Blockchain is undoubtedly a topic worth knowing about. With a seemingly endless number of use cases, it is always good practice to understand where a technology can be applied in a specific use. By narrowing our focus and applying any number of proposed blockchain use cases to an industry, we can begin to imagine how this technology can be used to create certain enhancements and reforms.
Let’s start with the smart contract and the construction industry. Specifically, we will look at where the technology of a smart contract stops and how it can be reinforced to adapt to more fluid transaction environments that do not, or even should not, always follow the same transaction methodology.
It is important to note that a smart contract is not a contract in and of itself, but rather an automated system on the blockchain that performs unalterable functions to execute an agreement. In essence, it forces the agreement to function.
The construction industry has a number of moving parts that impact the bottom line for all parties involved. There are owners, GC’s (general contractors), engineering firms, inspectors, sub-contractors, insurance companies, public agencies, and communities involved in the process. Many, or all, are often external stakeholders to one another. The number of participants and individual interests in a large scale private or public project can often lead to deflection of risk, miscommunication, and substantial extra cost.
As an aside to the focus of this article on blockchain, I recommend reading UK Construction Industry estimates loss of up to £13 billion in construction projects due to poor communication between parties, written by Susan Pettit, Director of Client Management at UK research firm, Client Confident. The article focuses on the cost of miscommunication (as the title suggests).
How might blockchain begin to mitigate and streamline the construction process? A developer or project owner wants to build a project and mitigate all risk, but should the risk associated with the project owner’s ambitions be pushed down the line on smaller and smaller companies? The legal issues, time, and expenses that may come as result of a contract disagreement can cost a small company its existence.
Smart contracts extend the idea of maximizing fair play throughout a project life-cycle. In the current language of many Prime Contracts, any subcontractor can become involved with any number of claims during and after their time on the job. This can range from labor disputes, delay of job clauses, and retainage of payment for issues that arise outside the scope of the subcontractor’s control costing time, legal fees, and productivity. The contract language is written specifically enough to make you a party, but vaguely enough in defining parameters, keeping the specifics of why a clause may be enacted undefined. This may adversely affects a subcontractor that has otherwise performed their work accordingly. Essentially, the contract world is not as fair as it could be.
If industry standards can be formalized, while simultaneously accounting for variables in the process, owners of large and complex projects can issue RFPs to the open market under a standardized smart contract for the particular subcontractor skills or vendors to bid on. Terms are predefined based on necessity of the outcomes and favor both the owner and bidding party accounting for each organization’s needs and understanding of potential variables.
A subcontractor, unless otherwise involved in the construction process, should have access to a contract or agreement that fairly represents their scope of work within the entire project.
The rules written in the smart contract may not contain all possible scenarios that a transaction, or series of transactions may encounter. It is likely that a smart contract be in addition to the actual agreement, more of a system to speed up and execute aspects of the agreement in a timely and trusted manner.
The construction industry is an excellent example of transactional volatility due to the multi-layered construction process in a single project. As mentioned before, there are potential variables with every hired contractor and subcontractor that cannot be taken into account when designing a blanket contract. In this scenario, we would employ off-chain logic that uses third party validation for the variable scenarios that arise outside of the standard permissioned smart contract language (IBM Developer, Desrosiers and Olivieri, 2018). IBM Operational Decision Manager (ODM) is a third party system that engages answers from each party involved in the transaction, specifically applying a determination based on answers provided by the parties involved in the transaction.
The technology and applications for increasing business intelligence, openness, and accountability are quite remarkable. How far can technology propel integrity and omission of human error in enterprise, free market or otherwise? Will smart contracts become legally binding in the court of law?
NOTE: As the domain name of this site suggests, the content my blog posts are opinion and not investment advice of any kind. Do your own research before making any decisions to invest (or not to invest). I am not a financial advisor. I am simply sharing information I gather from across the web, news, and media outlets and drawing my own possible conclusions.