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Smart Contracts

Smart Contracts – How Might They Change the Way the Construction Industry Does Business?

By now, just about everyone has at least heard of cryptocurrencies like Bitcoin and Ether and you may even have some idea of what they are, even if the actual mechanics of this new world of finance is still a bit confusing. The staggering jumps (and falls) in cryptocurrency value over the last year have been hard to ignore, as have the billions of dollars that are now circulating in this new decentralized economy. As cryptocurrencies become more mainstream, they will  have more and more of an impact on business, and the construction industry is not immune. One of the ways construction may benefit from the advent of this financial revolution is by implementing blockchain-enabled smart contracts.

Smart contracts have the potential to revolutionize the way the industry operates, but understanding how they work can be difficult without the proper background knowledge. In this article, we hope to provide a basic understanding of cryptocurrency and blockchain to illuminate the incredible potential inherent in smart contract technology.

First of All, What Is a Smart Contract?

In our introduction, we mentioned the cryptocurrencies Bitcoin and Ether. These are currently the most valuable cryptocurrencies, with Bitcoin getting most of the headlines and Ether trailing close behind. But even though they are both cryptocurrencies, they are vastly different in their functionality – and their distinction is important to understanding smart contracts.

Bitcoin is a blockchain-supported decentralized digital currency that functions as a store of value. Essentially, what this means is that you use it to pay for stuff.


Ether, on the other hand, is also a digital currency, but, in addition to functioning as a store of value, it is also the payment system for operations that occur on the Ethereum network. Ethereum is a blockchain-based platform that allows people or businesses to conduct financial transactions or execute (smart) contracts between themselves without the need for banks, lawyers, courts, or other intermediaries. Ethereum is not the only blockchain platform out there, but it is currently the most widely used and is therefore likely the platform upon which construction-industry smart contracts would be initiated.

In addition to knowing the difference between Bitcoin and Ethereum, in order to understand how a smart contract works, it’s also helpful to have at least a cursory understanding of blockchain. Here is a very simplified explanation:

Blockchain is a coding system that digitally documents information in a chain-like fashion. Each link in the chain is called a block. The blocks link together, and every time something changes, every block in the chain has to record the change, or the blocks won’t fit together anymore. The blockchain record is stored in a “distributed ledger” which means many computers across a network all have a copy, and changes are recorded in all places simultaneously. With blockchain, no one central person with access to the process can go in and make changes without anyone knowing.

How Could Smart Contracts Impact the Construction Industry?

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Faster Payment Processing

The construction industry can benefit from the implementation of smart contracts in a number of ways. First of all, smart contracts are self-executing, which means that they eliminate the need for a “contract enforcer” such as a judge or court if the terms are not met.

For example, let’s say you have an agreement to build a building for Company X. The terms state that Company X will pay you a certain amount of money as a progress payment every month as long as you meet agreed-upon milestone deadlines. The contract is programmed  to transfer funds from your client’s wallet into yours when you meet the terms. If either side of the obligation is not met, a fine and/or interest penalty system can be triggered.

In this smart contract scenario, all the contracted details would be automated and when the milestone completion is confirmed, a new block is added to the chain, which triggers payment. The entire process happens automatically and instantly, with no need for applications or forms to be submitted or reviewed to finalize payment. Smart contracts speed up the process and serve as a central record of progress accessible to everyone in perpetuity. They also can guarantee the presence of funds. The money to fund the job, or some other type of collateral can be held in a crypto wallet so there is never a question of whether there is money to pay for the job.

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Streamlined Supply Chain and Materials Management

Contractors can also use smart contracts to manage the ordering and delivery of materials. Once a phase of material is delivered, it can trigger the order process to begin for the next phase. The automating of this process can help with timeline management and the meeting of deadlines. Equipment rentals can also be managed through the blockchain.

Further, because all documents related to the job are stored on the blockchain, accessing information about products, pricing, warranties and quantities is instantaneous and accessible across time. This helps building owners and their successors down the line understand their buildings better, which can help with long-term and predictive maintenance.

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Transparency Makes Third-Party Oversight Easy

While a smart contract does not itself need oversight, the actual construction will still need to undergo inspections and meet code enforcement standards. The inherent transparency in a blockchain document storehouse makes finding information easy, which helps inspectors and compliance officers do their job more efficiently.

Additionally, by placing plans and specifications into the blockchain profile, the collaboration between sub-contractors can be more fluid, and the origination of change orders or plan modifications becomes easily traceable.

Smart Contracts Can Help Improve the Construction Industry Overall

At the end of the day, smart contracts, while still in their infancy, have the potential to dramatically streamline the paper, finance, and organizational aspects of construction projects. Smart contracts can improve communication, automate payments, streamline supply chain logistics and help with collaboration, ultimately resulting in better buildings overall.

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