriage of cargo can cause delays and loss of
earning time. Loading cargo into improperly prepared spaces can result
in damage to cargo with claims against the carrier.
Availability of crew, suppiies and spare gear: The shortage of a
certificated officer, certain supplies or spare parts can delay the sailing of
ship with a resultant loss of operational time.
The cargo: Inattention to the loading, carriage and discharge of cargo
can also result in claims against the carrier. Not taking cargo to the
correct capacity will also result in loss of earnings.
Ship’s appearance: Poor appearance of the ship, although not in any way
affecting the carriage of the cargo or the operations directly is often
taken to be an indication of inefficiency and poor maintenance and thus,
indirectly can effect the earning capacity of the ship.
The huil: Improper maintenance of the underwater section can result in
slower speeds and higher fuel consumption. The interior sections: poor
maintenance of cargo compartments can result in cargo damage and
discharge difficulties.
Sailing: Poor seamanship in the broadest sense can result in longer time
being spent on ocean passages, cargo damage through heavy weather and
even delays if the ship itself is damaged. Insufficiënt consideration of the
weather conditions and berth availability can result in unnecessary fuel
consumption.

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 Co-operation: Lack of co-operation between ship and shore staff,
whether government officials, shippers, stevedores or anyone associated
with the ship and its cargo can also result in delays and therefore loss of
earning time.
The way in which the ship and engines are maintained, the cargo
equipment works, the crew prepare for, carry and discharge the cargo,
sail and keep the ship in good order depend much upon the ship
manager. His choice of crew, their training, and organisation, the
maintenance planning, supplies arrangements and his overall control can
all effect the performance of the ship. As has been shown, poor
performance can result in loss of earning time, higher fuel costs,
penalties, etc., but it can also cause direct operational costs in such
matters as tug charges if they are kept waiting because the ship is not
ready. Additional stevedore and associated worker charges can also be
incurred through the crew not having cargo compartments or gear ready
to work cargo.
One of the most important areas for co-operation and need for an
overall decision, is in regard to the port where the ship is taken out of
service for dry docking and/or major repairs. Just as the cost of
positioning the ship for the next cargo is important to the operators, so
the choice of port is important to the ship manager, often affecting the
cost and time for the work to be done. But if the ship is scheduled to
return to service at or near the port from which it is taken out of service
for repairs, the ship manager has little choice but to arrange the work in
the vicinity unless there are considerable cost and time advantages in
going elsewhere.
The key factors for consideration are time out of service and consequent
loss of earnings plus the costs of the ballast leg to the repair port and re-
positioning afterwards. The state of trade at the time will obviously have
a considerable affect on the decision, but the decision can only sensibly
be made from the point of view of the company as a whole and its
commercial interests in particular.

Operations
As previously stated, it is unexpected changes in the operator’s
requirements which can change the running costs. These can be through
a change of operating area, a change in the requirement for the ship
itself, extending its service life, selling it earlier than scheduled or laying
it up. It will be recalled that in preparing the budget the ship manager
bases his costs on the ship trading to certain parts of the world for a
certain period. If those assumptions change then a change in the running
costs can be expected. Whether such a change is favourable or adverse
will depend upon the original assumptions. For example, if the ship
changes its trading area to one where regular calls are made at the crew's
home port, a considerable reduction can be expected in the crew travel

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costs. If the ship had been expected to call regularly at the home port
and is then moved to another trading area these costs can be expected to
increase. Even the number of cargo operations can affect costs. Ships on
short sea passages use cargo equipment more frequently, thus
necessitating more frequent overhauls and related costs. More,frequent
port calls will also increase the amount of overtime worked by the crew
while on standby, berthing and unberthing and reduce the amount of
maintenance they can carry out. Even trading to a colder zone may
result in increased costs for crew clothing if this is a requirement of their
service agreement.
The same applies to the assumptions for maintenance and repair ports,
supplies areas and spare gear deliveries. Even insurance will be affected
if the ship trades outside the institute warranty limits and requires
additional cover.
Maintenance and repair costs are usually based on work in shipyards
being carried out in ordinary time. Should the operators have an urgent
need for a ship during such periods, overtime worked to put the ship
back into service earlier will increase the technical costs.
And it should not be thought that poor performance lies only with the
ship management department; failure by the operators to keep the ship
properly instructed or advised can create unnecessary work and often
unnecessary overtime being worked. Lack of consideration of the ship’s
maintenance needs or lack of communication can result in work not
being done while the ship is laying idle which could have been done if
the ship’s staff had been fully informed. A more serious effect on the
ship is pressure by the operators or the master to get the ship into port,
to sail by a particular time, or to load or discharge a cargo in a way
which may be unsuitable to the ship. Of course, maximum co-operation
should be given, but safety of ship and crew is paramount and a ship
master should resist such pressures, recognising that the responsibility is
his. Failure to do so can have a highly costly and perhaps disastrous
outcome.

