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Disrupting the building blocks: smart contracts and blockchain in construction

The digital industry is having an increasing influence on the built environment and construction. The rise of smart cities and smart buildings may have started with the desire to utilise technology to manage and operate buildings more efficiently, but the digital influence continues with the use of 3D scanning and printing, robotic technology, drones, advanced building materials and BIM (Building Information Modelling). As the digital revolution rolls on, is the construction industry ready to embrace the newer emerging technologies such as blockchain?

October 2018

Blockchain and smart contracts

The construction industry is notoriously poor at record keeping. All too often when a dispute arises, parties do not have adequate documentation. Much time, energy and cost then goes into trying to ascertain retrospectively what happened on the project.

What if there were a way to record data relating to a construction project in real time, instead of relying on records kept by project managers, cost consultants and contractors?

Blockchain, has the potential to revolutionise the way we run projects in future. At its core, blockchain is an open and secure method of recording transactions - it exists as a peer to peer network and requires no intermediaries to run it, which makes it much harder to abuse. The system is highly suited to keeping continuously updated digital records.

A smart contract is a rules-based piece of code stored on the blockchain which automatically self-executes on receipt of the required data. The best way to describe it is to compare it to a vending machine - there is no lag between payment and performance.

How would this apply in the construction industry?

There is a long way to go before smart contracts are running construction projects, but perhaps if the blockchain technology were successfully combined with BIM, this would indeed be the start of a revolution.

Smart contracts and blockchain could one day be used as an effective contact administrator and/or cost consultant. It would be a truly objective, instantaneous way of recording matters relating to a project and then producing an outcome based on its parameters.

Project data recorded by on-site sensors could be fed back to the smart contract and into the BIM system, to give an accurate and contemporaneous report on progress. This could then be used to value the works automatically against the pre-agreed prices, and to release a payment at the appropriate time without an application - with potentially no more interim certificates, payment notices or pay less notices needed. The smart contract could be multi-party, so that when A pays B, B has no choice but to also pay C. This could eliminate the need for a project bank account. In an industry criticised for its poor payment record, these technologies have the potential to speed up payment times and increase transparency, both of which could help achieve a more collaborative environment and drive the productivity efficiencies that the industry seeks.

In the smart contract world, site staff and subcontractors could be given barcodes to access the site and record their attendance, while site deliveries could be chipped with GPRS trackers sending a message back to the smart contract to release payment on delivery to site.

A weather sensor on site could also be used to send data back to the smart contract to enable compensation events under a contract to be determined. The data could then be utilised to produce automatic extension of time decisions.

If the project's insurance were linked to the smart contract, there could even be automatic pay outs in certain predetermined situations if the requirements were verified to have occurred. One of the world's largest insurers is currently trialling a flight-delay insurance product which will store and process pay outs via smart contracts.

Verification and legal issues

The BIM system could potentially be the baseline for verification on a construction project. However, it is currently difficult to imagine how the required verification in construction would work as effectively as it can in purely digital transactions.

There are also many legal issues to consider. What if the parties disagree about a decision of a smart contract? What if the code is incorrect or the sensors/tracking devices don't work? Presumably, like any other contract, even smart contracts could produce unintended consequences or contain gaps. There could also be issues as to how the technology sits with the existing legal system, for example, the Housing, Grants (Construction) and Regeneration Act. For international smart contracts, there could even be confusion as to which legal system applies.

There is clearly a long way to go before smart contracts are running construction projects, but many industry leaders are seriously considering their potential. University College London, for example, has formed a Construction Blockchain Consortium to bring together the university's fintech experts with digital construction experts. The matter has also been commented on by the Chairman of the Joint Contracts Tribunal and the NBS, the global provider of technical information. The rest of the industry will soon also need to start planning for this future or risk a "Betamax" style fate.

The future?

Smart contracts and blockchain have the ability to drive efficiencies in the construction industry which is often accused of being slow to innovate. The Farmer Review, 2016: Modernise or Die, suggested that the pace and nature of technological change and innovation in the wider world needs to be embraced by the construction industry. Whether smart contracts and blockchain will be widely adopted in the construction industry remains to be seen, but it is already clear that these technologies are no longer linked solely to the world of financial services and cryptocurrencies.

If you have any questions on this article please contact us.

Construction helmets
Natalie Pilagos

Are smart contracts the future for the construction industry?

"There is clearly a long way to go before smart contracts are running construction projects, but many industry leaders are seriously considering their potential."