Are current shipbuilding cost estimation methods ready for a sustainable future? A literature review of cost estimation methods and challenges

1.Introduction

The profit margins in the European shipbuilding industry are really low. The most recent competitiveness study [25] from 2009, indicating a 2–6% profit margin. According to the research of Kamola-Cieślik [39], concluding that the shipbuilding industry in Europe is having difficulties staying in business, and the profit margins have not increased since. Therefore, correct, and accurate cost estimation techniques are vital for a company to do sustainable business. Considering that European shipbuilders are increasingly focusing on innovative and highly complex ships [73], the risk of making no revenue increases.

In the fiercely competitive arena of shipbuilding [45], swift adaptation to an ever-changing market becomes a vital necessity [74,78]. In addition to the imperative of improving production efficiency, in an effort to improve profits, the sector is confronted with mounting challenges related to safety regulations, cost-effectiveness, and the pressing need to address energy conservation and environmental protection [77]. All of this adds to the challenges associated with estimating costs, not only for Engineering-To-Order projects.

The likelihood of generating no revenue is particularly accentuated for projects requiring Engineering-To-Order services. By Engineering-To-Order (ETO), we refer to the process that leads to designing and constructing a customer-specific product. Hence, it is necessary to carry out design and engineering activities to meet a customer’s requirements. In the pre-contract phase of an ETO project, customer requirements and specifications still need to be discovered in detail, resulting in an immature design. This dilemma is found in every ETO construction project [22,85], but it is even stronger in a shipbuilding ETO situation, mainly because of the high engineering complexity and the long lead time [85]. For a yard, an ETO project means they must deal with several challenges arising from applying new systems and technologies, changes in the construction process and supply chain, and dealing with the chance of significant design changes during the project. Design changes often arise from customer involvement [17,22,42] and introduce waste in engineering design [37]. Design changes that occur during a project impact on previously established cost estimates. This is primarily because the design is a foundation for building and calculating cost estimates.

Nowadays, the maritime industry is confronted with an energy transition. This transition is an approach to ensure that the latest advancements in clean power sources, technology, and operational efficiency are utilized to decrease the industry’s environmental footprint [6]. The energy transition, involving the introduction of new systems and new regulations, presents an extra challenge when it comes to cost estimations.

Another crucial aspect is that the available design information is limited before signing the contract. And because of the uniqueness of an ETO project, only a few useful past performance product information is available [4,56]. Therefore, a comparison and extrapolation of known product data from previous projects cannot be made straightforward. Despite the uncertainties mentioned above, the cost estimate must be accurate. Accuracy is of importance for both shipyards and clients.

The level of information at the contract stage, available for cost estimation, depends on how much effort shipyard’s decision makers are willing to put into issuing a tender. The design information available in the contract is generally limited to a general layout drawing, the so-called general arrangement. They cover information about the hull shape, number and heights of decks, locations of rooms, and type and location of the main equipment.

Information on the weight distribution and further functional and technical requirements are also available. The contract also contains delivery planning, implying that a shipyard construction strategy is known. That means dividing the design into building blocks and manufacturing main processes is known [4]. Figure 1 illustrates that the available design information increases as the project progresses.

Fig. 1.

The dotted line is the moment of signing the ETO contract. At that moment design information is limited. When moving from concept design to eventually constructing a ship, available information increases. When a contract is signed information is available on the level of a general arrangement. After the contract is signed the basic design starts and more information becomes known about e.g., components and construction elements. In the next phase, detailed design, and detailed construction information is produced.

In an ETO project, customer involvement begins with signing the order and continues through the design phase. Given that multiple companies collaborate in an ETO shipbuilding project, from design to commissioning [4], the suppliers’ composition varies for each ETO project, and the supply chain process is customized accordingly.

The systematic review of Fatouh and Rego [29] showed that, despite the high-risk profile, research addressing ETO in shipbuilding is scarce. This also applies to research addressing cost estimation specifically for ETO projects in other industries, as concluded by Kjersem [42]. Of course, cost estimations are made for ETO projects, but a substantiated development direction of cost estimation methods is not found in the present review.

All cost estimation methods found in the literature aim to produce an accurate and correct estimation. They are using design information, construction techniques, and past performance information. The cost estimation methods used often differ per project phase [63]. As a result, accurately calculating the cost implications becomes a daunting task when design changes occur. As mentioned, design changes during a project are widespread in ETO projects.

