Forget Bitcoin while reading this. We’re going to discuss Blockchain. Blockchain is the platform that many Cryptocurrencies are based on. It’s the ledger system for recording transactions, and it’s making headway in the construction industry.
“The distributed ledger technology enables the design of tools which can help streamline processes in project development and the management system attached to it. Also, by eliminating the need for intermediaries or third parties, it can lead to a reduction in expenses and greater empowerment levels to any business.”
Think of a bank’s ledger - it’s their own private information which records every banking transfer they make. That ledger tells them how much money they have invested, divested, paid out, received, etc. This ledger is vulnerable though, as the bank controls it centrally. This means there is a location you (or a hacker) could access and alter, theoretically extracting funds, altering or stealing information contained within.
What is blockchain?
Blockchain is this same as a ledger, but DE-centralized. This means that it is not kept in one location, or owned by one entity. The blockchain is visible to everyone who is participating in a transaction, whether that be financial or a data exchange.
“A blockchain is an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk.”
As it’s not in one place, information can be encrypted and split across everyone in the network. Doing this means that there is no central location for someone to hack and steal from or alter. In theory, this makes it safer than a centralized ledger.
Similarly, if someone were to hack into one of these computers and change the information on the blockchain, the software would recognize it as an anomaly (as it doesn’t match every other record on all the other computers) and remove or rectify the issue.
Blockchain has this name because, at scheduled intervals, information on transactions is recorded and added to the chain as a block. This ‘blockchain’ is a continuously growing necklace of information records, giving us historical transaction transparency and chronological fulfilment.
So, how would this help construction?
It would help in two primary ways.
- It would save money by removing most of the intermediaries involved in contract processing and payment (without them, we save time and money as there will be fewer administrative contract documents and fewer fees).
- It would streamline project delivery and payment.
Construction is a regulation-laden industry; production has been flat against a generally increasing line across all industries. It’s strange to see this when, historically, economic progression was backboned by high or increasing productivity, of which construction was at least a few of the vertebrae. Now, construction is flat: we’ve been building to the same production levels for the past 5 years - why?
Why construction productivity is behind
One of the suggested major factors has been regulations which have led to companies seeking innovation, not in increased productivity but streamlining compliance and satisfaction of legislation. Much of this regulation has been to the benefit of worker safety and security, and there is no doubt that this will continue, however, we need to direct an element of our spend and time to productivity increases to achieve quicker construction for a lower cost.
New technologies, like robotic total stations and 3D scanners, as well as advanced processes, like BIM, aim to help us make more money from our projects by becoming more efficient, but a core area where we can see immediate improvement is the automation or reduction of administrative and/or financial processes.
This is where Blockchain comes in.
I’ll use BIM as a process structure in the following explanation, but this method could easily work without it. In a BIM process, the model can be seen as the contract between the owner, the GC and the subcontractor. The physical construction needs to match the model. If you deviate from the model, you may be asked to return and fix it. If the model has clashes or errors, you could raise a change order.
You get paid upon confirmation of completed work. This can usually be verified by consultants or the GC verifying that work has been done, either by confirming measurements by hand or using a 3D laser scanner and comparison to the model.
During the planning of this, project milestones are established by the GC for the owner. At these points, further funds are released - administrators are involved in this, receiving verifications from people checking that the milestone has been achieved and then informing finance and issuing payment. More granular milestones are held by the subcontractors responsible to the GC. A similar process happens when they attain these completions.
How do we remove the contractual paperwork and the expensive and time-consuming process of getting paid? Then, how can we tie this into the model so we can view, in real time, project completion and budget spend?
Imagine the client has a budget for the entire project and they keep it in a wallet (right now, this wallet is their bank account, but consider it a dedicated project wallet of funds). The GC also has a wallet and so do all the sub-contractors. Some of the owner's funds go to the architect and engineers to create the 3D building model. This then goes to the GC who establishes the key milestones in the project, along with the tranches of money to be released at that point. The GC ties these to areas of the model and they each form ‘smart contracts’ with the owner.
"Smart contracts are computer programs that secure, enforce, and execute the settlement of recorded agreements between people and organizations. As such, they assist in negotiating and defining these agreements."
The subcontractors do the same resulting in a very long list of tasks and associated payments, each with verifiable milestones. Each of these verifiable elements will be represented on the BIM model, for example: completion of the first floor, first fix electrical works, as they will be recorded and saved as another block of information on the blockchain. Every company working on the project has the ability to submit completed work and after verification see it added as the next string of information on the timeline - which is similar to the CoBie drops we see in some BIM projects today (scheduled data update points to make sure everyone is viewing an up-to-date model).
From this, each time a milestone is completed, a smart contract is fulfilled. I install the first fix electrics, the GC verifies, the contract is complete, funds move from the GC wallet to my own automatically. There is no paperwork, payments are made in small amounts and not lumps, cash flow is never a problem and most importantly, issues don’t compound on top of one another (someone completing multiple works installs pipe through the same area the ductwork is meant to run, they then install the duct around the pipe which makes it too low for the planned ceiling height etc.). Payment amounts could also be linked to scheduling, to incentivize timely work completion.
Now imagine this pushed all the way up the chain. Each complete smart contract is shown as progress on the model. The GC can then track progress and spend against granular results. The owner can see their model moving gradually from virtual to reality and a corresponding spend associated with the progress. Funds are only released on verification of agreed tasks (smart contracts). In this, the owner sees their wallet decreasing, moving through GC, then subs, then materializing in the physical building.
As a short summary...
- The project schedule becomes hundreds of smart contracts in a Common Data Environment (CDE), visible to all.
- Each smart contract has a value.
- Completion and verification of a smart contract triggers an automatic payment from one wallet to another.
- The project receives its next ‘block’ of information which updates the BIM model with completed work and project spend.
You get paid for what you do, when you do it, with no paperwork and no finance team needed for processing. This means less paper, fewer people involved, and complete visibility of responsibility and budget – you only pay for what’s done.
What do you think? Leave your comments below!