The Impact of Blockchain Technology on the Construction Industry
How Blockchain Works and why it is not really new. The distributed ledger explained and how it works as a smart contract.
The construction industry has had its fair-share of criticisms especially in the area of slow to change. For example, it has been slow moving towards any kind of momentum in how the industry conducts business. In spite of this, the trend of events appears to be reversing.
It’s understandable how the construction industry has been slow to change especially since it is highly regulated. It makes sense to have a standard of measurements and safety blocks in place to ensure that buildings and living spaces are constructed efficiently and soundly or inhabitable. I don’t know about you, but I like the idea of being able to lounge in my Livingroom and worry about the integrity of the structure. Or, being able to turn on the hot water for a bath and the water is rusted in color. Still, even with compliance variables in place, there is still a level of mistrust when it comes to the construction industry. The Blockchain technology might be able to assist in removing barriers to adherence to code of practice and trust issues.
The designing and building of living and work places or buildings in general, already requires a network of partnerships and cooperation amongst them. As such, skill in the area of Building Information Modeling (BIM), is increasingly becoming all-inclusive, welcoming teamwork, and innovation. As such, it opens the door to applying the Blockchain capability.
Blockchain and Construction Blocks
Simplicity of a blockchain and how it works
The use of computers is tightly rooted in a construction’s development from the initial idea to the task and operation, a variation made possible by way of disruptive technologies (e.g., BIM) (Source).
A Blockchain is an incessantly increasing list of documentations or records, called blocks, that are interconnected and safeguarded using cryptography. Meaning, it is a databank that is supported by an inclusive group of people, as opposed to a central authority or single entity such as a bank or government. For example, a business deal can be of cryptocurrency (e.g., Bitcoin). They can also represent the designation of worth (e.g., service, product, or Smart Contract) on procedures similar to the Ethereum platform.
Blockchains can be used to record value exchange, administer Smart Contracts, combine Smart Contracts to form a decentralized autonomous organization (DAO), and certify proof of existence of document. Every one of these utilizations of the Blockchain will be significant in the outlook of the construction industry. Below you will find how they apply to construction.
How Blockchain Works & What is a Smart Contract
A Smart Contract is a computer program that allows you to transact business without a third party, it is written directly into the lines of code. It operates on a very simple if “A” then “B” condition. For instance, if a contract is entered into by a home security system representative and a homeowner and if the security representative installs a security system for the homeowner(s) and then ask them to look the system over. If the homeowner is satisfied with the work, then the security representative gets paid.
This same principle can be applied in other areas such as delivery of goods and services. By purchasing directly from the supplier, the Smart Contract can offer an increased amount of trust in the business deal. For example, pay out to a supplier can be spread out; thus, transferring accountability to various contributors. Remember, this payout structure must be written in the lines of code for it to work. Take buying a section of a portable workshop, for example. The customer could procure direct from the supplier, disburse a percentage of the cost when it has confirmed that the industrial unit has left its original location, assign responsibility to the shipping company, disperse additional payout when the industrial unit arrives on site, once more assigning responsibility, this time to the worker in charge of installing the unit. After that, the last disbursement can be released as soon as the unit has been connected according to specifications.
As you can see, Smart Contracts can be applied for each of these if / then conditions and documented on the Blockchain (and can be secured with cryptocurrency). This all transpires securely because of the utilization of encryption in Blockchains to stock business dealings in blocks of data that are reproduced on numerous servers/computers worldwide.
Certification of Identity
Proving who you are can be a complex matter whether you are considered impoverished or rich. However, Blockchain Technology is helping to minimize this issue. For example, the establishment of a Digital ID enables individuals to disperse appropriate records that are confirmed by the authorizing body. As such, the individual and/or sellers ID can be firmly documented in the Blockchain. The Digital ID can be utilized to create individual trustworthiness for employment or contracts over time. This technique will enable buyers and sellers who do not more or less know or trust one another, to transact business. In construction, proof of membership to applicable professional organizations is one way of self-certifying one’s achievements, for example. A few more instances are where law enforcement security clearances are necessary to obtain government contracts, work at schools or airline industry.
A band of Smart Contracts can be utilized to design a decentralized autonomous organization (DAO). A DAO is an establishment that is taken through a series of procedures encrypted as computer programs using smart contracts. In other words, a DAO is what is programmed from the beginning; it has pre-knowledge of what is going to be accomplished because it has been programmed into the lines of code. For example, the construction of a building can be set up as a DAO at the start of a task all the way to the building stage and beyond to the actual occupying of the said structure.