Furthermore, the lack of a reference base, which is the case for ETO projects, presents an additional challenge for known cost estimation methods. It becomes extra challenging when introducing new systems requires another construction procedure.

Hence, the research question posed: “What cost estimation methods are currently available and capable of estimating accurately Engineering-To-Order projects in the pre-contract phase?”

In this review, our focus is on estimating methods related to man-hours needed for projects. Man-hours are something that shipyards can directly control, unlike material and component costs, which are governed by external market prices. Although, commonly, many sub-contractors are involved, labor costs under the direct control of the shipyard still account for roughly 20% of a ship’s construction [10,51]. Additionally, 50%-60% of the labor cost is directly related to the cost of constructing a ship’s hull [15].

To explore this, we provide a brief historical overview of how cost estimation methods have evolved. In the following chapters, we first give a justification of the literature review followed by a description of ETO characteristics, and after that, based on a literature review, we go into the different cost estimation methods used in the shipbuilding industry and their application for the pre-contractual stage of Engineering-To-Order projects. The review concludes with a direction for future research and avenues to follow.

2.Short history of cost estimation methods

During the 19th and first half of the 20th centuries, ships were constructed directly on the slipway, starting with the keel laying and constructing the ship from the bottom up as an ongoing process. Cost estimates for the significant labor processes – plate and profile preparation, riveting, caulking, and drilling – were based primarily on informal, personal cost engineering techniques. These estimates were usually generated by the yard manager using formulae derived from the main dimensions of the vessel, including its total weight, length, width, and height [50].

In the second half of the 20th century, new cost estimations emerged forced mainly by the increasing competition, and several fundamental changes. One of the reasons that changed the estimation approach was the change in the construction method made possible by, among other things, improved welding techniques.

From roughly 1930 until 1960, riveting was replaced by welding. The cost calculation parameters, like the number of rivets and meters of caulking, were no longer helpful. Cost estimators had to modify their cost calculation according to the welding of structures, using welding length as a determining factor.

After the late 1960s, not only construction techniques but also construction methods transformed. In 1969, Myers [58] introduced the modular construction concept in the US. This technique, also known as block construction, is now widely used when constructing large seagoing vessels [58,76].

The modular construction method revolutionized how work was organized. This ushered in the use of Work Breakdown Structures (WBS) to track and manage expenditure in terms of man-hours [62]. Estimations of effort also shifted from estimations for a particular profession to estimations about a specific group of tasks [1]. To ensure accurate cost estimations based on past performance, an activity-oriented time registration became necessary to be linked with the WBS. This practice is commonplace today, making it possible to refine man-hour estimations.

The increasing availability of structured information, mainly caused by the emergence of Computer-Aided Design (CAD) in the 1980s, triggered the search for method improvements. Among them, the Product Work Breakdown Structure (PWBS) stands out by allowing costs to be broken down into modular construction elements. A comprehensive review of the WBS initiatives commonly used for estimating man-hours in shipbuilding is provided in the work of Abd Rahman, Zaki and Husain [1]. In this work, they concluded that the Product Work Breakdown Structure is the best methodology for scheduling and cost estimation because man-hours are easy to identify.

A driving force behind the development of new cost estimation methods is the increasing computer power. Storage and processing capacity are no longer obstacles to introducing new estimation algorithms [51]. It enables the integration between design and Computer Aided Manufacturing [68,76] which can be used in cost estimations.

The combination of improved hours administration and increased computer power made it possible to determine and include other parameters in the cost estimates. Cost estimation methods were developed based on static analyses of previously completed projects. This has led to one of the commonly used parameters for steelwork, namely the weight of a ship or parts of the ship. The productivity figure man-hours per ton was expressed. The production factor inch/meter for piping has also emerged based on static analyses. Production factors based on static analyses are based on the principle that previously realized similar (partial) products have the same costs.

A force, that also influences the way a ship is going to be built, is the chosen ship systems. Nowadays, new energy systems are introduced, mainly as a result of new challenges related to sustainability [78]. This introduces changes in the shipbuilding design and construction process and, thus, how costs are estimated and how costs are recorded.