The design of the ship:

The ship manager can only do the best with what he is given. If the
operator was able to teil him precisely what he wanted and the ship
manager was able to have such a ship built, all would be well, at least
until the operational requirements changed. However, as explained in
Chapter Thirteen most new ships are a compromise and in any case ship
managers are often given second hand ships to manage.
When considering costs, the design of the ship can have a very important
impact; engines which consume too much or use the wrong type of fuel,
cargo pumps with insufficiënt capacity, derricks with insufficiënt
outreach, holds or tanks of the wrong size, etc. can have a considerable

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 affect on operational costs. Similarly ships not designed for general
purpose crew operation and efficiënt planned maintenance will be much
more expensive to run.
When purchasing a ship or when contemplating modifïcations the
operators should always seek the advice of the ship managers if costly
surprises at a later date are to be avoided and running costs minimised.

To summarise
Operating a ship requires maximum co-operation between operator
and ship manager.
It is the ship manager’s job to have the ship available as required for
the maximum amount of time possible.
The ship must perform as required — failure to do so will result in loss
of earning time, increased fuel and other operational costs.
The ship has to be taken out of service from time to time to maintain
its performance. Co-operation on the timing is essential.
Changes in the trading pattern assumed when making the budget can
affect costs either way.
The cost effectiveness of the ship’s appearance should not be ignored.
Lest it is forgotten
SHIP OWNING IS A COMMERCIAL ENTERPRISE. THE PRIME
OBJECTIVE IS TO MAKE A PROFIT.

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Chapter Sixteen

Theories and practices

“You pays y o u r m oney and yo u takes yo u r choice”

Punch

At times of rapid technological advance and low profits, it is inevitable

that opinions and theories will proliferate as to how best to contain or
minimise running costs. In theory this should be through “efficiency”; by
choosing the best crew at the lowest cost and using them effectively, and
obtaining the best technical services, supplies and insurance at the most
competitive prices. In practice the search for low costs, particularly in
regard to the crew, often overrules all other considerations, sometimes
with disastrous results.
The purpose of this chapter is to briefly examine the principal areas of
“opportunity” to minimise costs, yet still operate a safe ship. Some are
“provable” in money terms while others are not so, except that
experience has shown them to be generally beneficial, e.g., although it
can be said with some conviction that a happy crew of high morale will
work harder and more readily than an unhappy crew, this is difhcult to
quantify in money terms.
Because a number of “changes” can stem from work study, it is
preferable to start with this controversial area of “opportunity”.

Work study
This is the practice of studying work being done to see if there are ways
of improving efficiency through the effective use of resources available,
or which could be made available, i.e. manpower, equipment and
systems. Essentially it can be divided into two parts: Method Study and
Work Measurement. The first studies how work is done, and the second
how long it takes or how often it is done. It is suggested that readers
requiring more knowledge of the techniques should refer to the books
listed in the bibliography.
Preferably any study should be all embracing, co vering both ship and
shore organisations and equipment and essentially should be carried out
by experts from outside the company. This is not because they will know
the work better than those doing it, but because they will approach the
work with a number of advantages over those doing the work, for
instance:
They will approach the work with unbiased eyes.
They will be able to spend their whole time studying the work.
They will have authority to discuss the work with all involved.
They will be skilled in examining work in general, seeking new ways of
doing things and presenting their findings in a scientific manner.
They will have knowledge of systems in a number of industries which
can be readily applied to shipping.
Many of the ideas for improvements will come from those doing the
work and much of the skill of the work study practitioner lies in
encouraging staff to make such contributions and acknowledging them.
The relationship between practitioners and staff can be a minefield of
problems unless handled carefully with full communication with all
concerned at each stage of the study.
For a number of reasons, it may not always be possible for a full study to
be undertaken or for the findings to be accepted in total, but with good
will, co-operation and particularly a willingness to accept change, the
study can identify and recommend ways of improving efficiency.
Essentially the work study will look into all aspects of running the ship as
follows:
The Work: A prime part of any work study lies in identifying the work
which needs to be done, eliminating unnecessary tasks and specifying
correct frequencies for carrying out the essential tasks. This applies to all
shipboard activities, but particularly to maintenance where there may
have been excessive overhauls of some parts and insufficiënt attention to
others.
The Methods: Having defined the work this part of the study seeks the
best methods for carrying out the various tasks. This can involve design,
equipment, materials and skills and will not only result in the most
efficiënt way to do each job, but also, a Standard time from which the
total manpower requirement of the ship can be calculated.
The Labour: As described in Chapter Six, there are some maintenance
tasks which can only be done at a repair yard with the necessary
facilities, but there are other tasks which can be carried out equally we 11
by the crew or shore labour. In the first place, the study has to identify
the essential operational manpower requirements of the ship and then
decide the amount of maintenance they can carry out in the time
available and whether additional crew should be carried to carry out
more maintenance. This then becomes a matter of economics and will
depend upon the wage levels of the crew and the costs of labour at the
ports to which the ship regularly trades. If there is no regular trade
pattern, then assumptions as to relative costs have to be made.
The Shipboard Organisation: Associated with the study is an examination
of authorities, responsibilities and Controls, which should involve the
shore base organisation. This study comes under the heading of a related
technique called “Organisation and Methods”.
The study may well have to adapt its conclusions to existing
circumstances, i.e. constraints placed upon it by the requirements of
other departments, the government of the country of registry or trade
unions. It may also lose some of the savings envisaged through any crew
reductions, by having to share them with the crew in the form of
productivity payments, or additional payments for changes in job
structures, such as from traditional crew to general purpose crew or
involving inter-departmental flexibility arrangements.
Despite the various constraints and sometimes resistance to change,
studying the work done in ships both by experts and staff, played a large
part in the considerable reductions in manning scales in the 1960/1970’s.
These reductions were, generally, associated with the introduction of new
Systems of work and Controls in ships, coupled with design changes in
new and existing ships. Today, many shipowners benefit from these
earlier studies and the principle of the scientific study of work in ships is
generally accepted by staff, trade unions and government bodies alike, as
a means of determining manning levels.
The study of work in a ship should be on-going because circumstances
are changing continuously. Although the cost of labour is unlikely to
become less expensive, labour saving devices and maintenance saving
techniques, etc., continue to develop, creating opportunities for greater
efficiency. Ideally, each ship and its total work requirements should be
studied before it is built and then re-studied from time to time
throughout its life. This will ensure that systems and equipment are being
operated as intended and will also identify changing needs and problem
areas. It will also allow consideration of the application of technological
developments to the ship.
Because crew is one of the highest cost departments in the ship it is
inevitable that attention is always centred on the manning scale as a
potential area for cost reductions. For this reason there is often pressure
upon the work study practitioners to reduce the crew numbers. However,
it must be borne in mind that one of the objectives of the study is to find
the optimum crew in terms of numbers and skills and even quality, and
that the study may conclude one of three things:
That the number and mix are excessive.
That the number and mix are correct.
That the number and mix are inadequate.
It may well be that in certain ships and trades that this third possibility
has been reached and that the overall work load is too great for the
current manning scale. Alternatively, it may be found that at peak

