Fiduciary Underwriting Performance Bonds

The best way to learn is to find a major insurance agent who deals with a lot of corporate and business clients and also deals with a lot of large insurer's who typically do excess and umbrella coverage. People such as Lloyds.

Now, that said, I haven't heard of anyone getting the bond you refer to on a boat being manufactured.

There is one other way of attempting to limit your loss in such a situation. Write contracts in such a way that you're secured. Now you may not be able to secure against their inventory because they may already have it pledged. The way to then do it is for you to actually be purchasing along the way. You make a progress payment and it buys you all the parts and labor to that point. So if they go bankrupt, this isn't part of their ownership, but the boat in whatever shape it's in is yours. There have been many instances of boats started one place and finished another. Getting what has been started is the difficulty. There has even been at least one situation where the customer ended up buying the bankrupt company just to protect getting their own boat finished.

Just as in insurance, talking to a lawyer who specializes in Corporate contract law might be most helpful.

Ultimately, the best protection is knowing who you're dealing with and their financial situation. Choosing the right builder. The situation faced here is one we face in business all the time. We have to evaluate whether to do business with someone and then how we can protect ourselves. It's not easy. I've seen so many small businesses put out of business over the bankruptcy of another business. Also, look at what kind of deposit and progress payments are required. If it's small, that means they're only getting it to assure you're serious and protect them if you back out. If it's large, it means they're operating their business on your money. If they're doing that because they can't on their own money, then that's a concern.

One other piece of advice I'd give. If I'm going to pay any manufacturer large amounts before they deliver the product to me, I'm going to keep someone representing me in his facility on a regular basis. There are lots of signs that it's all about to fall apart and someone on site might warn you to get it out of there in it's current partial build or hold back on payments until some additional assurance.

The entire concept of making large progress payments on something you don't own bothers me. I don't mind progress payments on construction if I own the property. I have possession of what I've paid for. I very much mind large progress payments to a Florida entity for a boat being built by another entity across the globe. It can get so tangled just unwinding the legal structure.

One inherent problem with performance bonds, too, is that they're easy to get for a contractor you don't really need one on, but far more difficult for the very type contractor you're trying to protect against. Now the fact no one will bond a contractor, further encourages you to choose someone else.

Hi,

The builders I deal with provide a Bank Guarantee to protect the customers investment.

This of course costs the client ultimately but I do know of a man building one over 80m took it on with no guarantee to save some coin.

It was not the first time he had built a boat there and he felt comfortable with the operation so went for it.

Certainly a good alternative. It definitely requires a credit worthy builder. The number of boat builders that could obtain bank guarantees for the boats they build would be very small. For financially stable builders it has an advantage over reducing the up front payments. It doesn't reduce the purchaser's obligations so protects against purchasers backing out along the way. However, it does protect the purchaser.

It also covers the builder's cost of money for the construction time so plays a significant role in custom builds of three years and more. Even a financially strong builder would have to increase the price of a boat sold with a 48 month build as much as 10% to cover their cost of inventory during the build. They'd far rather quote the lower price and let the purchaser in essence finance the inventory.

Bank guarantees in the U.S. are few and far between in any industry. Now in the boating industry, I'd be surprised if there are any. Let's assume for a moment you're guaranteeing the build of a $40 million dollar yacht. That exceeds the value of many builders and if you then carried that to four yachts in progress and $160 million then I don't know if there are any builders who could get it. Also, most US and/or Chinese owned builders have so protected themselves with complex corporate structures that such guarantees become impossible. Typically you're purchasing the boat from an entity that has very little in the way of assets.

Yet another reason to buy used.

Well, just think. If none of us ever stubbornly buy new like us, then there won't be used boats for those of you who prefer them to buy.

Agreed 100%! There are lots of reasons to buy new, just pointing out one for the "used" column.