Combining Blockchain Technology and Building Maintenance Systems (BMS) can lead to a structure’s DAO filing an order for a new light fixture, receiving delivery, taking responsibility for installation and payment to all parties involved.
The payout is taken directly from the DOA’s bank account that is linked to the accounts of those that live in the building. The idea that people can pay their rents, corporate fees, as well as insurance fees is not too far-fetched. And to think that this can all be taken care of easily by a building’s DAO.
As a matter of fact, this can work in the initial construction stage; however, more human input is necessary to spell out what is actually needed such as paint colors, type of light fixtures, placement of windows, etc. The way of achieving these inputs begins with the if “A” then “B” scenario. Then make use of sections of connected Smart Contracts implemented amid buyer and various representatives of the project team, main contractor, and sub-contractor to plan, supervise, authorize, propose, put in, confirm and delivery constructed property.
A way to manage a project is termed project governance. What’s more, it can be reviewed on the Blockchain. In addition, entries of authorizations in the pre-construction stage, in-use overseeing of the building for supporting a range of concerns needing authorizations can also be captured on the Blockchain. Further still, the DAO’s documentation of currency, indemnification, voting and proprietorship are also represented by the database guidelines and are kept on a Blockchain. Will smart contracts and blockchain work in the service sectors as well, if you think as we do then check out iimhub technologies.
Current Construction Approach
Is it possible to approach the construction industry differently? Anything is possible. Let’s take a look at how it operates from the traditional perspective.
Presently, the main contractor employs sub-contractors to execute the work required to construct a building. The following is a basic project purchasing development:
• Buyer hires specialists to craft tender documentations
• Tenders are invited and a main contractor appointed
• Main contractor hires multiple sub-contractors to execute professional works on site
• A building contract is entered into, managed and verified by consultants
• Once documents have been signed, authorized and certified verified, the building handover takes place.
Construction contracts have many operations (e.g., payment to main contractor, the responsibility to make necessary to ensure a smooth handover, make repairs, and resolve disagreements). All of which can possibly be managed utilizing a Smart Contract.
What advantage can be obtained using Blockchain technology? It’s possible that by using Blockchain technology, one can realize a move towards direct predetermined dealings to the client using all four of the Blockchain use cases aforementioned. 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 businesses that regularly join forces. It will also permit those who execute tasks to better mirror the true experience they obtain during the course of their career.
There is a form of purchasing called “Construction Management” where a building director is employed by the client to oversee the sub-contractors who are contracted directly to the client. It’s also possible that the Blockchain will take us further by utilizing Smart Contracts and the development of DAOs to deliver projects and automate the administration of the building and sub-contracts. As such, a record of transactions and certifications of events in the series of stages necessary for the building become auditable.
By trusting in Digital IDs, more direct contracts can be created between client right down to the people implementing the project, supervising, staff and the producers of products. This would help avert the go-between cost add-ons that presently exist. Design will happen in much the same way. For example, it would be possible to purchase supplies from the source and hire individuals on a labor-only base.
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.
Making Blockchain Work How a blockchain actually works
Supporting BIM and the philosophy of ‘Build it Twice’ will be crucial. This will be simplified by the direct contractual connections mentioned above and bringing in skilled personnel input into BIM. In addition, a platform backed up on the Blockchain where all parties involved in a project can gather together can aid in what could follow.
A true BIM allocates for a Bill of Quantities (BoQ) to be produced more cost efficiently than without. The BoQ can be divided into an activity lists for personnel to bid on through a marketplace. With professional input, these activities can be employed to create a program of works. The program and activity schedule can be used for trades to bid on. A Smart Contract for labor can be entered and algorithms to further split the activities into smaller work packages at an individual level with an aligned Smart Contract.
Likewise, materials for a project could be bid on. A paint supplier secures a Smart Contract directly with the client to supply paint, thus, meeting the required conditions on a predetermined 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 IDs, 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. There are lots of influence, oversight, lawful and accountability issues to ponder. One of the strengths of Blockchain is automating business logic. This same reasoning can be applied to simple projects as well as complex projects.
By using Blockchain and BIM together, coupled with other technology, there is an opportunity to create a leaner purchasing system which better employs the individuals who make up a project team. This will result in reducing costs by removing go-betweens or third parties, giving more control to the client and allowing more transparency of cost, time and scope on their project.
For more detailed information on Blockchain check out Mosses Ma.