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The $814 billion U.S. commercial construction market requires a unique assembly of designers, contractors, subcontractors and suppliers to work together in a highly orchestrated manner to make sure that the right labor, material, equipment, tools and information all comes together at the right place and time. Alignment and coordination between companies is critical for a project to be successful; completed safely, on time, on budget and resulting in an asset that performs as designed.

Yet the industry is slowed by an operating model bogged down by transactional and informational barriers that destroys value across the construction supply chain. Companies are connected through contracts and purchase orders that are undercut by mistrust that yields adversarial relationships and conflicting priorities that result in restricted transparency, elongated payment cycles and an abundance of resource-sucking reconciliations, audits and disputes. 

With margins already razor thin, company protectionism cascades down from owners, developers and operators to contractors, subcontractors and suppliers with each player focused on optimizing their piece at the expense of the whole. Perhaps this is part of the reason 98% of megaprojects experience cost overruns or delays, 95% of projects are unable to meet even one business objective; and 70% of all construction projects are not completed within 10% of the proposed budget. 

The manufacturing industry has complex supply chains that are not that dissimilar from construction, yet they have found the way to alignment and transparency through technologies that enable goal congruence and increase productivity. When construction projects align, and participants and goal congruence avails up and down a supply chain, the industry will be able to unlock efficiencies that have to date been unattainable. The way to bring this new era to fruition: project goal congruence enabled by smart contracts. 

One of the Least Digitized Sectors

Over the last 50 years, manufacturing, retail and agricultural sectors have touted a 1,500% improvement in productivity, while the construction sector has remained stagnant. Globally, the industry’s productivity growth averaged 1% over the last two decades. Granted, projects have grown in size and complexity, but the industry has two fundamental issues that have to be addressed if we are to realize the improvements realized in other industries. The first is the disjointed nature of current contracting models, and the second is that construction is one of the least digitized sectors in the world

Together, these two issues restrict and delay information flow, increase transactional burden, limit transparency and ultimately compound to shatter trust between contracting parties. This makes goal congruence virtually impossible between two parties, much less across the construction supply chain. By focusing on the core issue of the lack of trust, three emerging technologies combine to enable real time information flow, eliminate transactional burden and provide full transparency between contractual parties. 

Smart contracts automate contract execution using Industrial Internet of Things (IIoT) data to verify conditions and the results are immutably stored on secure distributed ledgers, otherwise referred to as blockchains, only accessible to the contractual parties. Codifying contract terms in smart contracts and specifying the data required to verify conditions have been met, enables goal congruence by aligning incentives and agreeing on how performance will be measured. Storing this information immutably on a private blockchain with restricted access provides an independent single source of truth that strengthens the trust between contractual parties.

In Smart Contracts We Trust

The breakthrough comes when there is complete trust between contractual parties derived from a mutually agreed single source of the truth that automatically verifies that the terms and conditions of a contract have been satisfied. This is accomplished by smart contract, which is computer code that automates the executable terms using triggers and IIoT data. Smart contracts do not replace natural language contracts, they just automate what a contract states the parties are obligated to do to transact with one another. Distributed ledger technology is then used by smart contracts to immutably store all of the input data, calculations and required substantiating documentation in a block on a ledger that is replicated with private and permissioned access for each party.

Trust is forged by the parties agreeing in advance what data will be used, how it will be acquired, how the smart contract then uses that data to make the calculations defined in the contract, and by having fully transparent, immutable records. Because smart contracts are automated, the results are effectively available in real time versus being presented 30-60 days after an event or activity in an invoice or report when memories have faded and recollections diverged.

One example is the design, fabrication, testing, delivery, erection and inspection of structural steel for a building. Multiple companies have to work together and align to the project goals of zero accidents, conformance to specifications and executing on schedule and budget. The challenge for obtaining goal congruence is that contractual and commercial conditions combined with disparate systems between the various companies can choke the flow of information and limit transparency. For simplicity, assume the developer is directly procuring all products and services. If each contract or purchase order between the developer and these parties was automated with a smart contract that utilized data pushed to an IIoT platform and subsequently stored on a blockchain, goals could be aligned and performance monitored in real time. This would include items such as:

  • Sign off of design reviews in 3D CAD systems with e-signatures which are pushed to the IIoT platform where the design smart contract applies a schedule of values to the approved design package and automatically creates charge and invoice blocks and then provides the transaction information to the developer’s and designer’s financial systems where it gets automatically paid per terms.
  • Steel fabrication data along with independent testing and inspection certifications are pushed to the IIoT platform where the steel fabrication smart contract applies a schedule of values to the fabricated steel and automatically creates charge and invoice blocks and then provides the transaction information to the developer’s and fabricator’s financial systems where it gets automatically paid per terms.
  • Pieces of fabricated steel are barcoded or RFID tagged and scanned at control points along their delivery to a job site. That data is pushed to the IIoT platform where the steel delivery smart contract applies a schedule of values for delivery and automatically creates charge and invoice blocks and then provides the transaction information to the developer’s and delivery company’s financial systems where it gets automatically paid per terms.
  • Barcodes or RFID scan data along with the field inspection reports are pushed to the IIoT platform where the construction smart contract applies a schedule of values for steel erection and automatically creates charge and invoice blocks and then provides the transaction information to the developer’s and construction company’s financial systems where it gets automatically paid per terms.

The smart contract can also use validation and time stamp data to measure performance and apply incentives or penalties or other modifiers to reinforce goal congruence. What makes it more effective than current methods is that it is executing exactly as the contract intends, using data sources for validating that both parties agreed to in advance; and the performance is transparent to both parties real time. This is all captured in blocks on an independent, immutable distributed ledger that both parties trust.

The inherent automation and immutability of a blockchain record is foundational in allowing smart contracts to bring counterparties together and free them to invest their energies into analysis, collaboration and continuous improvement activities that truly add value. Any contract can be automated with agreed upon business logic, data sources and terms. Together this new approach will establish and grow goal congruence on construction projects. After all, it all begins and ends with a contract. It’s just time to make them smart. 

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