Smart Contracts are self executing documents. They operate in the same way as a vending machine – you insert money, click on item you want and if you have inserted enough money the item is released. These contracts are encoded into blockchains meaning they have the security of decentralisation and immutability and the code on which the smart contract is written becomes the middleman, it enforces itself, meaning you don’t need to rely on third parties to ensure the contract is executed properly.
In construction smart contracts really come into their own when combined with BIM.
Payment has always been an issue in the industry but by utilising smart contracts this issue could be resolved; for example, smart contracts could be used for interim payments. A smart contract could confirm that the client has sufficient funds for the valuation period (based on cashflow projections) thereby giving the contractor confidence that if he completes his work to the correct level he will be paid, once complete the contractor would then log his valuation into the BIM software which would be audited against the BIM model, this would then calculate the correct payment to the Contractor and the smart contract would then generate the correct notices and tax invoices for both parties and release payment on the correct date.
Another scenario could be where when supplier is ready to ship supplies to site, they would log this into the BIM software the software would be linked by the smart contract to the employers account to verify that there are sufficient funds available to pay for the goods. Once the goods are delivered to site and have been checked as correct the project manager would confirm as receipt in the BIM software and payment and exchange of notices, invoices and supplementary documentation would be exchanged and released by the smart contract
As smart contracts operate on the blockchain all participants can have trust that the information and actions taken are secure, correct, fully auditable and immutable.
As construction becomes ever more digital the industry will need to adapt. A smart construction contract built upon a block chain could:
- Resolve current payment issues currently found within the industry
- Resolve the current legal questions relating to ownership, responsibility and liability of design contained within a BIM model
- Create more trust between the parties and a more transparent working environment
- Smart contracts are fast as they don’t rely on lawyers, notaries or other third parties. The contract is monitored and verified by the blockchain so actions required by the smart contract are almost instant.
Although the concept of smart contracts has been in existence since 1994 it was only until the advent of blockchain technology that the concept became feasible and now their use within this sector is widespread. However, moving the technology from a digital sector into a traditionally analogue one a number of questions arise for example does the industry have the personal with the ability to code these smart contracts and also will the courts recognise the enforceability of these contracts.
Urban Project Services have associates who specialise in blockchain technology. If you would like to find out more about block chain, please get in touch.
This article contains information of general interest about current legal issues and does not provide legal advice. It is prepared for the general information purposes only. This article should not be relied upon in any specific situation without appropriate legal advice.