Changing a cost estimation method has many consequences and can be challenging to implement. First of all, when changing from a method, new experience-based estimator knowledge must be built, new cost recording and cost control methods must be introduced, and historical performance information must be re-engineered or barely usable. Barely usable because historical performance information is based on requirements coming forth from the previously used estimation method. Of which the cost recording is based on different data and data structures than what is required by a new method.

3.Literature review method

The primary objective of the literature review is to identify publications over the last 20 years concerning cost estimation methods. And to uncover the latest trends and future directions in cost estimation methods for Engineering-To-Order projects in the shipbuilding industry and discuss their ability to deal with new or out-of-experience inputs.

The first selection is based on the criteria “Cost estimation” AND (“shipbuilding” OR “ship building” OR “Vessel construction”). Using the Scopus database, this resulted in a set of 207 documents. Many shipbuilding innovations are not published in regular academic sources but often only at conferences, a broader search was preferred. Therefore, Google Scholar was used with the same selection criteria resulting in a set of 1920 publications. These publications included the set that was found using Scopus.

In Fig. 2, it is shown that the number of new publications over the last two decades, which refer to cost estimation, has increased significantly. This statement illustrates the ever-growing relevance of the subject, underscoring its status as a vibrant and important field of study.

Fig. 2.

Number of new publications that refer to cost estimation in shipbuilding per year since 2003.

The review focuses on cost estimation methods; therefore, the selection criteria were narrowed down by adding the criteria “cost estimation method”, resulting in a set of 80 relevant publications. Figure 3 illustrates the publication selection flow.

Fig. 3.

Publication selection flow.

The analysis of 80 publications was focused on evaluating their relevance in cost estimation methods. Relevance was determined by carefully examining the abstract, discussion, and conclusion paragraphs. Out of the 80 publications, 44 of them are deemed irrelevant for a variety of reasons. Among these, 14 publications merely mentioned another publication from the same set of 80 as a reference without providing any substantial additional information or content. The other 30 publications were irrelevant because they focused on other aspects of the Shipbuilding industry. Aspects like maritime market development, slipway development, cost management process, and manufacturing software. As a result, a subset of 36 publications was identified. This subset was then subjected to further study. The main objective of this study was to analyze the improvement direction of known cost estimation methods and the application domain of the methods. The findings from the analysis of the 36 publications have been incorporated into Table 1. This table gives the publication, the publication source, the type of publication, and a short description of the direction for improvement.

In this study, we focus on the application of the mentioned methods for Engineering-To-Order during in pre-contract phase. As presented in Table 1 a set of 5 publications containing relevant cost estimation method information concerning ETO-projects.

The existing methods have been discovered based on published scientific literature. Because if something is of value, it is also described in a publication. Looking at the available literature, we must also realize that cost estimation methods and their results are seen as competitive information, yards do not like to share all details usually. This was also noted during Caprace’s research [15], where only 2% of the 1250 shipyards, shipowners, and research centers contacted responded to his survey regarding cost estimation methods and results used. More accurate methods may be available but are not available for study. As a result, we had to limit ourselves to the broader Google Scholar search for this subject.

In the next section, we discuss the properties and limitations of estimation methods identified in the selected papers in the context of ETO projects in the pre-contract phase.

4.Cost estimation methods for Engineering-To-Order

The literature review results can be grouped on their approach to the problem. A method for cost estimation is either top-down, bottom-up, or computer-based reasoning. The latter refers to the digitalization of expert knowledge. The first two are named after the starting point of the estimation.

Although methods can be divided into these categories, shipyards cannot. To minimize errors, shipyards usually employ at least methods from two categories [15,49]. The cost estimation approaches utilized during a project depend on the design maturity and available cost information from past performances.

5.Discussion

This literature review focuses on cost estimation methods capable of estimating cost accurately for Engineering-To-Order (ETO) projects in the pre-contract phase. Criteria for making a cost estimation method capable for ETO projects in the pre-contract phase are:

∙ A breakdown of scope, activities, and deliverables.

∙ Traceability to first principles.

∙ Utilizing historical data from past projects.

∙ Accommodate changes in project scope and design revisions.

The literature review indicates that existing cost estimation methods used in shipbuilding rely mainly on available product specifications, which include shape, dimensions, and material specifications. Furthermore, these methods rely heavily on historical data, assuming similar products have similar costs. The most suitable method is chosen based on the details of the product information.