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periods of activity such as loading or discharging, the crew levels are too
low causing a dangerous situation whereby ships sail with weary men on
watch. It may also be found that in certain trades much of the
maintenance work can be done more cheaply by the crew than by shore
labour thus suggesting permanent or temporary additions to the crew or
the use of riding crews.
Usually the best solution can be found by studying the work and costs of
all activities and carefully considering the various alternatives.
Time and cost: The time for the average work study of a ship from
agreement of the terms of reference, negotiating with trade unions and
briefing all concerned is about four months. Agreeing conclusions and
implementing them with further negotiations and briefing may take a
further six to eight months so that the total time before any benefits from
a work study are achieved may well be a full year.
Where crew numbers are excessive the costs of the study itself can be
recoverable in the first year by a reduction in manpower and supplies
costs, but recovery of the costs of associated modifications and
equipment may take longer dependent upon the cost of any modifications
or new equipment and systems which may be required. As some of the
modifications and equipment are often relatively simple and cheap it may
well be that all costs can be recovered in the first year or two. From this
it can be seen that work studies should only be associated with ships
which are intended to be retained in service for sufficiënt time to benefit
from the results. However, there are often side benefits from a study
such that findings in one ship can usually be applied to similar ships
providing the conditions are the same. In any case there may be specific
benefits or techniques brought to light which can be applied to all ships.
Whereas work study can be all embracing there are a number of
associated techniques which it can include or which can be developed
independently; they are:
Planned maintenance
Spare gear control
Controls and computers.

