Trends in Construction: Smart Contracts

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Several potential benefits are driving the move to replace traditional paper construction contracts with smart contracts. Chief among these benefits are the ability to automate contractor payments and the increased security and transparency derived from the fact that once finalized, a smart contract cannot be altered.

What Is a Smart Contract?

IBM defines smart contracts (also known as chaincode) as “software that you can use to read and update data on the blockchain ledger. Chaincode can turn business logic into an executable program that is agreed to and verified by all members of the blockchain network.” The business logic related to a construction contract includes what each party to the contract is promising to deliver and the terms and conditions of the contract. Capturing this business logic as code on a blockchain yields substantial benefits in terms of streamlining transaction processing and auditing and eliminates a lot of manual processing and paperwork.

How Does It Work?

Blocks of contract details are stored as blocks of data chained together in what is called a distributed ledger. Each piece of data gets linked to and also references other pieces of the chain by a unique hash that functions much like a digital signature. Nobody other than the parties to the contract can view the blockchain. The fact that a smart contract only exists in electronic form is an advantage, because any party to it can easily look up contract terms and conditions without having to be in possession of a hard copy.

Once data has been added to the chain, it cannot be altered. If it becomes necessary to amend the contract—to change a delivery date, for example—that can be done only through an addendum. We know that the cost of construction materials can vary significantly over time. Base prices are locked into the blockchain and cannot be changed. But the software calculates price changes based on price books.

Automated Payments

The fact that payments are made automatically upon satisfactory completion of a payment milestone or work stage is very reassuring to contractors. Project owners benefit from the decreased administrative workload that processing and paying invoices entails. Establishing smart contracts for very large projects can relieve project owners of the need to make substantial payments up front because of the guarantee of automated payments.

How to Create a Smart Contract

Don’t let the technology intimidate you. You don’t have to have a deep understanding of how blockchain technology works to benefit from smart contracts. A competent programmer can turn a paper contract into a smart contract. Even a novice can use a template to create one. As blockchain technology becomes more mature and advanced, there will be more options and opportunities to utilize this technology to create greater efficiencies in the construction world.

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