Exactly as olderboater wrote: structure your contract. It's basically the only workable way.
Not only bonds and guarantees have the "easy wen you don't need, hard when you do" problem, it also costs you a good bit and could get you tangled in legal proceedings with a sizeable bank/insurer with good lawyers.
Specifically, if you smell fish right during the build (which is easily several years), it could severely limit your maneuver as many options would be good grounds to argue a bond/guarantee.
In other words, you're buying a supposedly bulletproof west that you will have to field test yourself.
While a well-structured contract won't give you the same promise of "GOOJail Free Card", it could be made perfectly solid and actually work in any case, leaving you with exactly what you paid for.

Coming from a business background, the entire concept of progress payments over a three to five year construction period and having that money invested in a partially built boat in a yard, or multiple yards if part constructed separately, that you don't know the true financial situation of and may not know even who owns what is scary and it's foreign to anything you've ever done. You make progress payments on construction but it's on your property. You make down payments on things you order, such as furniture or cars or equipment, but they're quite moderate, typically 10%, no more than 20%. So many things can change to impact the manufacturer during that time period. Sometimes for major purchases you'd have to use a letter of credit but that was released to the manufacturer only when the product was delivered.

An example I'd give would be Trinity a few years ago. They went from having more orders than they could possibly service to not having work to do. This was no fault of theirs. It was people deciding not to do projects that they'd planned. They went from customers being able to sell any of their yachts for more than they paid to a market where they were worth 30% less. Then with staffs reduced, with money tight, the build of the boats that were in progress got delayed greatly. From what I've read, it was a bit of a nightmare. Every yacht builder in the US faced similar challenges and a lot worldwide did. Some have been more open than others in discussing it. Nordhavn is one where they're written about it and the fears and challenges it brought.

Now that also tells you why the builder needs to protect themselves. I will say that some builders have developed solutions to make the protection equitable and put both parties at limited risk. I also talked to one builder who when the subject was brought up started doing a song and dance and wouldn't answer any questions directly and completely. I figured out quickly I wasn't going to do anything with him, but the exercise was interesting and the ending sort of fun. His process required the buyer to submit financial statements or tax returns. So, I asked, "Will you submit them as well?" The look on his face.

Who would've expected this question, honestly, you bad bad man?

Also since you brought it up, hope there isn't argument that those tax returns are useless for the purpose? That's even if he does submit it

If i get you right, you're talking about the extreme where you strong-arm a builder (and/or his suppliers) to offer you goods/services in credit for limited advance payments. That's the ideal for a buyer but I do doubt it's realistic terms when working with a self-respecting wharf.
You still get to keep in mind that the better-off a builder is, the less likely he is to agree to extreme terms like these - a variant of Bond/Guarantee Problem One.

But even full advance payments for each delivery/stage still do great job of limiting buyer's risk exposure to singular percents of a full sum.

My selling point as a consultant for a long long time has been that hiring me is cheaper then learning these kinds of lessons.

It also tends to fly much better with people who already learned...

It's not strong arm. All I was stating is that nearly every other industry works that way. I've ordered a lot of very expensive items to be manufactured over the years but never outside of a boat have I been asked to pay for their manufacturing progress. The largest deposit I've ever paid was 33%. But then I've also never ordered anything else that took 3 to 5 years to build.

It's a very unique situation and I'm not saying it should conform to other industries. I am saying there need to be better ways of protecting both seller and buyer.

My asking for the manufacturers financials was just in reply to his approach toward things. I knew full well I wouldn't get them, but I also knew enough to know already I wouldn't do business with him. And I did ask with a smile on my face and he even laughed about it. Any chance we had of doing business fell apart before that over other matters. Most interesting people who I loved talking to but just could never get the comfort I'd need to build a boat with them.

And that's what it comes down to. If you don't feel comfortable with a builder, then you need to trust that and go elsewhere. While the quality of work is most critical, the financial condition of the builder and their ability to see the project through is also highly important.

By comparison I've talked with others who were open and you got a good feeling about. They also discussed honestly problems they had when the economy collapsed and how they got through them. I've been through their side too. Worst was having tons of production under a celebrity label as a scandal broke that meant you wanted to totally disassociate.

