How Blockchain Technology Will Be Utilized in the Construction Industry

Nov 09 • Nicky Redl

smart construction industry

The construction industry is one often considered much in need of innovation and disruption, with many experts criticizing it for being slow to embrace change and struggling to digitize in the 21st century. In fact, there has been considerable research in the industry that suggests there are a wide variety of reasons why this is the case, including cultural, regulatory, and other historical barriers. Throughout the years, many different approaches to construction management have been proposed, each promising a dramatic transformation in the industry, yet each failing to live up to their self-proclaimed potential.

However, times are changing, and innovations in decentralized technology have been opening the door to new approaches and possibilities never thought possible. Many industries have jumped on the blockchain bandwagon and are already implementing these solutions into their businesses. However, while sectors with high levels of digitization of information such as finance and accounting won’t have as much trouble implementing decentralized technologies, constructions historically low rate of digitization means it’s generally not the first place people think of as being “high tech.” After all, at first glance its hard to see how distributed ledgers can help people whose jobs are to sheath roofs, pour foundations, and lay tile.

There is some truth to this idea, as blockchain innovations will not have as big of an impact on the day-to-day lives of blue-collar works (at the moment). However, the impact will undoubtedly be felt amongst the higher-level white-collar workers in the industry; project managers, architects, engineers, stakeholders and decision makers. These people all rely on looking at things from a birds eye view as well as managing all the data required to build buildings today. Innovations in these areas make the jobs of these professionals much easier while providing some badly needed cost-efficiencies for the construction industry.


Existing Problems In The Industry

 

Those who are not primed with the reality of the industry might assume that the cost of construction should have gone down over the past century in light of technological advancements in building materials and methods. This is far from reality.

While it is true that building supplies and supply costs associated in the construction process have gone down – drywall paneling has replaced labor-intensive plaster installations, for example – the median home price in 2000 was almost four times as much as prices in the 1940’s after adjusting for inflation. Some might attribute this rise in price as a sort of “cost creep” plaguing the industry, driven by the fact that labor itself has become more expensive, with the average home in today’s age being larger and demanding more stringent safety standards. Others might argue that the issue is partially driven by supply and demand, as the price for land in metropolitan areas has skyrocketed over the years as these urban areas continued to grow.

However, a fourfold increase in median home prices is still significant enough that some industry experts argue that other factors are in play. One of these critical issues that have undoubtedly been increasing construction costs is the difficulty of managing all the complex information required to build a home today. This is in contrast to the earlier 20th century where building materials are usually sourced locally with less stringent building regulations, as well as building design details were often laxer. The question of where exactly to run some wires, for example, could have been done on the job site, whereas today’s construction industry requires a wealth of data that would be difficult to manage and communicate effectively.

Additionally, construction materials are imported from all over the world, invariably leading to logistical problems such as scheduling or late deliveries of crucial materials. Unexpected delays of a significant component can hold up an entire project for weeks.
Modern building designs, often drawn up by architects who might not even visit the construction site, include large amounts of detail that builders need to interpret correctly in order to mitigate safety and liability risks. Even worse, property purchasers have little leverage of ensuring that builders do what they promise, especially when a buildings crucial systems can be hidden in inaccessible places where even professional building inspectors might not be able to detect problems.

As mentioned earlier, dealing with red tape and regulatory middle-men in the construction process undoubtedly slows down the speed of construction as well as adds to the total costs involved. Think about the homes we live in and what we expect from them. They need to be structurally sound, built from materials that won't’ make us ill or burn easily, and if they do catch fire then there need to be minimum fire door widths, escape routes, and distances to ensure that every possible emergency can be mitigated. We expect our lights to work and not to be electrocuted by a poorly installed power socket. We also expect our homes to be insulated, maintain a comfortable temperature, not adversely impact our environment as well as be efficiently designed from an energy consumption standpoint. All of these things would not be possible if it weren’t for government regulations ensuring that these details are properly implemented. However, this has also created a slew of inspections, permits, and red-tape that will sooner or later need to be addressed for the sake of the industry’s future.

All of these areas, whether it be logistics, information control, or regulatory hurdles, play their role in the larger question of why the construction industry is struggling with increased home prices as well as why it’s not innovating as much as other industries. Blockchain technology, however, may very well be the missing piece in this puzzle of changing the industry for the better.

 

 


What Is Blockchain Technology?

 

 

blockchain technology

 

 

Over the past few years not many innovations have generated as much media buzz as decentralized ledger technologies, but few know that the idea has been around for a while. The basic premise behind a blockchain is that is a decentralized database which securely and chronologically stores transactions.

Simply put, these technologies serve as a peer-to-peer controlled distributed transactional database where different types of agreements and transactions (contracts, purchases, etc.) are recorded and confirmed without the need for a third party.
In the 21st century with debit cards, credit cards, and bank accounts, transferring money to another party usually requires a trusted intermediary such as a major bank to vouch for you. Otherwise, it’s entirely possible for one business party to say they forwarded the money over for a product when in fact they did not. These intermediaries create the trust necessary for these transactions to be carried out.

