Smart contracts in construction: a step towards a digitally transformed sector
Mainer regularly examines developments in technology to establish which solutions can be applied in the sustainability space as part of its ongoing mandate to deliver tangible benefits to its clients. Given that all companies and individuals are engaged in “Digital Transformation” in one way or other the construction sector should be no different. However, it’s important to ensure that the disruption implicit in adopting a new technology doesn’t necessary outweigh the anticipated benefits.
Blockchain technology has recently come to mainstream prominence, largely due to the proliferation of crypto currencies that are based on that technology. The application of blockchain techniques and processes though are significantly broader than Bitcoin or Ethereum. Smart Contracts that are built using blockchain could prove transformational in the construction sector, and as such we’re looked at what they are and how they could affect your business.
Smart contracts are computer programs or transactional protocols that run based on a set of predetermined conditions. They are used to automate the execution of an agreement so that all participants can be certain of the outcome, without any intermediary's involvement. They are typically stored on a blockchain, in a language that is both human-intelligible and machine-readable.
The US National Institute of Standards and Technology describes a smart contract as a
"collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network".
This formulation means that a smart contract is really being defined as a computer program rather than what we might typically consider a contract to be. As that sentence intimates, their legal status is contested.
The attraction is that due to negotiation and verification being undertaken by a computerised protocol, there is a resulting reduction in costs, potential fraud losses, arbitrations, and so on. Despite how au courant the term sounds, it was first used in 1994, by computer scientist, cryptographer and lawyer, Nick Szabo.
Image: Roma Bhatara/licensed under Creative Commons 4.0
To turn to construction, they have actually been under discussion for some time now. Indeed, they were recommended by Digital Built Britain for construction procurement in level 3 BIM (building information modelling) back in 2015. That is not to say that there is wholesale agreement regarding their efficacy, especially considering the extent to which the industry has relied on standard form contracts. However, there are flaws in the traditional process, such as
“the over-complex/time-consuming process of negotiation, the widespread amendment of standard forms and the scope for consequent contractual ambiguities that increase the risk of disputes.”
It’s easy to see why stakeholders would want to militate the likelihood of such problems.
What are the advantages of smart contracts for construction companies, then? These, according to Designing Buildings:
· Autonomy: removes the need for intermediaries
· Trust: documents are encrypted on a shared drive
· Back-up: documents are duplicated on the blockchain
· Safety: websites are encrypted, keeping documents safe
· Speed: removes time spent manually processing contract documents
· Savings: costs saved on intermediaries
· Accuracy: errors in manually filled-out documents can be avoided
· Audit trails: simple audit trails and records in real time can simplify the resolution of claims and disputes
One facet not mentioned above that is particularly useful for built environment businesses is the ability of smart contracts to be changed during a project. Obviously, a traditional contract can be amended or a new one agreed, but that is potentially costly; a smart contract can be changed much more easily and cheaply.
Furthermore, as stated in this recent article,
“Technology could be used on site to record a variety of information such as the moment that site workers "clock on", progress on the build, weather conditions and the arrival of materials. These records would be fed into the smart contract which would then, automatically, check the next step in accordance with the contract's terms as coded and trigger an action (for example, an automated payment at a certain milestone).”
These innovations would form part of an agile business methodology and would be facilitated, as the quote implies, by cloud-based blockchain technology designed to promote visibility and transparency in the workplace.
And what of any issues? Mason & Escott’s article, “Smart contracts in construction: Views and perceptions of stakeholders”, lists a number, as summarised by Dentons:
· How far could the use of smart contracts extend and how would their use fit with and support the industry's collaborative agenda? After 20 years of industry focus on collaboration, how do we deal with the inevitable upheaval of introducing an automated process?
· How do you manage this change within the industry – especially when the survey results indicated that older generations are concerned about the loss of specialist knowledge on contracting processes and the loss of skills?
· Would the "new tech" itself cause disputes? Are humans needed to resolve disputes? Or, is there scope for smart contracts to create trust, standardise contracts, improve quality and reduce administration and disputes? Smart contracts might reduce the scope for differing contractual interpretations – but they would also cut out middlemen administrators.
· Will smart contracts cause job losses in the industry?
· How do you automate construction contracts anyway – are they each unique?
· Will the use of smart contracts affect the build-up of trust during the construction process? Or will it require parties to invest more heavily in building trust and collaboration at the outset of the construction process?
· Should we consider semi-automation as a compromise? This would involve automating those elements of construction contracts that involve repeat and severable processes, while leaving humans to address intractable issues such as dispute resolution.
· What role can lawyers play to facilitate change?
Let’s look at the possible need for humans for dispute resolution and the issue of job losses initially. They are, of course, intimately connected. It is axiomatic to state that technological innovation often involves the loss of specialist skills: this has been true since the industrial revolution. What is contestable here, though, is whether such a complex legal process can work without that specialist knowledge, and whether that knowledge is standardised to the extent that it can be fed into and used by technology.
Similarly, job losses always go hand-in-hand with technological innovation. There is an argument that Just Transition, developed by the trade union movement to ensure that workers’ rights and livelihoods are maintained as production changes to more sustainable models as part of the fight against climate change, be extended to cover those affected by technology making their roles obsolete.
Trust and collaboration are also of interest, as arguments can be made for both sides here. An automated process could increase trust and facilitate collaboration, provided that work is put in at the beginning to ensure that everything is to the liking of all parties. However, the absence of the human touch could certainly lead to a tendency for silos to form, and perhaps for problems to fester.
As with all digital transformation, it is going to happen. If technology works – and it is likely that it does – then that will lead the process, and the issues we’ve looked at above will form part of making sure the technology facilitates better construction projects.
If you’re interested to see how smart contracts could affect and/or benefit your business, then message us at admin@mainer.co.uk and we’ll arrange a conversation