Smart contracts & blockchain technology : Transformation of the construction industry

While blockchain originated to serve as the public transaction ledger of cryptocurrency, the technology is now being explored for other purposes. Companies such as Walmart and British Airways have made use of blockchain to track and manage its data.  Walmart's system was designed to help track down the source of bad food in case of product recalls. British Airways tested blockchain with the goal of stopping conflicting flight information from being reported at airports and on mobile devices.

It is only a matter of time before the construction industry engages in earnest with blockchain and benefits from the technology.

Block chain is a decentralized data structure, similar to a ledger book maintained by a bank. Each party involved in a blockchain transaction has a copy of the transaction that took place, and the information cannot be modified by another party.

One of the key benefits of block chain technology is its decentralized nature. The absence of a centralized body means the technology is largely impervious to hacking.

Smart contracts are computer programs built on blockchain technology. Smart contracts use automation to streamline the execution of that contract. The contract is set up based on a series of "if" and "then" conditions. A simple example is if the requisite amount of concrete is delivered to site, then the concrete supplier gets paid. A contract can be encoded to comply with the terms and conditions of the contract.

Application of blockchain and smart contracts to Canada’s construction industry

Canada’s construction industry is ready for a change. Projects are now more complex, wait times for payment have been growing and disputes are taking years to resolve. In Ontario, as part of an overhaul of the Construction Act (the “Act”) to address these challenges, prompt payment and adjudication were introduced on October 1, 2019. Federal and other provincial governments are in the process of reviewing applicable legislation and implementing prompt payment and adjudication rules as well. This shift across the country presents a perfect opportunity for the industry to examine and embrace technology that can transform the industry: block chain technology and smart contracts.

Prompt payment and adjudication are governed by procedures, timelines and use of forms, as prescribed by the Act. The deadline for payment is measured from the owner’s receipt of a "proper invoice" as defined in section 6.1 of Part I.1 of the Act. A smart contract can be triggered to verify whether the invoice delivered by the contractor meets the criteria set out in section 6.1 of the Act, such as the contractor's name and address, date of the invoice and period for which the services or materials were supplied, and description of the services or materials supplied, and any additional contract criteria for a “proper invoice”. Once the program confirms that the invoice meets these “proper invoice” requirements, the program can then be triggered to perform whatever verification process has been agreed upon by the parties.

For example, the owner's payment certifier can be required to submit its independent records and verify these against the contractor's invoice. In the case of the concrete supplier, the delivery of the concrete can be logged into the system, including quantity and price, and matched against the invoice delivered by the contractor. If there is discrepancy in the payment certifier’s review or the quantity of concrete delivered, the program could be set up to deliver a notice of non-payment, pursuant to section 6.5(6) of the Act, either deducting the discrepancy from amounts payable or allowing no payment to be made at all. The program could also be set to make full or partial payment within 28 days of receipt of the invoice, depending on whether a notice of non-payment has been issued. If a contractor does not receive payment or a notice of non-payment by the prescribed date, the contract can be programmed to generate a notice of adjudication, or more likely, to prompt the project manager to generate a notice of adjudication per section 13.7 of the Act and to select an adjudicator per section 13.9(2) of the Act.

This simplistic example showcases how the technology can be used to assist parties to comply with the new prompt payment and adjudication regimes. Such an automated system can be customized based on the project's delivery model and the complexity of the contract. By reducing the efforts currently required to sign off on payment applications, smart contracts and blockchain technology can result in greater efficiency and savings for the construction industry.

Another application of blockchain in construction is with the use of Building Information Modelling (BIM). BIM is technology which allows project participants to work more collaboratively, deliver workflow processes with fewer errors, share information and improve schedule performance. Central to the integration of BIM and blockchain technology are the concepts of trust and collaboration, which are also the principles behind the newest standard form contract issued by the CCDC, the Integrated Project Delivery Contract, CCDC 30 – 2018. However, the use of BIM has raised challenges in terms of verifying and tracking the information. Blockchain, as a decentralized and traceable ledger, could ensure a secure environment for BIM and protect intellectual property rights as every model author’s work and changes would be forever recorded.

Another aspect of construction that could greatly benefit from blockchain technology is the storage of project records. All data and records could be held within a public  blockchain ledger, immutably time-stamped as to their entry or creation. If a dispute arises and an adjudication is commenced, the underlying information will already be stored, organized and accessible to all parties. This could help to alleviate some of the pressure on the parties to comply with the tight adjudication timeframes or reduce potential challenges to document authenticity. Further, at the end of a project, it has been estimated that 95% of building construction data gets lost on handover to the first owner.[1] Firms in the blockchain industry are developing programs to eliminate this loss of data by encoding all specifications of a building into the blockchain, whether it is the paint colors, ceiling fixtures, or the manuals and warranties so that the service provider can effectively maintain and monitor the building.

Given the existence of standard form contracts, such as the CCDC, RAIC and ACEC documents, and the changing statutory landscape, the Canadian construction industry is well suited to embrace blockchain. Several firms have explored the concept of smart contracts, however use of the technology is still very much in its infancy. The adaption of blockchain is predicated on all parties using a digital system, a goal that the industry is and should continue to be moving towards. One of the key catalysts for prompt payment and adjudication was the industry’s desire to create greater efficiency, and blockchain can be the tool that assists parties to think and work in a modern way.