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Automated contracts: A silver bullet for efficiency?

The construction sector is ripe for disruption, but can technology transform the way we do business on a granular, contract level asks JLL's Ashley Perry


In short, yes. From procurement to governance, from management to legal, the construction industry struggles with highly regulated, complex and time-consuming systems.

Building Regulations have imposed minimum standards and contracts require certification from approved companies and individuals. Due to the complexity of creating buildings and the sheer number of regulations and standards, there are still issues around trust between parties over verifying the quality of work.

While we of course need regulations to protect the end-user, the industry needs to find a way of improving the efficiency of its contractual business practices. Fortunately, the advent of blockchain technology could provide a solution.

Blockchain explained
So what exactly is a blockchain? In simple terms it is a database that chronologically and securely records all transactions across a shared peer-to-peer network. The chain of transactions cannot be hacked and are publicly verifiable, making safety, transparency and collaboration crucial.

The potential to create, authenticate and audit contracts in real-time, across the world and without ‘middle man’ intervention, makes blockchain technology attractive to many and is why it could drive a new era of ‘smart’ contracts.
Smart contracts would have instructions rooted in the transaction so that payment can only be taken as long as the instructions are fulfilled. This provides complete transparency to all parties in terms of what instructions need to be followed, which would reduce the likelihood of payment disputes.

The introduction of smart contracts can also provide more certainty to all parties during the construction phase of a project. For example, if a flooring installer has completed its works, a request for inspection could be triggered. If the quality control inspector approves the works, then the subcontractor payment is released.

BIM appears to be a clear precursor to the adoption of blockchain, as the technology can automate the processes involved in each BIM level as they are increasingly adopted – namely collaborative design working (Level 2), shared project models (Level 3), time analysis (Level 4), cost management (Level 5) and facilities management (Level 6).

However, the algorithm associated with blockchain smart contracts uses computer code to replace the legal elements of a contract. Both forms of code seek to describe what should occur in different scenarios – eliminating the need for a contract administrator. As a result, the process becomes more streamlined, cost-effective and time-efficient.

Some way to go
Despite the exciting prospects related to blockchain, we are probably several years away from wide-scale implementation in the construction sector.

Large companies like Amazon, Microsoft and Cisco are developing their own blockchain platforms, but the technology is mostly unavailable for independent construction companies at present due to the need for a special IT platform.

Nevertheless, the construction industry is beginning to at least grasp the benefits of increased speed, lower cost and better security associated with blockchain. In fact, University College London has just formed a Construction Blockchain Consortium to bring together its experts with digital construction leaders to drive the growing dialogue around this emerging technology.

We should all pay close attention over the next few years to what could be a turning point in the way we do business.

First posted on Construction News​