Planned maintenance
The objectives of planned maintenance are to maximise the reliability
and availability of the ship’s equipment and to extend its life to the
maximum possible. Properly arranged the amount of unscheduled or
breakdown maintenance should be minimal and most maintenance work
should be in accordance with the plan.
Although maintenance must be carried out regardless of who does it,
from the point of view of planning and control there should be a general
policy as to how much of the work should be done by the crew and how
much by shore labour. For this reason planned maintenance should be
compatible with the manning scale, such that the required work can be
carried out. Similarly, the system should be compatible with the spare
gear control system to ensure spares are readily available when required.
A key factor of planned maintenance is controlling the work being done
and which has to be done. To operate effectively the managers
concerned must know promptly if there is any shortfall in the
maintenance carried out as against that planned. They must also be able
to take corrective action either by supplementing the ship’s staff or
having the work done by shore labour, or both, if necessary.
Ideally, a planned maintenance scheme should be installed with the spare
gear system, while the ship is being built. In the case of an existing ship,
the system can be arranged while the ship is in service, but a problem
lies in bringing the ship to the required levels of maintenance at which
the system can work effectively. If the system is arranged and
implemented without the level of maintenance being raised to an
acceptable level, it may well take a long time before the system will be
effective, as breakdown maintenance will hinder the progress of planned
maintenance and it may never reach the required level.
The cost will probably be that of two experienced men for three to six
months. Although savings are not easy to quantify in detail, there is
much evidence to show that in ships where planned maintenance is
operated, there is a marked reduction in the amount of unscheduled or
breakdown maintenance and a reduction in off hire and out of service
times. A further advantage is the savings in fuel and lubricating oils
through greater efficiency of the plant and machinery and a reduction in
replacement and repair costs.
It is important to bear in mind that the system is dependent upon having
properly trained and experienced personnel and equipment to carry out
the maintenance, both in the ship and in the repair yards used by the
shipping company. It is also dependent upon the ability of the ship's staff
to utilise to the fullest extent the manpower available and for the system
to have sufficiënt flexibility for them to co-ordinate the work with the
operational requirements of the ship.
An essential factor in the control of planned maintenance is the
frequency of overhaul of the various items of plant, machinery and
equipment. A common fault of many planned maintenance systems is
“over maintenance” , which leads to unnecessarily high labour and
material costs, particularly when parts with minimal wear have to be
replaced as a result of the overhaul. Over maintenance may also lead to
faults in otherwise well running plant, etc., as a result of disturbance or
incorrect re-assembly of the parts, which again increases costs.
The solution lies in having sufficiënt flexibility built into the system to
allow the managers concerned to extend the periods between overhauls if
the plant etc., is running satisfactorily. The decisions to extend the
periods are aided to a great extent by advances in “condition

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 monitoring” equipment, referred to in Chapter Six, which allows the
condition of plant, etc., to be monitored without disturbance.
Like work study, there can be additional benefits, as experience gained
in developing a planned maintenance system in one ship can often be
applied to other ships, thus reducing study and implementation times.

Spare gear control

This has been described in some detail in Chapter Twelve. As previously
mentioned, it is preferable for it to be installed when the ship is new.
The older the ship the more difficult the task, as even if stock levels have
already been established for similar equipment, the actual on board
sorting and checking can take a considerable amount of time.
The cost will depend upon whether the ship is new or has been in service
for some time. It will also depend upon whether stock levels for similar
equipment have already been established in other ships in the company.
In a new ship, with stock levels for most of the equipment already
established in other ships, the system could be established by two men in
a month, but in an older ship without established levels, it could take six
months. The cost benefits lie in the reduction of waiting time for spares
which could have far reaching effects and savings through not having
excessive stock.

Computers
“Controls" have been covered in Chapters Eleven and Twelve. It is the
computer which adds to their effectiveness. It can store, analyse and
present information in a great variety of ways to the benefit of the ship
manager provided:
He knows what he wants, knows how to use it when he gets it, and
ensures that good information is fed or put into the computer in the
first place.
If good information is not fed into the computer then the well known
expression “rubbish in, rubbish out" will apply. The advent of the micro
chip has increased the capacity and decreased the cost of computers i.e.
the “hardware” , considerably, making the “software” or program, design
the expensive part of the installation of a computer system. Managers
may utilise ready made programs for their particular field or may have a
program specially designed for them. Alternatively, they may use a ready
made package program capable of modification for their special needs.
Whichever path they take, experience has shown that within a fairly
short time they will want more information and for this reason a liaison
will need to be maintained with the software designers.
The ready made program has an advantage in that it has already been
tried, irregularities in the system have usually been removed and it is

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cheaper than having a tailor made or custom built program. The
disadvantages of some, but not all, ready made systems lie in the
inflexibility of both program and computer, such that the program cannot
be altered and can only be used on a particular type of computer. The
advantages of the tailor made program is that with proper guidance, the
manager receives the information in the way he wants it. The
disadvantages lie in the time required to instal a system and its higher
cost.
Technological advance in computers and programs is rapid. Computer
languages are becoming less complicated and thus more easy to
comprehend, programs arranged on some computers are now more
readily transferable to others and the range of hardware capability is
such that very careful consideration needs to be given before deciding
the computer requirements of the business. The computer has a
considerable number of uses for the ship manager, not only in regard to
costs, but for all the control data requirements referred to in Chapter
Eleven. It can show stock levels instantaneously, produce average
consumptions of supplies, give complete details of crews and the status of
the planned maintenance and spare gear systems. It is also particularly
useful in the analysis of results and information.
Computer input directly from ships via radio telex or satellite has further
extended the ability of the shore base to support and control the
activities of the ship without delays.
Other techniques which have cost saving potential are:
Weather Routeing
This is only available in the North Atlantic and North Pacific at present.
Fee paying ships are advised on the optimum track to follow throughout
an ocean passage by ocean weather experts, who take into consideration
the ship’s size, draft, speed and the prevailing and forecast weather
conditions.
The benefits are considered to be a faster ocean passage although more
distance may be covered than the usual route, plus less stress and
damage to ship and cargo through heavy weather. The costs are
relatively very low when compared with the anticipated savings. Proving
the savings is not particularly easy, as a comparison has to be made with
the speed it is assumed that ship would have made if it had followed the
usual route. The usage of the services indicates that many shipowners are
convinced of the advantages. The installation of radio facsimile
equipment to produce on board weather maps has given the experienced
shipmaster a means to help him to decide whether or not to follow the
advice he is given.
Cathodic Protection
The savings are long rather than short term but evidence of the
effectiveness of these systems is easily obtainable. Not only is there a
considerable reduction and even elimination of wastage of metal through

