How Blockchain is Disrupting the Construction Industry

The construction industry is known as a technology laggard and currently at the bottom of the McKinsey Global Institute Industry Digitization Index. The industry has many silos, a non-collaborative process for stakeholders and old analog methods and traditions. It results in fragmented markets with low margins and unpredictable project performance.

Since 2007, the industry has been on a digitization journey with Building Information Modelling (BIM) processes, laser scanning, digital surveying and drone usage in site surveillance and progress measurements. In the future, building on that and using blockchain-powered contracts and setting up an automated payment mechanism will help mitigate the industry’s payment delays.

Let’s look at some worldwide statistics:

1. USA: Late payments cost the construction industry $64 billion in 2019 (survey by Rabbet partners); 43% of subcontractors wait 30-60 days, and 30% wait for more than 60 days for payments.
2. Canada: Account receivables days increased from 62 days in 2008 to 70 days in 2011; in the same period, other industries account receivables days increased from 46 days in 2008 to 48 days in 2011.
3. United Kingdom: Contractors take an average of 43 days to pay their suppliers. The construction sector suffered a 27% year-over-year rise in the number of overdue payment incidents in 2015. Most affected were general contractors, civil engineering providers and wiring and fitting providers, with the latter suffering disproportionately due to large projects running over budget.

During the COVID pandemic, the situation has become more worrisome, and many contractors have been forced into bankruptcy as they have yet to get paid. Additionally, very few new projects are being launched and many are being halted due to businesses prioritizing revenue generation vs. expenditure. This scarcity in new projects is creating intense cut-throat competition, which ultimately bleeds everyone in the industry.

It is a bleak situation for the construction industry right now, and blockchain technology can be a way forward to solve these major issues, but its implementation needs to be an agreement between owners, design consultants, project management consultants, contractors and subcontractors.

“The first generation of the digital revolution brought us the Internet of information. The second generation — powered by blockchain technology — is bringing us the Internet of value …”  — Don Tapscott, Blockchain Revolution (2016)

A blockchain is a decentralized, distributed public or private ledger that records transactions in blocks. By design, blockchain is resistant to modification of data and typically managed by a peer-to-peer network collectively adhering to a protocol for communication and validation of new blocks.

Blockchain is the cutting-edge technology upon which Bitcoin and Ethereum are built and is regarded as the future of payments and how we do business on the Internet. The construction industry’s use case of blockchain in construction is based on the creation of a “smart contract.”

A smart contract is a digital application with no middle man and executes its terms automatically once predefined conditions are met. Smart contracts are written and executed as computer code linked to payments. It offers fast settlement, high accuracy, less risk, reliability of payment fulfillment and lower transaction costs.

Smart contracts are purely digital contracts that can mimic the terms of traditional contracts and are enforced by computer code. The effectiveness of a smart contract can be enhanced with BIM integration.

A smart contract appears as a logical extension to BIM whereby the contractual performance itself becomes automated.

Current Industry Payment Practice

Currently, all funds for construction projects go through some banks. The primary issue is that it is not clear how the funds are spent with the current banking system.

Transaction history is very confidential and significantly less transparent. The money gets spent as per the general contractor’s wish, and the investor has little control.

Future of Payments in Construction

Smart contracts protect money paid by owners. They provide transparency because the investor can see all transactions that go through the system, and there is no possibility to fake a transaction or add it after the fact because of the way blockchain technology works!

Typically, all money to be paid by owners will be stored on one account, and mutually agreed contract conditions determine terms of payment and trigger automatic payment to involved parties. In the near future, the increased use of the Internet of things (IoT) will boost blockchain in construction.

Let’s look at some case studies in construction.

1. Dubai Land Department is the first government entity in the world to carry out all of its transactions through the blockchain network based on the Dubai government blockchain strategy.
2. In France, bridges are being designed using BIM and blockchain by tech startup io. Its service offers the potential to revolutionize BIM into a collaborative and legally binding tool. (Arup Blockchain Case Studies)
3. Telecommunications company Nokia is offering a blockchain-powered IoT sensing service for smart cities. It aims to employ technology, utilizing data analytics and blockchain. (Arup Blockchain Case Studies)

There is widespread sentiment in the construction sector that change is needed in terms of modernizing payment at all levels in the sector. Clients’ timely payment – based on agreed smart contracts milestone achievements – will release more money to invest in efficiency and productivity, boost the sector and deliver better customer outcomes.

Blockchain technology disrupts the construction industry by drastically improving the current model of payment for work performed. Cashflow is more predictable, earned value is more accurate, and payer/payee relationships improve thanks to the decentralization of the process. Subcontractors tight on cashflow can trust that they will be paid for their work in a timely manner; general contractors can trust the payment process and bid more competitively by reducing contingency; and owners can trust that their money is being applied to actual project expenses.

The blockchain disrupts the construction industry’s tendency to distrust one another and allows users to place their “trust” in the immutable ledger of the blockchain, and that is what makes blockchain so revolutionary.

Hear more about technology trends like Blockchain in our virtual event HxGN LIVE evolve720. Watch the on-demand sessions in the Buildings & Infrastructure Track here.