With the use of any technology, the value lies in improvement to processes or providing solutions to problems, rather than technology for technology’s sake. Replacing traditional paper-based construction contracts with smart contracts offers a number of benefits, including increased security and transparency through immutability (i.e. the contract cannot be altered) and automating contractor payments.
Smart contracts and immutability
Blockchain is the most common method of implementing a smart contract. A smart contract is the technology that sits underneath the contract. The ‘smart’ part refers to the automation process, rather than the use of AI.
Blockchain uses what is known as a distributed ledger, storing blocks of data chained together, in this case, contract details. Each piece of data has a unique hash, essentially a form of digital signature, that is linked to and references other data in the chain. This unique hash also validates the data and prevents alteration. Once information has been added to the blockchain, for example, the terms and conditions of a contract, the information cannot be changed. For contracts, data is stored in a decentralised manner, similar to peer-to-peer networks, on a private blockchain, which only parties to the contract can view and which is held on their computers and / or in the cloud.
Accounting for crises and price fluctuations
Immutability is a key strength of smart contracts, but what happens when a crisis such as COVID-19 necessitates changes to the contract? Just as you would for a paper contract, an addendum can be added.
Over the lifetime of long-term construction projects there can be substantial fluctuations in material prices. Adjusting for changes in prices can be managed through a combination of on-chain and off-chain technologies. Base prices sit in the blockchain and never change, on top of which sits software that calculates changes using price books. As with other forms of data use, the accuracy is dependent on the quality of data. As a side benefit, as the data builds over time, it creates a dataset than can be used for estimating costs and as a quotation tool at quite a granular level. This dataset can cover not only material prices, but also estimates based on where the work is carried out and where the materials are sourced from, for example. Historic data held on blockchain can also be used to analyse trends and patterns, such as causes of delays, and give indications where potential issues could arise in projects. Blockchain additionally can provide an early warning system for existing contracts of problems on site, for example, if automated payments aren’t triggered when expected.