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corrosion, there is also the advantage, in the case of huil protection, in a
smooth huil form and thus better speed. This protection can be installed
at any time during a ship’s life, but is best installed at the time of
building and maintained thereafter. Savings can only be proved against a
comparative ship of a particular age without such protection.
COW (Crude oil washing)
Although now required by international law in many tankers, it is
interesting to note that apart from the anti-pollution benefits of this
System, there are reductions in the work associated with cleaning or
mucking out the tanks and reduction in hot salt water washing and,
therefore, a reduction in corrosion in tanks.
Automation — Unmanned Machinery Spaces
The benefits of automation lie principally in the reduction of manpower
required to operate the main engine and auxiliaries and, at sea, the
freeing of officers and ratings to carry out more planned maintenance. A
further advantage is reduction in wear of the engine due to more
controlled operation. Installation is usually associated with new building
and the fairly high additional cost can be compared with manpower and
maintenance costs savings over a number of years.
When comparing costs it should be borne in mind that the cost of
maintaining the automatic equipment can be high, as it usually involves
specialist servicing and repairs, necessitating makers’ representatives
attending the ship during voyages and at dry docking etc., away from
their home base.
Paints
Advances in paint technology are continuous and the advent of self-
polishing paints and leaching under-water paints is the latest in a long
line of developments since the days of lead and linseed oil mixes. But
sophisticated paints require very much more care in surface preparation
and repair and the self polishing types require a clean steel surface to be
effective. Essentiaily the objective of the technical researches into huil
coatings is avoidance of frictional drag through either roughness with
fouling, and longer periods between dry dockings.
As in the case of so many cost saving techniques, they are best started
while the ship is being built. The cost of self-polishing paints is much
higher than conventional paints but it can be shown that there are overall
savings to be achieved through better speed, less fuel consumption and
less frequent dry docking over a period of at least three to four years.

The Organisation
People spend a considerable time in talking about organisations and
there is a wealth of writing on this subject. The cost effectiveness of
some organisations compared with others is not always easy to prove.
The cost of numbers and skills alone says nothing as a larger staff may
be able to exert greater control and thus greater overall costs savings
than a smaller staff. The structure itself is important as there may well be
an imbalance between managers and support staff, or there may be too
many reporting levels such that the organisation chart looks like a steep
pyramid, and much time is wasted in achieving results because of the
levels of communication necessary before a decision can be reached.
There is almost a legend in the shipping industry of the shipowner of an
old maritime nation who ran everything and knew everything that was
going on. The complexity of the industry today makes such a situation
difficult, nevertheless there are two lessons to be learned from this:
Simplicity: The less complicated the organisation and everything about it
the better. There should be a continuous search for simplification.
The Organisation Chart: Should be as flat as possible, i.e. a trapezium
shape rather than a pyramid. There has to be a chief, but beyond that
there should be a number of people, both expert and flexible, working
together as a team and not as one more senior than another. To these
should be added support staff such that the experts can utilise their
talents to the full.
The lines of communication should be as short as possible otherwise the
quality of the information is liable to be lost en route.
As already mentioned in Chapter Four there is a desire in some
companies to delegate as much responsibility and control as possible to
the ship. Unfortunately, this is often ineffective due to the difficulty in
providing the ship’s staff with sufficiënt information for them to make the
best possible decisions outside their purely operational roles.
The cost of studying and recommending a suitable structure for a
company need not be high. The benefits may lie in a reduction in shore
staff and associated costs, but may well be achieved through increased
efficiency in the organisation. Consultants can be used to help re-
organise a company but the real key both in terms of cost and
effectiveness lies with the staff. If they can look at their organisation,
diagnose the problems and find Solutions themselves, a much more
workable structure will result.
No two organisations are alike, even though they may appear the same
on paper, because they are essentially a group of people who all behave
differently regardless of titles and positions. As people change so will the
organisation and there is a need for periodic self-examination in any
organisation to ensure that it is efficiënt. Some organisations drawn on
paper can look very odd, but the important question to be asked of any
organisation, regardless of its construction, is, does it work?

Minimum Crews
The smallest crews depend almost entirely upon the flexibility of the
positions held by the crew members. Whereas general purpose ratings

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are no longer uncommon, dual purpose officers are still in the very early
stages of evolution and are, necessarily, associated with the structures of
certificates in the countries concerned.
With automation and unmanned engine rooms in a ship on regular
voyages, it is possible to have a very small crew indeed, their role being
only of an operational and emergency nature. All regular maintenance,
cargo activities and even mooring operations can be carried out by shore
staff if required. Having overcome any objections of government and
trade unions the benefits of a very small crew can only be assessed on
the basis of the cost effectiveness of other means of carrying out work
traditionally done by the crew.

