Could Blockchain Change Construction’s Process, Payment?

By on July 4, 2017

by David Hughes, Director, Hanga Ltd.

The construction industry is often sighted as ripe for disruption and in the same breath criticised for being slow to embrace the change it apparently so desperately needs. There has been significant research on this subject that suggest a bad mix of cultural and practical barriers that have historically impeded change. However, the tide is turning.

One issue holding back change is that construction is a highly regulated industry, for obvious reasons. Think about the built environments we inhabit and all we expect from them. Primarily they provide shelter so need to be structurally sound, built from materials that won’t make us sick, or burn easily, if they do catch fire then minimum requirements for fire door widths, escape route signage and distances are needed. We expect the lights will work and not to be electrocuted by a power socket, we want them to maintain a comfortable temperature, not adversely impact the environment and not cost us too much in utilities by being energy efficient. Over the years governments have imposed minimum standards requiring certification from approved companies and individuals. Because of the complexity of some of the work and the sheer number of regulations and standards there are still issues with trust and verification that compliant work has been carried out the Blockchain may help provide this.

Construction brings together large teams to design and shape the built environment. With technology and in particular Building Information Modelling (BIM) becoming more widespread, openness to collaboration and new ideas is increasing across the industry. This momentum could be leveraged to bring the use of Blockchain technology to the fore.

What is the Blockchain and why is it being hailed as an innovation that rivals the advent of the internet in the ways it can impact how we do business?

A Blockchain is a decentralised database which chronologically and securely records transactions. A transaction can be of cryptocurrency like Bitcoin (and looking into Bitcoin is a good place to start understanding the fundamentals of blockchain architecture). However, Blockchain transactions can further represent the transfer of value on systems like Ethereum and others. Value might be a service, a product or an approval in the form of a Smart Contract.

The four potential uses of Blockchains are;

  • Recording Value Exchange (as described briefly above),
  • Administering Smart Contracts,
  • Combining Smart Contracts to form a Decentralised Autonomous Organisation(DAO) and,
  • Certifying proof of existence for certain data (for instance, providing a securely backed up Digital Identification).

All of these uses of the Blockchain will be relevant in the future of the construction industry. Below is a short description of each, and how we might broadly imagine their application to construction:

Smart Contracts: A Smart Contract is computer programme that works on the if / thenprinciple. In this way the contracts are administered. So if the painter has painted the wall then he requests it’s inspected. If the person responsible for inspecting the work agrees it’s acceptable quality then the painter gets paid. Smart Contracts can be used for each of these if / then scenarios and recorded on the Blockchain (and can be collateralised with cryptocurrency). This all happens securely because of the use of cryptography in Blockchains to store transactions in Blocks of data that are replicated on multiple servers/computers around the world.

Another example is the delivery of goods allowing clients to buy directly from the supplier because the Smart Contract can provide more trust in the transaction. Payment to a supplier can be staggered and liability transferred to different parties. Take for example a piece of mechanical plant. A client could purchase direct from the supplier, pay a portion of the cost when it’s verified the plant has left port in the origin country, transfer liability to the shipping company, release further payment when the plant arrives on site, again transferring liability, this time to the contractor responsible for installation. Then final payment can be issued once the plant has been installed and commissioned.

All these stages can be stored on the Blockchain and provide more opportunity for direct transactions without the need for middlemen.

DAO: A group of Smart Contracts can be used to create a DAO which is an organisation that is run through rules encoded as computer programs using smart contracts. There is no reason with the Internet of Things (IoT) and the amount of metering and monitors that can be put into buildings that the building itself can not be set up as a DAO at the beginning of a project, through the construction phase and beyond to the in-use phase.

Integration of Blockchain and the Building Maintenance System (BMS) could lead to a building’s DAO placing an order for a new light fitting, accepting delivery and liability for it, calling out someone to install it and paying both the supplier and installer. Payment would be made from the DOA’s wallet (bank account) which is connected to wallets of those that live in the building. It’s not a far jump to see that rents could be collected, body corporate fees, and insurance payments all managed autonomously by a buildings DAO.

For the construction phase it’s no different, it just takes more human input to clarify requirements and make decisions to meet those requirements; which light fitting, paint colour, temperature range in rooms etc, etc. All these requirements and decisions start a series of if / thens that will use bundles of interrelated Smart Contracts executed between client and different members of the project team, main contractor, sub contractor to design, monitor, approve, tender, install, certify and take handover of the built asset.

Project governance can also be captured on the Blockchain. Records of approvals in pre-construction phase but also during the in-use management of the building for voting on various issues requiring approvals.

The DAO’s transaction record of money, insurance, voting and ownership are captured by the program rules and are maintained on a Blockchain.

Certification of Identity: The creation of a Digital ID allows people to share relevant information that is validated by the authorising body. Identities of people and/or vendors could be securely recorded in the Blockchain, and additionally used to build reputation for work or contracts over time. This identification and reputation system would allow for people who don’t necessarily know or trust each other to be able to do business. In construction, for example, we can think of having proof of membership to relevant professional bodies to be able to self-certify work, also police security clearance to work at airports, schools and on government contracts.

So already there are quite a few terms which are likely new to a lot of people (who I hope are still reading this.)

If you want a better explanation of Blockchain then I suggest you take a crash course here.

Despite the increasing openness to tech in construction, advances have predominantly supported the current approach to building. By embracing Blockchain the industry may see the fundamental disruption underway in other industries. 

What might a fundamental disruption of our current construction approach look like? One way to imagine this shift is to examine the procurement process for most buildings.

