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Blockchain and Smart Contracts in the Construction Industry

The design and construction industries are poised to transform tremendously with the adoption of Blockchain technology. Flow of information is the foundation of the industry and many of the issues and inefficiencies in construction transactions can be remedied by having an accurate, absolute, and shared archive of information. With the momentum of recent local initiatives, Northeast Ohio has the opportunity to capitalize on this technological innovation to facilitate advancement of the adoption of innovative Blockchain based procedures within the design and construction industries.  What then, is “Blockchain technology” and how can its application change the way the construction industry operates?

Blockchain is a software protocol that creates an electronically-stored ledger that tracks the history and present status of an item. The item can be physical, such as land, a building, equipment, or currency; or intangible, such as plans, schedules, or contracts. Data is stored in a series of “Blocks” and each new block is linked to the immediately preceding block to form a successive “Chain”. Blocks and Chains are replicated identically over multiple computer systems across a network, and the system records the time and sequence of each change to the chain, giving instant notice of changes to all participants. A network of participants all agree to the rules of a specific Blockchain system.  The most familiar use is by digital currencies, or “cryptocurrencies” such as Bitcoin that utilize Blockchain technology as their supporting platform.

The Blockchain records all transactions and makes a permanent record of this history.  The ledger is vastly more reliable than the communicating and recording systems currently utilized because nothing is ever erased from it; information can only be added to it. The shared record is the one, true, agreed-upon record of the transaction.

The shared ledger is also verified by replicating it identically across a network of multiple computers, decentralizing the location of the data. This process makes the information less vulnerable to tampering or hacks. Complete accessibility and transparency makes any changes or tampering immediately visible to all participants.  It is impossible for one party to manipulate the record to try to fool other participants into believing an untrue set of facts.

One of the most apparent applications in the design and construction industries is the utilization of “smart contracts”, which is a contract where the provisions are capable of being self-executing.  For example, parties to a smart contract can follow a checklist of conditions that are required to be satisfied (such as completion of a certain task) in order to cause other provisions to be self-executing by the contract program (such as payment for that task) without any further action needed by the parties.

Smart construction contracts would most likely be built of form provisions that are recognized as industry standards, much the same way as AIA documents or ConsesusDocs are already used as industry accepted forms. But a smart contract would be an active participant in the construction administration process, with the contract itself verifying that certain tasks have been completed and then executing the next required steps. 

For example, a smart contract could vastly streamline the progress payment process.  All parties would agree in the contract to construction milestones and associated payments. As construction deliveries and completion are verified by the parties, payments could automatically be released. This payment process could essentially be continuous – with no need for payment applications to be limited to monthly requests. The smart contract could also track payments flowing from the owner or lender though the general contractor down to subcontractors and suppliers, vastly speeding up payments to lower tier parties and reducing the likelihood of payment disputes and mechanics liens.

A smart contract permits real time information to be universally available to the lender, owner, architect, general contractor, subcontractors, and suppliers, and all parties would be able to track the flow of funds with full trust in the veracity of details. Suppliers could verify the owner’s availability of funds at the start of a project, and the checklist of conditions that lead to payment, and then countdown the satisfaction of those conditions to know exactly where they are in the payment process. Parties would know their funds are available and that they only need to complete their end of the contract for payment to be automatically released.  This saves all of the parties’ time and money, and increases trust between them.  For example, if all parties verify on the Blockchain ledger that steel joists were delivered and correctly installed today, the program can send payment out for that task immediately. 

A Blockchain-based ledger can also be used to speed up common construction tasks such a submittals, inspections, change orders, and other tasks requiring a chain-of-command process that can happen almost instantly with full and immediate notice to all project participants.  A Blockchain-based ledger can be integrated with the BIM process to provide an accurate list of required materials and quantities, which could permit more accurate apples-to-apples bidding, and which could ensure that all bids match exactly what is shown in the building design.

The obvious initial challenge is developing a base set of contractual agreements and standards that are universally accepted by all the parties to a typical construction project.  This is compounded by the expected cultural lag-time that it may take for everyone from the mortgage lender to the landscaper to buy into, test, and embrace the process.   And, a new Blockchain record is only as good as the data that is input into it.  If the information gathering can be automated by common industry wide protocols, a user-friendly system can be developed where the participants are passive users of a well-designed system, and don’t feel burdened by having one more layer of recordkeeping to contend with.

The increasing application of Blockchain technology in all areas of social and commercial life is inevitable. Just as the introduction of computers increased the speed and quantity of information that is used in business, and the introduction of the internet increased the availability of information, Blockchain technology is poised to greatly increase the trust parties have in digital information.   We can expect to see rapid changes affect how construction transactions are documented and administered in the coming years. 

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