New thought for an old thread. Clean letter of credit is another source of security and are commercially common. Whether a bond or an LC make certain that the "presentment" process is "clean", otherwise you've only created another lawsuit to collect your money. The security agreement is in place to help you only if something goes wrong. You want it to work simply and successfully if you need it. IMHO don't do this yourself. Get an experienced attorney.

I've built plants, non-serial manufacture is always a story. I wouldn't say yacht building is much different from erecting a factory or a nonstandard building (e.g. ones you see in architecture reviews), from what i've personally dealt with, but another guess would be spaceships, big railroad projects and stuff like that: when the scope and budget of a project severely exceeds any reasonable financial scope of a provider. E.g., in our case, boat builders for superyachts, as a business, cost less or comparable to one superyacht itself.
While I am wholeheartedly on a buyer's side, there are reasonable expectations and there are unreasonable ones. Shipbuilders simply can't be expected to finance 66%+ of the process for payment upon delivery, unless you're dealing with relatively small serial grp yacht from select brands which push'em out in dozens yearly. (even those sometimes approach it on a per project basis, leading to individually creative wiring and other stuff discussed elsewhere on this very forums.) If they agree to it and their name is not Feadship, "wowmehhhmmm" would be my first gut response.
That's why I call these terms a bit too good to be true.

I completely agree with your logic aside from this particular application. Even knowing such terms to be exceptionally good, never hurts to start negotiation there. Especially when you have an abundance of sound logic to back'em up. Just listening to what you're being said in response would be most of the due diligence you need

(Edit: as a bit of late continuation to our running joke, I just imagined some of VHNW's i've dealt with shopping for a boat and being asked to "present financial statements or tax returns" to a builder, and specifically, their response. In Russian, ofc. A language known for well-developed cursing compositions )

I wouldn't exactly say for olderboater, but the way I see it our combined point is going for the minimal court action with the most certain outcome. Well-structured deal with scheduled payments and ownership of a boat-in-progress does that. Any and all kinds of insurance/guarantee is a second step, "backup chance for get-out-of-jail-free" with a good bit of story and own risks possibly attached, not the sole good precaution/ actual guarantee one might expect.
It's much harder to loose money you never parted from your hands

Yes, court actions are a lose/lose. They take years. And if you're talking across countries or continents, you're talking jurisdictional battles and legal fees beyond imagination. I know one case on which the order was in 2007 and the legal case regarding the boat is still not resolved.

As to losing the money you never parted with, the adage is "He who has the money, has the control."

For us, we ultimately just didn't have the current tolerance to go through a complete custom build and a three year or more process across continents. There were options to fit our needs. So, for now, don't have the issue of
bonds to deal with, at least not to the same extent. In my purchases my potential risks will be a maximum of 20% and practically very remote. The builders will basically have no risk as they would still get the profit on a boat and have one in inventory that would be easily sold.

One thing I don't do is draw up contracts that are totally one sided in my favor either. Just not a good business practice. Also, when I was entering into contracts with much smaller businesses, that could actually make then unenforceable if you did so. There is a doctrine of law to protect that small business in that situation.

Since I work for clients, not for myself, I do not consider myself having the right to indulge in my morals on client's money. Having a starting point well-weighted in you favor is the basics of negotiations, after all. I do inform of my opinions regarding what would be "fair". However, what I've been saying that if this favor simply puts my client in control and comfort that's one thing, if it makes the deal practically impossible that's the other.

Besides, my recognition of "fair" varies depending on what I see from the other side with regard to effort and attitude. There is quite a number of boat builders, designers and brokerages with what one might call a "second-grade resort approach", e.g. "hey here's the fat pocket, let's get it!" You would want to steer clear of it, but sometimes it either pops up in the middle or there are significant other reasons to try having business. (Like it being an exclusive supplier of something you quite want). In that case I honestly consider "fair" much different way of doing things then when genuine care comes from the other side. And in my experience clients agree with that.

As for enforcement, I believe that's much the point of scheduled payments: you stay in control most all of the time, so there is no need for any other kind of "enforcement" besides the next money transfer. hence you can keep many small issues contained just by having ongoing force to apply, and if push comes to shove, your initial position in any legal battle is the other side holding the sack, so to say.