Currently, the number of direct contracts with a client is limited to consultants and a main contractor. The main contractor engages subcontractors to carry out the specialised work.

A simplified project procurement process for a building currently looks like this:

  • Client employs consultants to create tender documents
  • Tenders are called and a main contractor engaged
  • The main contractor then engages multiple sub-contractors to carry out specialist works on site
  • A building contract is entered into, administered and monitored by consultants.
  • To handover a building requires that various sign offs, certifications and warranties are checked and confirmed are in order.

The diagram below shows the contractual links over the main stages of the project. You can see each consultant has a separate contract. Client and Main Contractor have one contract. It’s the Main Contractors responsibility to manage all the subcontractors and suppliers or manufacturers of goods. Included in the subcontract will cover supply of goods which they install. There are many advantages to this single point of contact approach but it does mean a number of middlemen sit in between client and end product.

Building contracts have various functions such as: to pay the main contractor, make changes to what is expected at handover of a project, damages, dispute resolution etc. All of which could potentially be administered using a Smart Contract.

While this is a very simplified explanation of the process for a construction project in the UK and most Commonwealth countries, methods of procurement mostly boil down to allocation of risk throughout the process.

What might this common process look like leveraging Blockchain technology? With Blockchain I can see a shift to more direct contractual relationships to the client using all four of the Blockchain use cases I listed above. This also ties into the trend of the gig economy and may even help remedy the skills shortage in the industry. I don’t think it will lead to a complete breakdown of company structure but it could result in more smaller companies that regularly collaborate. It will also allow those who carry out work to better reflect the true experience they gain throughout their career. I wrote about that a while ago – Will all construction consultants eventually become freelancers in the gig economy?.

There is already a form of procurement called Construction Management where a Construction Manager is engaged by the client to manage the sub-trades who are contracted directly to the client. I think the Blockchain will take us further by using Smart Contracts and the formation of DAOs to deliver projects and automate the administration of the building and sub contracts. This would create an auditable record of transactions and certifications of events in the life cycle of the building.

By relying on Digital ID’s more direct contracts can be formed between client right down to the individuals carrying out the design, monitoring, trade staff and the manufacturers of products. This would help avoid the intermediary cost add-ons that currently exist. Design will happen in much the same way. Contractual arrangements on site is where the change can occur. In effect, it would be possible to buy materials directly from the factory and employ people on a labour-only basis.

By using Smart Contracts and creating DAOs for a project, the administrative load on reporting, governance, monitoring responsibilities and transfer of risk can be reduced.

What would be needed to make this work?

Embracing BIM and the ethos of ‘Build it Twice’ will be key. This will be facilitated by the direct contractual relationships I described above and bringing in the expertise right through the supply chain to input into BIM. In addition, a platform backed up on the Blockchain where all parties involved in a project can congregate can facilitate what could follow.

An accurate BIM allows for a Bill of Quantities (BoQ) to be created much more cheaply than without. The BoQ can be divided up into an activity schedules for tradespeople to bid on through a marketplace. It also allows for a true measure of materials required.

With professional input those activities can be used to create a programme of works. The programme and activity schedule can be used for trades to bid on. A Smart Contract for labour can be entered and algorithms to further split the activities into smaller work packages at an individual level with an aligned Smart Contract. Someone responsible for assessing the quality of work on behalf of the client.

Here we can use the example of the painter again. The BoQ says there is 10,000m2 of walls to be painted that require X number of tins of paint. The 10,000m2 can be broken down into smaller parcels of work as activities. A painter with appropriate qualifications as backed up by digital ID can place bids on the parcels of work and confirming they can meet or beat the programme’s timeframe. Then a Smart Contract is entered into by the DAO on behalf of the client. Once completed, the painter has his work inspected by the monitor (also on a Smart Contract they bid for) and the painter is paid for their days work.

Think of the implications of a tradesperson contracted directly to the client and knowing that once they finish a section of work they get paid immediately. If they had bid a section of 200m2 to be complete in 3 days for £450 how motivated might they be to try and complete in less time to get paid and have more leisure time or have more opportunities to earn more money?

In a similar way materials for a project could be bid on. A paint supplier secures a Smart Contract directly with the client to supply paint meeting the specified requirements on a set date to provide the paint.

This all requires a platform where a client can post their needs to be answered by a community of investors, consultants, manufacturers and trades staff. By using secure digital ID’s the client can have confidence that the correct qualifications are held by individuals working on the project.

All the roles of main contractors would still exist such as monitoring, programming, health and safety etc, but would be contracted directly to the client instead of through a series of sub-contracts.

What I have described is very simplified, and I accept that some reading it will think it’s naive. There are lots of governance, management, legal and liability issues to consider. One of the strengths of Blockchain is automating business logic. There is nothing I am describing that couldn’t be used to build a simple garden shed so there is no reason complexity can’t be added to eventually use it on a multi-million pound scheme.

By using Blockchain and BIM in tandem, along with other quickly advancing technology there is an opportunity to create a leaner procurement method which better engages the individuals who make up a project team. This will result in reducing costs by removing intermediaries, where a client has more control and transparency of cost, time and scope on their project.

Hanga is a firm located in Wetherby, West Yorkshire England. It provides project management, contract administration and quantity surveying services in the higher education and residential sectors. David Hughes understands the Levels of BIM, but is  not yet convinced BIM alone will provide all the benefits it claims.  He is very interested in opportunities in the Blockchain and how it might disrupt the industry.  

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