To Convert or Refit ... Or Not
THE HARD FACT IS THERE AREN'T ANY MIRACULOUS SAVINGS TO BE HAD IN MAJOR CONVERSIONS, REFITS, AND REFURBS
Sometimes, nostalgia or raw gut attraction for a particular vessel or form or type leads one to spend more in labor, time, and dollars on a conversion, refit, or refurb than makes cold financial sense.
Not too long ago, I received a query from a potential client who wanted to talk about refitting a partially-built motor yacht he was considering buying. His email to me went something like this:
I'm presently looking into buying an 18-meter steel hull motor yacht ... The vessel is about five years old but has never been in the water ... Some of the interior has been installed, but the quality is quite poor and I believe that it will need to be taken out and redone correctly ... There is one main engine and one generator, although nothing has been commissioned ... I am considering a change to the existing bow and also cutting the vessel in half and inserting a 3-meter section amidships ... I would like to arrange a possible meeting with you in the near future to discuss the development of a projected scope of work.
Not renown for my diplomatic skills, my first words in response were, "Why in the world would you undertake a project of the kind you are describing? The cost would, in all likelihood, exceed the cost of building a new yacht from scratch — even if you could acquire the vessel as is for only a single Euro."
Now, you might think my answer was overly abrupt or even harsh, but you'd be wrong. The fact is, in my experience of more than 30 years in the marine industry, I've never seen a project of the kind he described turn out any other way. And I long ago came to the conclusion that the best path is to say so bluntly in a way that allows no room for misinterpretation or starry-eyed self-delusion. After all, "friends" don't let friends pursue potentially disastrous, half-assed ideas without at least trying to take their "keys" away from them before they manage to hurt themselves or others.
Let's be brutally honest. The primary, if not the sole driver in most instances where someone wants to perform a conversion or a major refit is the envisioned cost-saving. The all-too-common belief is that, if you start with an existing vessel or at least a hull/deck shell, you will save large sums compared to buying a newer, finished yacht or having one built from scratch. Unfortunately, nothing could be further from the truth. Here's why.
Every conversion or major refit requires a lot of what is effectively double work — first removing everything that needs to be replaced, then performing the necessary modifications and new installations. And the more you target for modification or replacement in the course of a refurb project, the deeper you will cut into any originally projected cost saving.
As well, make no mistake. It is not a question of whether the evil gremlin of emergent work will raise its ugly head, only a question of when. And emergent work, the necessity of which becomes apparent only after the job is well underway, is the deadly bane of all project budgets.
The Effect of Charisma
A couple of decades ago, when I took over executive management of Palmer Johnson Yachts, the company's Savannah refit operation was in the early stages of performing a major refit on a 150-foot steel Feadship that had sunk, been salvaged, and then purchased out of salvage by a private party for refurbishment.
The yachts post-salvage owner was a very successful hedge-fund manager who had only a passing previous acquaintance with yachts and yachting. There were both yacht brokerage and yacht project management firms involved as Owner's representatives. The idea was to strip the yacht, which had lain underwater for a significant amount of time and so needed to be, among other things, completely re-wired. The original plan was to re-build the vessel, both inside and out to a high level of fit and finish, at a projected budget of three to four million dollars. The owner's anticipation was that he would end up with a 150-footer at a cost (in 1999 dollars) of less than five million, about 1/3 to 1/4 of what a new Feadship that size would have cost.
Fortunately, the P-J Savannah yard and the yacht's owner had entered into a time-and-materials contract, with only the barest outline of an anticipated Scope of Work and little more than a nod to a projected timeline. Yea, I know, I know. Not the kind of agreement I personally would ever have allowed one of my clients to enter. But hey, the owner had professional representation when he negotiated and signed the contract. And he was a big boy. So, the nature of his contract was not my problem, especially since I had nothing to do with the original contract negotiations, and he was not exactly on poverty's doorstep.
What was my problem was the situational "clean up". When I took over, the yard was a year into the project, significant progress was stalled, and it was necessary to completely revamp the yard's planning and management structure, develop a fully-detailed SOW for this pretty substantial project, and figure out ways to drive it to completion. This was made even more difficult by the fact the owner, his naval architect, and his other representatives almost continually came up with new ideas (change orders) they wanted to implement.
To cut to the chase, two years, a lot of arguing and pain and endless conferences and correspondence — and some $15 million later — a truly magnificent fully refitted and refurbished yacht emerged from our huge paint shed.
She was superb. The custom interior joinerwork was, I firmly believe, without match on the world market. Mechanical, piping, and electrical had all been meticulously replaced, engines, tanks, you name it. She was so magnificent, she handily won Showboats International magazine's "Refit of the Year” award for 2002. So what's the rub?
A Pyrrhic Victory
Fast forward to the Showboats International black-tie awards banquet. The yacht's owner had (graciously, we thought) shown up to accept the award; and several of us who had been involved on P-J's behalf were thinking all's well that end's well. Not.
Following a brief introduction and speech by representatives of the magazine extolling the owner's vision and great taste in creating and funding this magnificent "refit" yacht, the owner took the podium and, trophy held in hand, proceeded publicly to ... politely but firmly trash just about everyone involved, including us who had done what we were contracted to do.
His main point was that he had been led down the garden path and that, had he known in the beginning it would cost as much or more to do the refit and refurb as to build a new yacht from scratch, he never would have started in the first place. And that the irrationality of the situation was exceeded only by the lack of foresight of those with whom he had dealt and whose judgments he had trusted — never mind that he was the kind of financial hotshot who knows just about everything about business and steadfastly refuses ever to listen to anyone about anything, anyway.
Game, Set, Match
The point of this story is to illustrate that, when I say major refits and refurbs are more often than not a fool's game, I am talking not only about those being implemented on a shoestring budget. I'm talking about all major refit and refurb projects. Little, big, bigger, and truly mega sized. The constants involved in such projects are generally the same.
The cost of building a hull/deck/superstructure shell for a given yacht is usually not more than 15% to 17% of the total cost of building the entire vessel. And that amount of saving is almost always vitiated by the need in a major refit or refurb to perform double work, that is, removals precedent to mods and new installations.
Consequently, about the only time, a conversion or major refit or refurb makes financial sense is when the vast majority of the vessel's systems ― it's propulsion power, electrical, plumbing, and major machinery ― are fully functional and can be retained in place, as is, or with only minor upgrades. If the project you are contemplating requires stripping out the shell entirely, there is no way you are going to save money versus building new from scratch. Or versus buying something used that requires only a readily-defined series of minor repairs and/or upgrades.
Of course, if you have a fascination with, for example, classic tugboats and want to convert one to a yacht, the matter ceases to be purely cost-driven, and the equation is changed significantly.
Sometimes nostalgia or raw gut attraction for a particular vessel or form or type of vessel leads one to want to spend more on a conversion, refit, or refurb of such a vessel than makes cold financial sense. However, keep in mind that such instances don't refute the realities involved in refits and refurbs; they simply push one to ignore them.
— Phil Friedman
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Note: An earlier version of this article was published on my LinkedIn blog.