However, as is the case when any large entity becomes an established middleman, inefficiencies begin to crop up in the system. For one, transaction fees become the norm, along with potentially long delays in transfer times. What’s more, relying on a few major institutions brings up the issue of security vulnerabilities, as leaks and potential shutdowns could have drastic implications for millions of users. All of these reasons laid the backdrop for the development of blockchain technology, and while the idea has been around for a while, it wasn’t until 2008 that the first cryptocurrency Bitcoin came onto the scene. Without the need for centralized databases, Bitcoin let users cut through middlemen and interact directly.

But what makes this technology so secure is that every piece of information in the database if “chained” to every other “node” in the system. Since every node on the network needs to validate a change or transaction, it’s almost impossible for the system to be rigged or compromised in the same way a centralized database can be corrupted, paperwork lost, or some other misfortune. But while cryptocurrencies for conducting financial transactions are good in and of themselves, what really makes blockchain technology so powerful is how it can be applied to industries in how they deal with each other, as well as the contracts and agreements that bind them together. 

 


Smart Contracts

 

 

smart contracts

 


Undoubtedly the most important innovation in the blockchain world is that of the smart contract. A computer program that works on the if/then principle in administrating contracts, when certain pre-programmed conditions are fulfilled by both parties, the contract executes automatically, and once programmed, cannot be modified. These self-executing “smart contracts” let parties conduct business with the same level of officiality and security as a traditional legal contract would but with all the aforementioned benefits blockchain technology brings to the table.

To use a construction example, if a painter has painted a wall, then he can request for it to be inspected. If the person responsible for checking the wall agrees that’s it’s done to an acceptable quality; then the painter gets paid. Smart contracts can be used to automate and execute these if/then instances and record them on the blockchain.

In another example, a supplier of construction materials can sell materials directly to a buyer because the smart contract provides more trustworthiness in the transaction. A smart contract can automate paying a portion of the cost when the materials are confirmed to have left the plant, transfer liability to a shipping company, then release further payment when material arrives on site, then again transfer liability to a contractor responsible for installation. Once the final project is completed, the last payment portion can be automated. This way, projects can pay for materials as they arrive instead of paying upfront and worrying about delays, giving them more financial room to work with at any given point in time.


Decentralized Autonomous Organizations

 

Another powerful development deriving from blockchain technology is called a Decentralized Autonomous Organization, or DAO.

In short, it is an organization or business whose decisions are made electronically by a group of Smart Contracts and run by rules encoded as computer programs.
Alongside other technological innovations coming in the next few years such as the Internet of Things (IoT), it’s reasonable to see blockchain technology integrating with existing Building Maintenance Systems (BMS) for construction projects in the future. These DAO’s can help automate various processes in the construction and maintenance phase of a project. For example, a building’s DAO can place an order for a new light, accepting delivery and liability for it, call out someone to install it as well as pay both the supplier and installer. In a sense, DAO’s can automate much of the “back office” aspects of construction projects.

 


Specific Areas of Improvement

 


Supply Chain Management

 

It goes without saying that supply chain management is an area where transparency is vital and holds much promise for what blockchain technology can do. In today’s day and age, if building materials can’t be delivered on time or if the wrong supply is shipped by accident, builders have limited ability to discover these mistakes ahead of time. This can lead to project delays, standstill, and missed deadlines.

If the construction supply chain data were moved onto a distributed ledger, however, builders would quickly be able to spot and rectify potential material delivery issues and plan accordingly as every aspect of the supply chain from the manufacturer, shippers, warehouses, etc., all contribute onto the blockchain.

For instance, if a builder knows that there is a supplier delay on a specific floor tile that he’s planning to receive and start installing in a week, they could switch focus to installing drywall panels or sheathing the roof instead in order to avoid wasting time. All of these innovations help minimize inefficiencies and delays which only spiral building construction costs, while at the same time giving a greater access to information for everyone involved. 

 


Reducing Fraud and Certification of Identity

 

reducing fraud 

 

For one, blockchain technology would allow the creation of a Digital IDs that lets parties share relevant information that is validated by the authorizing entity. These individuals or vendors could be securely recorded on the blockchain, and additionally be used to build business reputations for work or contacts over time. This can create a trusted network between a variety of parties in the construction industry, letting people who don’t necessarily know each other more likely to do business.

In an industry where there can be a wide difference in competency between various contractors and companies, blockchain networks can let companies vouch for each other by being able to see their history of work, since all information on a blockchain can be made public and cannot be fabricated. Other ways these networks can operate is by storing proof of memberships to relevant professional bodies as proof of being able to self-certify work, along with relevant police and security clearances to work at school, airports, government contracts, etc.

At the same time, moving the various building planning and construction records to a blockchain would help combat fraud. Instead of relying on building inspectors and regular contracts to ensure buildings are built as promised, smart contracts can prevent builders from being paid until the smart contract confirms certain preset conditions have been met.