Industrial psychology
As ships have become more sophisticated, and the number of people
sailing in them has decreased, a number of maritime nations, either on a
national or company level, have become concerned about the problem of
keeping people happy at their work at sea. Apart from the fact that a
happy crew can be seen to be more productive than an unhappy one, the
economics of recruiting and training crews, only to have them leave the
industry after a relatively short time, have forced owners to seek answers
to the problem.
A number of excellent studies have been produced which have
highlighted the problems of lack of challenge, short time in port with no
time for recreation and the reduced size of the on board “community”.
Some progress has been made in dealing with the problems; many of the
barriers between officers and ratings have been removed, more wives are
allowed to sail with their husbands, service time in ships is shorter and
leave is longer.
Some companies have been successful in providing their sea staff with
more job satisfaction through greater involvement in the management of
the ships, but many have had difficulty in finding ways of implementing
such changes, even when they believe in them. The difficulties are easy
to understand but it is unfortunate that the management potential of so
many seafarers, particularly senior officers, is so under-utilised.
The cost of implementing changes to provide more job satisfaction is
mainly in the training of sea and shore staff to accept new concepts.
Some savings can be made through reductions in the shore staff but the
principal savings are through greater productivity in the ship.

Training and safety

Most training is associated with safety, directly or indirectly. The direct
safety training is through courses on such matters as firefighting, tanker
operation, the carriage of hazardous cargoes, accident prevention, and
navigation and ship handling. Courses associated with crew management
are indirectly related to safety because they show the ways to motivate
staff towards operating ships efficiently, and safety and efficiency go hand
in hand.
There is no doubt that every shipowner would like to have well trained
crews in his ships, as few would argue that well trained, disciplined and
safety conscious crews reduce the chances of accidents. The problem
arises when it comes to paying for the training, as referred to in Chapter
Five. Training is expensive, involving not only course and
accommodation fees, but also the time of the crew members attending
the courses. If it is outside statutory requirements there is a tendency to
question whether it is really necessary.
The cost effectiveness of training is not easy to prove and is best shown
in reduced insurance premiums in a company with a good safety record,
as referred to in Chapter Eight. The concept that there should be
benefits for owners who spend money and effort on training, compared
with those who do not, is a matter which will, hopefully, one day obtain
recognition.
Ideally, the matter of training should be a company policy. Senior
managers should decide the minimum training requirements they
consider necessary for officers and ratings sailing in their ships. Having
decided this policy it should not be changed, regardless of the economie
situation of the company, as to do so is likely to increase costs. But this
is an ideal philosophy and unfortunately, one of the first costs to be cut
when times are bad are the training costs.
As referred to in Chapter Seven, the advent of the video tape recorder
has created an opportunity for on board training, particularly when short
training films are attached to entertainment films. However, the
application of what is seen in the film into everyday practice, depends
upon the leadership skills of the senior officers, but these too can be
developed with training.
One aspect of safety which is rarely voiced is the language barrier which
often exists between officers and crews of different nationalities.
Language teaching equipment in ships can also assist in this area.

Registry
So far registry has only been mentioned as a fee in the technical budget.
The cost effects of registry are very complex and depend upon two
principal factors: Taxation and crew nationality.
Shipowners with nationality of the country in which their office is
registered often have no choice: their ships must be registered in that
country and they must pay taxes in accordance with its rules and only
employ its nationals for their crews. The crew must hold certificates as
required and issued by the country of registry and the ship must comply

137
 with all its regulations, particularly safety. However, not all countries
have such stringent laws and some shipowners are able to choose a
country of registry to their advantage, hence the term “Flag of
Convenience”. However, it does not necessarily follow that because they
have a choice they will register in a “Flag of Convenience” country, for
the following reasons:
Taxation: One of the advantages of registration in many of the “Flag of
Convenience” countries is the fact that there is no tax on profits or
Capital gains, or the tax is very low, or is only applied to income received
locally. However, there can be advantages in registry in some of the non
“Flag of Convenience” countries which although their tax rates are high,
grant low interest finance for new ships built locally. They may also allow
“free” depreciation on the ships, or perhaps allow taxable shipping
profits or losses to be off set against profits or losses in other areas of
business. It must also be borne in mind that even owners who register
their ships and have offices in low tax countries, may have difficulties
with the taxation authorities of their own countries. Often the choice can
be between tax avoidance or the use of tax laws to advantage. This is a
most complex subject and an owner able to choose the registry of his
company and ships needs to carry out a considerable amount of research
into the matter before making a decision.
Crew: Of considerable importance to all seeking a reduction in running
costs is the choice of crews allowed by some countries of registry,
particularly the “Flag of Convenience” countries. It does not necessarily
follow that because an owner chooses to register his ships in a “Flag of
Convenience” country that he will employ the cheapest crews. He may
well employ the crew in whom he has confidence and they may well be
paid at rates acceptable on an international level (See ITF Chapter Five).
Neither should it be assumed that because a low cost crew is used, that
they are necessarily not as good as a highly paid crew. Much depends
upon the owner’s methods of selection and recruitment and the calibre of
the officers and ratings.
Safety: Although not to be considered when contemplating cost
alternatives it must be noted that there are shipowners who deliberately
register their ships in countries whose marine laws and inspection
procedures are lax, and whose officer certification requirements are low,
just to minimise costs. Fortunately, international and national legislation,
plus actions by international labour organisations, have done much to
restrict such practices, and it is hoped that in time this will not be a
factor in competitive shipping.
The ship: Associated with the need for greater efficiency, energy
conservation, fuel and crew costs, changing trades and operational
developments, safety and anti-pollution requirements is the continuous
development of ships — their huil forms, main engines and auxiliaries,
propellers, cargo handling equipment, etc. It is well beyond the scope of

