What is blockchain and how might it affect construction
by David Hughes
Blockchain is a recent technology stirring up innovation across many sectors. This article explores how blockchain might lead to innovation in the construction industry.
What is blockchain?
The simplest explanation is it’s a database. More specifically a decentralised database which chronologically and securely records transactions. A transaction can involve cryptocurrency like Bitcoin (if you’d like to know more about how blockchain works looking into Bitcoin is a good place to start). Blockchain transactions can also further represent the transfer of value on systems like Ethereum and others. Value might be a service, a product or approval in the form of a Smart Contract.
A Smart Contract is a poor name. It's often said - they are not contracts, and they are not smart. They are simple computer programmes that work on the if / then principle. If a condition is met then a predefined result occurs. 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. It can also automate payment. This all happens securely using cryptography in blockchains to store transactions in blocks of data that are replicated on multiple servers/computers around the world.
Blockchain has gone through a pretty heavy hype cycle and is now settled down to the quiet work of finding itself a home where it can be of use. The question is if and how blockchain will impact the construction industry.
Blockchain in of itself is not useful unless it can be applied to a problem. It’s acknowledged that constriction has plenty of problems. Here’s a few where blockchain might make improvements;
Poor payment practices.
Poor profit margins.
High levels of disputes.
Difficult supply chain management.
Of course there are processes and tools to deal with these problems - we still build. What’s described below are possible improvements that blockchain can support.
Poor payment practices such as late, under or not paying at all without proper justification are common in the industry. Blockchain and smart contracts could change that by effectively disintermediating the general contractor from the payment process. This can be done without removing any of the general contractor’s responsibility for approval of the quality of the workmanship because approvals would still be recorded.
When a subcontractor has completed a section of work they would request payment on an app. This request would be logged on the blockchain and a notification sent to the site manager to inspect the work and give approval it’s ok to pay. This amount would be added to the general contractor’s application for payment which when issued would notify the contract administrator. Once the contract administrator is satisfied they will make a recommendation to the client to make payment. When the funds are paid the money can be distributed to the subcontractor and the general contractor simultaneously.
Faster, transparent payments will have a massive impact on the subcontractor’s ability to manage cash flow and strengthen their financial stability, allowing them to grow over time.
Historically it has been difficult for general and subcontractors to increase profit margins. The ones that are able to do so have hard-won reputations for high quality work and meeting deadlines. Lowest price tendering is often the cause of increased costs to the project over all. Clients will pay a higher price if they are confident they will get value for money but because it is very hard to prove in construction we often find ourselves in a race to the bottom.
In the scenario above subcontract data is recorded which is based, not on opinion, but on actual contract deliverables. Their performance creates a digital reputation which could be represented as a score. Because blockchain is a highly secure system that can’t be faked, the performance data created can be relied on by other clients wanting reliable general and subcontractors. A contractor can then expand on the basis of their digital reputation and refine a process that they have found works. They can drive efficiencies in their process and generate better margins.
Construction disputes are a common occurrence. Blockchain can provide a reliable way to identify who is responsible for the failure. This will save time and money in resolving disputes.
That’s rather a negative process of dealing with teammates on a jobsite. A more productive and proactive method of dealing with delays and disputes would be to use blockchain to give the business logic to support Integrated Project Delivery (IPD) including financial incentives. Blockchains transparency provides the perfect platform for this type of working relationship, providing the tools necessary for several businesses to work together in a trusting collaborative way.
This is an area where blockchain is already making inroads in other industries. Blockchain can be used to provide real time status of materials. When materials arrive on-site by signing a digital acceptance the responsibility of the goods can be transferred. The processes described in Jessica’s article about supply chain and IOT can be further supported by blockchain by adding relevant data to the database.
Supply chain management can go further though. Blockchain is helping large companies manage their supply chain networks letting them better manage their inventory. Imagine being able to track an order of doors or windows from the factory and knowing immediately if they are held up somewhere giving more time to mitigate the lost time.
These are just a few examples of where blockchain might lead to change. Remember as we move forward, it’s often not what might happen but how it might happen that's important.
With the recent pandemic, the world is entering into an economic downturn which will further weaken an already financially weak supply chain. This could be the catalyst for changes our industry needs around payments, transparency and streamlining. Blockchain could support faster payment to subcontractors, help general contractors become leaner by automating subcontractor payments, and give clients confidence that supply chain payments are being correctly made by providing transparency.
Only time will tell but as blockchain transitions from hype to sustainable applications we’ll begin to see more businesses offering real solutions in the near future. It will be interesting to see if any of those are working within the construction industry and how they will position themselves in the market.
David is a full time project manager for Mace Consulting based in Leeds, UK. The Co-Founder of Malablock a blockchain application for construction payments and approvals tracking. Host of the Hanga Podcast which explores why change in construction is so hard. He’s also a contributor to the Better Building Network, a global advocacy forum created to facilitate conversations with all industry participants with the purpose to build a better and more resilient construction industry.