Blockchain has the potential to revolutionise how projects function. But what does this translate to and what are the possible legal ramifications?
The construction industry is notoriously poor at record-keeping.
All too often when a dispute arises, parties do not have adequate documentation. A lot of time, energy and cost then goes into trying to ascertain retrospectively what happened on the project.
What if there was a way to record project data in real time, instead of relying on records kept by project managers, cost consultants and contractors?
One of the newest emerging technologies, blockchain, has the potential to revolutionise the way we run projects. At its core, blockchain is an open and secure method of recording transactions. It exists as a peer-to-peer network and requires no intermediaries to run it, which makes it much harder to abuse.
The system is highly suited to keeping continuously updated digital records. This can be utilised with a smart contract: a rules-based piece of code stored on the blockchain, which automatically self-executes on receipt of the required data.
The best way to describe it is to compare it to a vending machine: there is no lag between payment and performance, as payment automatically triggers a response.
How would this look?
There is a long way to go before smart contracts are running construction projects. However, the potential combination of BIM and blockchain may be the catalyst for the start of a revolution.
“There is a long way to go before smart contracts are running projects, but many industry leaders are seriously considering their potential”
Smart contracts and blockchain could be used as an effective contact administrator and/or cost consultant. It would be a truly objective and instantaneous way of recording matters relating to a project, and then producing an outcome based on its parameters.
Project data recorded by onsite sensors could be fed back to the smart contract and into the BIM system, giving an accurate and contemporaneous report on progress. This might then be used to value the works automatically against the pre-agreed prices, and to release a payment at the appropriate time without an application, with potentially no more interim certificates, payment notices or pay less notices needed.
The smart contract could also be multi-party, so when A pays B, B has no choice but to also pay C. This could eliminate the need for a project bank account.
In a smart contract world, site staff and subcontractors could be given barcodes to access the site and record their attendance, while site deliveries could be chipped with GPRS trackers sending a message back to the smart contract to release payment on delivery to site.
A weather sensor on site may also be used to send data back to the smart contract to enable compensation events under a contract to be determined. The data could then be utilised to produce automatic extension-of-time decisions. If the project’s insurance was linked to the smart contract, there could even be automatic payouts in certain predetermined situations, if the requirements were verified to have occurred.
One of the world’s largest insurers is currently trialling a flight-delay insurance product that will store and process payouts via smart contracts.
Verification and legal issues
The BIM system could potentially be the baseline for verification on a construction project. However, it is currently difficult to imagine how the required verification in construction would work in the same way it does in relation to purely digital transactions.
There are also many legal issues to consider. What if the parties disagree as to the result of the decision of a smart contract? What if the code was incorrect or the sensors and tracking devices did not work? Presumably, like any other contract, smart contracts could produce unintended consequences or contain gaps.
There could also be issues as to how the technology sits with the existing legal system, ie the Housing, Grants (Construction) and Regeneration Act. For international smart contracts, there may be confusion as to what legal system applies.
There is a long way to go before smart contracts are running projects, but many industry leaders are seriously considering their potential. University College London, for example, has formed a Construction Blockchain Consortium to bring together the university’s fintech experts with digital construction experts.
The matter has also been commented on by Joint Contracts Tribunal chairman Richard Saxon, and by global technical information provider NBS.
The rest of the industry will soon also need to start planning for this future or risk a Betamax-style fate.
Natalie Pilagos is a senior associate at Taylor Wessing