138
this book to detail developments to date and on the drawing board for
the future, Each trade and ship are, and will continue to be, different.
The shipowner’s dilemma lies in choosing the right ship for his current
and anticipated requirements knowing that within a few years the ship
may be technically and economically outdated and have to be used in a
trade for which it was not originally intended.

The cost of the ship

The actual cost of the ship, the terms of purchase payments, the costs
and conditions of financing any borrowing must, of course, have an effect
on the costs of running a ship. As explained in Chapters Three and Ten,
the treatment of the costs related to the purchase of the ship, i.e., the
depreciation and interest charges is essentially a company accounts
matter and is thus well outside the area of influence of the ship manager.
Ship financing is a complex business. The price paid for a particular ship
and its cost over a period of time depends very much on market
conditions in the ship building industry, (which also reflects world
shipping conditions), and the cost and availability of money, i.e. the cost
of borrowing and credit.
It is in this area more than any other that the entrepreneural flair of the
shipowner comes into its own; as the timing of the decision to purchase a
ship, whether new or second hand, is all important in relation to the
price and, ultimately, the effect on the running costs. The decision is, of
course, prompted by expectations, speculative or otherwise, of the
earnings of the ship.

Management by objectives
Having started the first chapter with the statement, “If you don't know
where you are going, any road will take you”, it seems appropriate to
end the last chapter with mention of a technique which is very much part
of many of the philosophies on which this book is based: it is
“Management by Objectives” or MBO.
It is the technique of identifying and agreeing the objectives of each
person’s job and it applies particularly to managers at all levels whether
ashore or afloat. Once the technique is learned the cost is relatively low
as it onlv involves the time of those concerned. Ideally it obtains the
personal commitment of a person to do his best to achieve the agreed
objective in a given time. It is a technique well worth developing and can
have remarkable results, particularly when associated with such matters
as work plans and financial budgets.

139
 Conclusion

. . and all I ask is a tall ship and a star to steer her

b y ”.
John Masefield

In most fields of activity there is always someone who knows how to

obtain something, or have something done, at less cost than anyone else
and shipping is no exception to this rule. The very competitiveness of the
industry results in a constant search for ways of reducing costs and thus
there is always a great interest in the way other people minimise their
costs. As will have been seen, the complexity of a ship’s costs is such
that any claim of low costs for running a particular ship, or department
of a ship, needs very careful examination as to what the costs include, or
exclude, the assumptions upon which they are based and the overall
effect of such low costs upon the ship as a whole.
Many of the so called “savings” in running costs result from taking risks
and while a degree of risk is involved in most business decisions, in
shipping there are those which may be described as acceptable, while
others are unacceptable. For example, a decision to delay the overhaul
of a piece of equipment for a few months may well be acceptable and the
risks even quantifiable, but the decision to engage a crew with
insufficiënt training and experience for a particular ship is unacceptable
and the risks unquantifiable except that there is a potential for loss of
disastrous proportions.
Fortunately, taking unacceptable risks is not the only way to minimise
costs and the preferred solution lies in the efficiency of the ship and the
whole ship/shore organisation through optimum utilisation of resources,
i.e. staff, equipment and systems. But these must all complement each
other; the crew must be capable of dealing with the ship and systems, the
shore staff must support the ship adequately and the systems must aid all
concerned. Any imbalance will reduce the chances of achieving the
desired results.

