by Nicholas Otieno, IHRM Member, Content Writer on Blockchain Adoptions
Construction is one of the largest industries in the world. Global construction output is forecast to rise to US$12.9 trillion in 2022, up from US$10.9 trillion in 2017.
But the effectiveness and productivity of the industry have frequently been called into question. Based on McKinsey research, construction productivity has been flat for decades, while in the manufacturing industry, productivity has almost doubled over the same period and continues to improve.
In the UK construction, productivity has stagnated for the past twenty years, limiting growth, and representing a productivity gap of at least £100 billion a year of economic benefit.
Improved productivity is the key to more stability and sustainable growth across the industry. The construction industry is, therefore, required to keep up with the pace of the global economy.
As the construction industry embraces “the fourth industrial revolution” (with adoption of IoT, robotics, VR, and AI), construction firms are experimenting and exploring new disruptive technology and innovation.
Though studies indicate that there are many investment and activity in the field of blockchain, the construction industry is only at the beginning of its journey towards understanding and implementing blockchain. So far the construction sector has been resistant to change, especially technological change.
Let’s see what blockchain may bring to the construction sector.
Smart contracts are widely acknowledged as the future of the construction industry. Automated contracts, which decrease the necessity of intermediaries and can save money and time, are ready to make a significant mark on the industry. Blockchain is one approach in which these contracts can be updated and transactions recorded.
Blockchain may be connected to a tracking system, whereby parties involved define the regulations, rules, penalties, and other agreements around the projects which they are working on together. Then, the system would work to enforce such regulations and rules as the work progresses automatically.
For instance, if materials were not shipped on time, then the blockchain system would record that, and appropriate retaliatory action – based on the pre-agreed upon regulations and rules – could be imposed. If there is a penalty fee, then the transaction may take place happen automatically via internal payments tokens.
The implementation of such a system would not only improve efficiency, and address disputes before they happen, but also could work to hold the parties involved more accountable.
BIM And Smart Asset Management
Digitalization is a major trend in the construction industry. The number of different software and modeling tools make the design process more effective and control documents and projects more interactively.
Perhaps, the application of BIM (Building Information Modelling) is the greatest change. It is making the design process more integrative, and the process assists in building a digital description of each aspect of the built asset. The industry research forecasts that within the next five years, over 60% of construction companies will apply BIM on most of their projects.
Several construction companies use BIM technologies on their project sites. But the combination of BIM with blockchain could work to enhance the effectiveness of smart contracts significantly. Bloockchain can greatly improve the security and transparency of collaboration in BIM.
Currently, BIM projects share models via a centralized Common Data Environment (CDE) that raises vulnerability to hacking and security concerns. Blockchain networks can permanently record change to BIM models and effectively time-stamp data; therefore, it cannot be tampered or changed.
This is relevant for “BIM level 3” that proposes all parties work together on a truly single, shared collaborative model. Blockchain may improve change control for documents, enable retaining of intellectual property, and ensure consistency and compliance throughout the project lifecycle.
Usually, the as-built state is not accurately captured in the 3D model. This is a current challenge to the use of BIM, which could be improved based on the use of blockchain and smart contracts.
For instance, a precast/prestressed concrete beam arriving and installed on site won’t be marked as finished in the BIM model, therefore triggering the next step of the smart contract, until the installation is verified, with a smart asset connected to the network like laser scanner or GPS machine.
Tracking systems already are in place that allows a 3D structural model to display progress visually, from design intentions to delivery. Blockchain may be applied with this highly automated system to add tracking of origins of materials to the model.
Also, blockchain technology can manage payment upon delivery of materials to the site using smart contracts, with all relevant information recorded on the blockchain and available on the BIM model. In this way, the BIM model truly becomes a single point source of truth that is still yet to be consistently achieved.
Less or No Construction Delays
In the construction sector, projects come up with all sizes and various complexities and include numerous levels of parties in many phases. Disputes and delays frequently happen when a communication breakdown occurs among the project parties.
Issues may include the application of different definitions of contract terms, change orders being made without full agreements of the parties, and delay incurred but not communicated until the project is behind schedule.