The use of product specifications as the sole basis for ETO project cost estimates does not consider the uniqueness of the construction and supply chain processes. To cover that the knowledge of experts is used to substantiate the cost estimate. Not least because the design information is limited in the pre-contact phase. Estimates based on professional knowledge mean there is no traceability to the first principles, and the professional knowledge gained based on experience is challenging to transfer to new employees. In essence, this means that all described methods fail to provide a good answer in the current situation. They fail for ETO projects in the pre-contract phase because:

The literature review triggers the question: how are cost estimation methods used in other industries for ETO projects, and can these methods be effectively implemented in the shipbuilding sector? The next phase of our research will delve deeper into this issue. For now, however, we limit ourselves to finding that the construction and manufacturing sectors use techniques identical to those used in shipbuilding. See for example [16,31,54,80]. This suggests that cost estimates for ETO projects formulated during the pre-contract phase are based on the same underlying principles.

The findings of the literature study call for a development that considers the construction processes and techniques used while also considering the criteria for creating a cost estimation method suitable for ETO projects in the pre-contract phase. This is illustrated in Fig. 4.

Fig. 4.

Current cost estimation methods are limited to product specifications supplemented by expert knowledge. One direction in which improvement of the estimation method can be achieved is to include how (sub)products are built.

The first step in that direction is to capture the process of constructing products.

By capturing the construction process, for cost estimation purposes, the possibilities of the yard and suppliers can be considered. Using the assumption that the same forces that previously affect the costs will also affect costs in the future a record of past construction processes and the associated costs must be created.

Taking construction processes into consideration requires that the estimation method be adjusted accordingly. To make accurate comparisons with previously constructed products, we must look beyond the final result and evaluate the processes and techniques employed during production. This includes such factors as the order of the construction steps, the tools used, and the techniques adopted during the manufacturing process. Further research is needed to determine how to effectively compare present (sub)products to those of the past including the way they were built.

Estimating the cost of an ETO project, including the construction process, in the contracting phase is challenging because there is only limited insight into the expected detailed construction process in the pre-contractual phase. The construction strategy, block divisions and block assembly sequence have been identified as this is necessary to demonstrate that the ship can be delivered on time according to requirements. This information can serve as a basis for defining the construction process in such a way that it can be used for cost estimation. The work of Son and Nam [75], Taraska et al. [79] and Deul et al. [21], which describe concepts to automatically generate a construction process for hull blocks, can be a starting point for this.

Further research is necessary to create an adequate format to capture process and output details for cost assessment. Garcia-Lopez NP’s [32] approach of utilizing activities as a basis can prove to be beneficial, as well as Zheng Y, Törmä S, Seppänen O’s [89] research involving objects as a starting point. These developments give valuable insight for improving the estimation method.

Although not in use now, a suitable cost estimation method is badly needed by the shipping sector to deal with the energy transition and to prevent a wave of bankruptcies in shipyards at a moment when every yard will be needed.

6.Conclusion

The research is limited to the cost estimation methods currently known in the shipbuilding industry, which are now published in some form. Scientific databases were consulted first while performing the literature review. The amount of literature found that way was limited. A wider range of publications was found through Google Scholar.

Looking at the available literature, we must realize that applied cost estimation methods and their results quickly become competitive information, as experienced in Caprace’s [15] survey. Consequently, the availability of real practical figures is limited.

The research focuses on methods for estimating the costs for realizing an ETO project in the pre-contract phase. The relative lack of literature on this topic illustrates that estimating costs for an ETO project in the pre-contract phase presents a significant challenge.

Current cost estimation methods used in the pre-contract phase depend heavily on expert knowledge, making it difficult to manage cost control, reproduce estimates, and share estimation knowledge.

The performed literature review shows that several estimation methods have emerged over time, taking advantage of new opportunities, and adapting to technological advancements in construction. Still, there is currently no method capable of producing a substantiated accurate cost estimation for ETO projects in the pre-contract phase.

With the shift towards energy transition, which lacks a clear direction, the shipbuilding industry requires a novel cost estimation method – one that can withstand the dynamic changes in construction technology and construction processes it is applied to.

To achieve that further research is necessary by improving the connection between cost estimation and implementation of construction processes and new technologies. This research should start by creating an information structure that bridges the gap between cost estimation and the construction processes.