140
Reference books and
papers

Managing for Results, Peter F. Drucker

The Practice of Management, Peter F. Drucker
Drucker on Management, Peter F. Drucker
The Business of Management, Roger Falk
Financial Planning and Control, P. E. Palmer & A. H. Taylor
Financial Accounting, Michael & Anthony Guter
The Balance Sheet Barrier, Anthony Jay
Business Planning and Control, S. V. Bishop, MC, FCA
Management Accounting, The Association of Certified & Corporate Tax Accountants.
The Trading Prospects for Panamax (50-80,000 DWT) Bulk Carriers and OBOs, H. P.
Drewry
Crew Costs - The Shipowner’s Dilemma, Galbraith's Shipping Advisory Services Ltd
Running & Maintenance of a Fleet of Bulk Carriers and General Cargo Carriers T. W.
Major, CEng, FIMarE, InstMarEng, 18.10.77
Optimising Ship Repair and Maintenance Costs: A Systematic Approach,
J, B. Bunnis, BSc, CEng, NE Coast Institution of Engineers & Shipbuilders 8.10.73
A New Approach to Ship’s Maintenance, B. K. Batten, MSc, CEng, FIMarE, Journal of
Ship Repair and Maintenance, February 1975
Budgeting for Repair and Maintenance, Shipbuilding and Shipping Record, 23.10.73
Inspection, Maintenance and Repair, J. B. Bunnis, Seatrade Academy Session, Paper 37,
9.11.80
The Challenge of the VLCC, E. S. Ware, Marine Engineer’s Review April 1980
Handy Book for Shipowners and Masters, The London Steam Ship Owners’ Mutual
Insurance Association Limited.
The Shipping Industry, Victor Dover
Huil & Machinery Insurance — some practical considerations, Galbraith’s Shipping
Advisory Services.
How not to have your cake and eat it — Insight into Huil Insurance Costs, Chris Hewer,
Fairplay International Shipping Weekly, 8.5.80
Marine Insurance Practice, R. H. Brown
Insurance Claims for Salvage and Damage, Average Adjusters, Marine, Arbitrators —
Loss Adjusters, R. Rutherford, Trans 1 MAR E (TM) Vol 91, Part 6, Paper 8, Inst
Mar Engineers.
The Principles of Marine Insurance, Harold A. Turner, ACH.
Voyage Estimating, William V. Packard, Fairplay Publications
Studies in Maritime Economics, Advances in Maritime Economics, Marine Week,
25.1.80, R. O. Goss, Ship Management.
Management Techniques, John Argenti
A Manager’s Guide to Work Study, Owen Gilbert

141
 The Directors Guide to Computing and The Directors Guide to Computers, The Institute
of Directors in collaboration with the National Computing Centre.
The Great Pan Lib Hon Controversy, Erling D. Naess
British Flag, Galbraith’s Shipping Advisory Services
Explaining the Nose for Business — The Greek Entrepreneurs, William V. Packard,
Fairplay International Shipping Weekly, 15.5.80
Up the Organisation, Robert Townsend
Some Problem Areas in Ship Safety, G. Victory, FIMechE, FIMarE, FRINA, Trans I
Mar Eng, Vol 91, 1979
Long Life Paints, D r C. A. Smith, Shipbuilding & Marine Engineer International, June
1980
Large Tankers — Their Safety and their impact on the Marine Environment, Ralph
Maybourn, Thomas Gray Memorial Lecture, R.S.A., 26.3.80
Impact of fuel costs and anticipated developments in technology on ships of the 1990s
and their operation, Marshall Meek BSc, CEng, FRINA, FIMarE, FRSA, Shipbuilding
& Marine Engineering International, July/August, 1980.
Condition Monitoring, Lars Noyen — Det norske Veritas, International Maritime
Conference, Europort, 1975
Improving Management Performance — Management by Objectives, J. W. Humble
Un c t a d looks at a greater degree of uniformity in policy conditions, Fairplay
International Shipping Weekly, 26.6.80.

142
Ship M anagem ent Series
This series of books is designed to provide helpfuI advice on the more
practical aspects of ship operation and management, useful both to those
w ith experience in the industry, and those just starting to get to grips w ith
the management of ships. Bunkers, by W. D. Ewart, is a practical guide to
the sort of fuel efficiency essential since the price of bunkers went up so
steeply, and their quality down. Marine Surveys provides an introduction
to the art of the marine surveyor, useful to the person beginning such a
career, and to those that em ploy surveyors.

Tram p Ship Series

Voyaga Estimating Laytime Calculating Timechartering
Sale and Purchase Tramp Shipping Arithmetic

These books by shipbrokers, and operators provide between them a

practical introduction to the art of operating and broking ships. Voyage
Estimating demonstrates the importance of a methodical approach to a
calculation that w ill make the difference between profit or loss on a
voyage. Laytime Calculating is a practical guidebook for the broker and
operator to the proper interpretation of laytime problems. Timechartering
is a thoroughly modern and practical approach to the avoidance of
contractual warfare and the interpretation of charter-parties. Sale and
Purchase takes the reader through the frequently complex procedure that
is involved in buying, or selling a ship. Tramp Shipping A rithm etic is a
collection of well tried calculator programmes designed to deal with
everyday problems of commercial ship operation.

Fairplay Shipping W eekly

For nearly 100 years Fairplay Shipping Weekly has been keeping the
marine w orld informed and up to date w ith vital inform ation and business
trends. It has a fu lly subscribed circulation spread throughout the w orld
and an editorial team of shipping professionals consistently providing
trenchant comments and international news.