Indian Shipyards Seek Balanced Risk Allocation in Government Shipbuilding Tenders

Recognising the long execution period and capital-intensive nature of shipbuilding projects, the Shipyards Association of India (SAI) has recommended a series of contractual and commercial modifications to the Government’s commercial shipbuilding tender framework, particularly in relation to the ongoing tenders for Medium Range (MR) Tankers and future commercial vessels. The proposed reforms seek to align these tenders with the contractual framework adopted under the Platform Supply Vessel (PSV) procurement programme, with the objective of achieving a more balanced allocation of commercial risks, improving project bankability and encouraging greater participation by Indian shipyards.

Key Contractual Reforms Proposed

1. Exchange Rate Variation (ERV) Mechanism: SAI has proposed the incorporation of an Exchange Rate Variation (ERV) clause to mitigate foreign exchange exposure arising from imported equipment and systems, which typically constitute 40–50% of a commercial vessel’s construction cost. Since shipbuilding contracts generally span three to four years, fluctuations in exchange rates can significantly impact project economics under fixed-price contracts denominated entirely in Indian Rupees. A mechanism similar to the PSV tender would mitigate currency risk and reduce contingency pricing by bidders.
2. Cap on Liquidated Damages: The Association has proposed introducing an overall cap on liquidated damages, similar to the 10% ceiling prescribed under the PSV tender, to ensure proportional allocation of contractual risk and greater commercial certainty.
3. Realistic Delivery Milestones: SAI has recommended that delivery schedules be standardised to reflect domestic shipbuilding capabilities. Instead of incentivising increasingly aggressive delivery commitments through commercial evaluation criteria, it has proposed delivery of the first vessel within 36–40 months, followed by subsequent vessels at intervals of six to eight months.
4. Standardised Commercial Evaluation: A uniform milestone-based payment schedule, similar to that adopted under the PSV tender, has been proposed to improve transparency, ensure objective bid evaluation and facilitate fair comparison among bidders.
5. Steel Price Indexation: SAI has advocated the introduction of a steel price adjustment mechanism linked to a recognised international steel price index to mitigate the impact of commodity price volatility during project execution.
6. Rationalisation of Bank Guarantee Requirements: The Association has sought a reduction in cumulative bank guarantee obligations under the MR tanker tender, noting that the existing requirements significantly increase financing costs and working capital pressures compared to the PSV tender.
7. Balanced Termination Provisions: SAI has recommended revising the termination framework to provide equitable contractual remedies, particularly where termination arises due to employer default or force majeure events.
8. Progressive Billing: The adoption of milestone-based progressive billing has been proposed to improve project cash flows, reduce financing costs and enhance the financial viability of long-duration shipbuilding projects.

As government procurement increasingly focuses on promoting domestic manufacturing under indigenous shipbuilding initiatives, adopting balanced contractual mechanisms may encourage wider industry participation, improve bid competitiveness and reduce the pricing of contingencies associated with market risks. The evolving procurement approach reflected in the PSV tender may therefore serve as a useful benchmark for future commercial shipbuilding programmes and other large-scale infrastructure procurements.