In the short term, the process of verifying these conditions might require a manual inspection. However, it’s possible to see a future in the coming years where smart devices will allow data to be collected and inputted into smart contracts automatically. Pipes, which can already be monitored and regulated through IoT technology, can be made to include sensors that confirm which type of material they were made with and where they are placed in the building. This data can be fed into a smart contract to validate whether the pipes were installed according to building specifications, even if they are hidden away from the site of a manual inspector. In cases like these, sensors and blockchain-powered smart contracts can eliminate the risk that builders might lay an inadequate pipe or installed one in a poor location for the sake of cutting corners. 

 


Decentralized Access to Important Information

 

Instead of relying upon conventional, centralized Building Information Modeling (BIM) platforms to share information regarding a building with architects, builders, and inspectors, this information can be moved to a distributed ledger for a number of advantages.

For one, this approach would ensure that any change made by one party (such as an architect or a builder on the job site who realizes that a certain detail can’t be implemented due to an unforeseen on-site issue) can quickly and rapidly be modified and distributed to all stakeholders. Otherwise, making modifications to these plans would likely involve a lengthy process of information every single party involved in the project, a hassle that would take some time.

At the same time, this distributed information would be beneficial to investors, inspectors, and even residential residents. As a homeowner, imagine the advantage of having an immutable record of the home’s design and construction at your fingertips. If you ever wanted to cut through your wall to install a wire, you would have to hire an electrician or play a guessing game of whether you pierce through an important wiring section. But if these building plans were stored on a distributed ledger, even decades after a buildings construction these plans would be easier to obtain.

 


Simplified Payment Solutions


Getting paid in any industry can be a tricky affair, especially with the potentially complex relationship in the construction industry between designers, builders, contractors, sub-contracts, etc. Each stage in the payment process not only creates opportunities for delays, but in some cases, various companies can be motivated to drag out the construction process for longer than necessary for their own benefit.

Shifting to a blockchain-powered solution can streamline the process significantly. Imagine a situation where a company has a large project, which can be broken down into smaller parcels of work as activities with their own independent smart contracts. A tradesperson with appropriate qualifications (backed by their digital ID) can bid on these individual parcels of work. Once completed, the tradesperson has his work inspected, and then paid for their work.

Imagine how much different the industry would be if the tradesperson was contracted directly to the client and knew that once they finished a section of work they get paid almost immediately (again, without delays and with little to no intermediary fees).

How much more motivated they might be to try and complete their assigned contracts in less time to get paid and have more leisure time or more opportunity to take on other projects?

On a labor level, this could bring incentives back to contractors to be more efficient, rather than drag out their projects. Construction projects and their corresponding DAO’s and smart contracts can be put on a public blockchain where anyone with sufficient qualifications can bid of those projects. This opens up more avenues for smaller companies and individual contractors to find clients and prove their worth as opposed to the current situation where large projects get assigned to major companies. Since these large projects would be broken down into smaller units of work, contractors that might be overqualified on an individual level can find themselves opportunities to work in what would otherwise be projects restricted to the major firm that won the bid.

In a similar way suppliers and materials for a project could be bid on. An electrical supplier secures a smart contract directly with the client to provide wiring by a specific date. Everyone in the industry can enjoy quicker payments with higher levels of trust, and all that this would require is a decentralized platform where this can take place, and the business logic can be automated. Blockchain technology is the perfect catalyst to make this happen in the coming years. 

 


Possible Roadblocks to Implementation 


While proponents of blockchain technology see the potential for almost every industry under the sun to enjoy some improvement or another, it’s another question whether or not the construction industry is fully ready to embrace the coming decentralized revolution.

Historically, the construction industry has been very resistant to change. For one, there is arguably an administration gap in terms of existing systems that might indicate the industry isn’t mature enough to implement crypto-technology. According to Klaus Nyengaard, chairman of GenieBelt, construction remains one of the least digitized industries where over 95% of all produced data is thrown out.

Many experts in the industry have warned that construction as well know it needs to “modernize or die.” Lack of investment in innovation, limited collaboration between entities, and convoluted business structures are just a few of the problems the modern global construction industry needs to deal with, and it might be possible that the industry simply needs a few more years before it can fully take advantage of these benefits listed above.


Conclusion

 

Blockchain technology has already been successfully applied to many other industries in the world, but that doesn’t necessarily mean that it will happen in the same way with construction. But even if the immediate benefits of implementing decentralized technology aren’t felt by the end-of-the-chain contractors and workers, it’s without a doubt that the back-end of the industry will enjoy many of the benefits it has to offer. Increased efficiency, fewer middlemen, higher transparency, reduction in fraud, sharing design information, as well as optimizing workflow are just some of the potential benefits. While it’s true that construction isn’t the most digital of industries at the moment, that also means that if blockchain technology is adopted, the changes we could see might be more monumental in transforming the landscape of how construction operates then most other industries.

Blockchain Technology

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