Please let me know if I'm missing something here.
I'm working on building a ship, so first I looked through the production rules. Now I understand that "There must be sufficient capacity in weight and volume in the facility/station to hold the finished product(s). The available space includes that which is currently taken up by the materials that production will use." But it also says, "(This doesn't apply to ships 80 metres or larger because they're built outside.)"

However, when I go to retool a SY1 I get the following message: "Shipyards smaller than 3km can only build ships their length or smaller." If all the mats fit and it's being built outside, what exactly am I missing?

“All ships may be built in shipyard space stations (see Stations Rules) if the ship is the length of the station or smaller (doesn't apply to stations 3km or larger).

- SWC Rules - Production
 ”

Means the ship you want to build is longer than the station you're trying to build it in.

The part that doesn't apply is that you would need sufficient weight and volume capacities in the shipyards to house the ships. The ship still can't exceed the length of the shipyard.

hmmm. Gotcha. Thanks, folks.