Blockchain can offer a new level of transparency to construction projects. The technology can streamline the processes and enhance communications. In a commercial development project, blockchain technology can make the flows of payments and the progress of construction fully automated and transparent, and thus eliminate fraud.
With blockchain adoption, project milestones can be verified by all parties in real-time, and payments automatically released upon completion of the milestones. Business managers can track the flow of payments downstream to ensure suppliers and subcontractors are being paid. General contractors can track the approval process of payment applications, including funding from lenders upstream.
Such transparency would minimize the possibility of payment disputes and enable parties to recognize potential issues in advance, thus allowing projects to proceed on time.
In addition, communication lines would be wide open. Submittals could be reviewed, change orders processed, shipments tracked, workflow schedules updated, and inspections shared, all in real-time, and with all entire historical records of the contractual obligations and timelines linked with such items.
Payments and Project Management
Cash flow issues and late payments are a recurring problem in the construction industry. In 2015, late payments increased by 27%. The average payment time for construction companies and SMEs (small and medium-sized enterprises) was, in some cases, made after 120 days that put the supply chain at risk. However, steps have been taken to improve this.
Carillion’s collapse in 2018 January, can be remembered as incident, which led to at least thirty thousand small businesses at risk of not being paid. This indicated the ongoing need for better traceability and transparency of payment within the industry.
In such cases, blockchain has the capacity to streamline operations, thus saving money and time, by setting up automatic payments created on smart contracts, contractual terms, and digitally approved work.
Also, blockchain can track project spending and progress in real-time. Each time a task or milestone is completed, a smart contract is fulfilled. This removes paperwork and several administrative processes, and payments can be made in smaller quantities, so cash flow is improved.
Each smart contract’s progress can be shown visually on the model, thus enabling better tracking of spending and progress.
Supply Chain and Procurement Management
Blockchain has the potential to make fundamental changes to how the global supply chain and procurement management is undertaken across all industries.
The technology may play an important role in the highly-fragmented supply chain of the construction sector. Managing such huge supply chains together with tight margins, as well as lack of accountability within the industry can put projects at risk of possible failures. Blockchain can assist in making processes more accountable, transparent, and efficient between all parties involved in the project.
The origin of materials used in construction projects is significantly vital for reasons like safety and health, quality assurance, and materials sustainability and standards. In 2017, the Grenfell Tower tragedy was an example of where blockchain technology could have offered better traceability of the origin of construction materials and improved transparency of the fire specification required to avoid the disaster.
Since the disaster, the construction industry has been under pressure to prove that projects are fire-safety compliant. But demonstrating compliance with existing buildings has frequently proved impossible or difficult because of the lack of good record-keeping or original documentation.
In this example, the benefits of a blockchain solution are vital; all information of the materials (from procurement to maintenance) for projects could be visible and securely recorded so that stakeholders can have confidence in the standards, safety specifications, and quality of materials.
To trace origin of a product in the supply chain is crucial for procurement sustainability, as material recycling frequently depends on the certified material specifications.
If all the quality checks and material certificates during construction are shared and stored through a blockchain system, then it will be much easier to quantify sustainability measures such as total carbon footprint.
Certification of Identity
Nowadays, digital IDs are created online and enable people to share relevant information, which is validated by the authorizing body.
Blockchain may be useful in this area, particularly in the construction sector. The technology can securely record identities of vendors and people and build a reputation for contracts or work.
This reputation assurance and identification system would enable people who don’t necessarily trust or know each other to be able to do business. For example, in construction, having proof of membership to relevant professional bodies can help to self-certify work.
In the start of 2019, a study indicates that 20% of the UK’s largest construction companies by turnover were openly and actively researching blockchain.
Blockchain has the potential to positively impact not only procurement, project management, payment, transparency of construction projects, and the BIM’s future development, but also sustainability in the industry.
Blockchain has a huge impact on the technology sector, like the construction industry. But compared to other industries, the construction industry has been slow to adopt blockchain.
The industry is at an early stage of its journey to understand and adopt blockchain, with numerous challenges to encounter. With blockchain, there is a great opportunity for all construction companies to become more productive, transparent, efficient, and sustainable.