The importance of blockchain technology for the construction industry

Overview of the construction industry

The construction industry, a vital part of human civilisation, has existed in some fashion since the dawn of our earliest societies. Throughout history, the construction sector has played a key role in creating new environments. Spanning across diverse epochs and cultures, it became a fundamental pillar of societal progress. It is one of the largest industries in the world and the backbone of economic growth and productivity.

As technology and materials have improved, the construction industry embraced new techniques, methodologies, and materials, demonstrating its capability to meet the changing demands of development. However, the construction process has kept some of its key elements such as conception, launch, project performance, and control.

Due to the growing complexity of construction processes and innovative technologies of the fourth industrial revolution, the construction industry needs to evolve once again. 

Time for a change

The architecture, engineering, and construction (AEC) sphere has entered a period of disruption caused by the development of new technologies such as blockchain technology, artificial intelligence (AI), the Internet of Things (IoT), Building Information Modelling (BIM), and big data management. Several studies examined the current blockchain adoption within the AEC industry, and found out that it is gaining significant traction.

For example, many construction products are manufactured through global supply chains. Along with complex construction projects and the increasing demands of quality and efficiency, the industry needs to find novel ways to maintain the sustainability of the supply chain.

Important features such as supply chain management, quality management, and payment processing can be improved with the use of digital tools. 

Construction companies are using blockchain technology to take control of supply chains and smart contracts in a manner that wasn't possible just a decade ago. With more complex projects and companies adopting blockchain, even broad construction projects will become easier to manage.

Smart contracts are self-executing agreements based on code. If you want to find out more, why not read this article: 'What are smart contracts?'.

Even though blockchain technology is still in its early days, it has the potential to play a vital role in shaping the construction industry for the better. The construction industry has also been traditionally slow in adapting to new digital technologies. However, this promising technology includes the ability to address common issues of the construction industry while adapting to its core principles. 

A study suggested that blockchain technologies could reduce entry barriers and facilitate trust among construction stakeholders by eliminating the risks associated with counterfeit products, inefficient documentation and unauthorised modifications. 

In this article we aim to answer this question - Can the same distributed ledger technology that powers cryptocurrencies also enable better execution of projects in a conservative sector such as construction, involving large-scale projects and teams of contracts and subcontractors, along with a variety of safety regulations, standards and building codes?

Productivity of construction projects worldwide

Since the 1960s, the construction industry has grappled with a 50% decline in productivity. On the other hand, the manufacturing sector has experienced a doubling of productivity over the same timeframe. The decline can be attributed to several factors such as regulatory problems regarding permit applications and the absence of a standardised design for each building. At the same time, the profit-driven nature of the construction industry added up to higher prices for customers. 

This is not all; the majority of issues stem from two pain points of the construction industry – poor project management and inefficient cooperation between stakeholders in the entire construction process. The absence of consistent collaboration between managers and project stakeholders created an inconsistent flow of data. 

Additionally, contractual relationships often become cumbersome for the parties involved. Construction contracts typically require companies to put their performance before project performance which results in an efficient and slow system. 

The productivity issue is the first signal that something needs to be changed. Blockchain in construction seems to be a revolutionary tool to improve the efficiency of the industry's life cycle and help all parties stay on the same page. Many administrative tasks can be unlocked with the ease and flexibility that blockchain technology brings to construction companies and users.

Supply chains in the construction industry

Construction projects involve the coordination of many divergent suppliers, contractors, and manufacturers. If the supply chain is not in sync, construction projects are going to suffer due to potential delays and lapses in productivity.

Therefore, the backbone of any construction project is to bring together a team of divergent actors to build a specific building for the client. As mentioned above, supply chains include main contractors, subcontractors, engineers, architects, suppliers of materials, and consultants.  

It is significant to state that the construction industry is project-based; clients have various requirements and preferences which tend to create unique supply chains that need to be reshaped for each project. Combining new construction projects with the competitive bidding process amounts to inefficient information management. 

The whole AEC industry has recently started to change its ways by adopting new business models in supply chain management such as blockchain implementation.  

In the area of building supply chains, blockchain technology can help by providing a transparent framework with decentralised architecture and the reinvention of how materials are procured, managed and monitored.

Supplier-Buyer relationships and management

The relationship between suppliers and buyers has an impact on corporate performance. Several studies demonstrated that efficient exchange relationships bring to the table better performance and lower costs. 

Suppliers became more significant within the global business ecosystem, along with the need to objectively assess their capabilities and identity. The client needs to know whether the supplier can meet their needs. Suppliers can be evaluated on several levels such as the product level, process level, quality assurance and company level.  

However, the current system encompasses a few flaws. Let’s take supplier onboarding and validation as an example. Although most of the data that a supplier has to provide is common, there is no standardisation.

Simply put, suppliers have to prove their identity every time they want to do business with a new client, and clients need to find efficient ways to track and accept data. This issue leads to increased operational costs and delays for both suppliers and clients. 

There is a big reliance on global supply chains to maintain production. Taking into account that the current control over the supplier-buyer relationship is limited, each novelty introduced into its management has an effect.

Supply quality control

Quality management is a key function within the construction industry. It can be defined as the collection and analysis of data through which the level of compliance with determined standards is analysed for a product or service. 

Companies spend a lot of time and resources on conducting a quality assessment and choosing methods to ensure that construction project materials are within established specifications. 

But how do we define the concept of quality? There are various definitions but we can simply state that the quality of the product is based on the extent to which the buyer requirements are met. Requirements typically relate to technical or sustainable features of a product or service.

Many companies face the same problem today – how to conduct remote quality assessment operations within global supply chains that include various parties and management solutions. This is where the blockchain concept jumps in.

Blockchain applications got their first opportunity to enhance global supply chains and quality management at the beginning of 2020 and the Covid-19 pandemic. The restriction of international mobility made things very complex, especially when it comes to the verification of products within a supply chain.     

What are Non-Conformances (NCRs)?

Non-conformances (NCRs) refer to products of poor quality and are common occurrences within construction projects. In many cases, NCRs are not accurately documented or reported, which makes it hard to find the responsible party. Being able to accurately document NCRs enhances the ability to trace their history and provides a learning opportunity for construction organisations. 

The construction industry lacks a system within a project supply chain that can assess quality data and ensure security and compliance. Even though construction organisations tried to build systems for managing quality control, they are mainly centralised structures governed by contractors as a central authority. 

For example, a lack of trust regarding the integrity and authenticity of the data typically exists among project stakeholders. In such a centralised system, data is usually maintained by the construction contractor who hypothetically has an opportunity to modify it.  

The construction industry needs a secure and transparent record of data that is co-managed by multiple stakeholders to track materials and store lifecycle information about everything within the industry that needs quality control and assessment.

Benefits of blockchain technology

In 2008, when the global economy faced big problems, someone known under the pseudonym Satoshi Nakamoto wanted to create a digital currency that wouldn’t be controlled by a central authority or a middleman like one of the big banks that caused the financial recession. 

Therefore, when you use Bitcoin, the details are written down in a shared public record called a blockchain. This ensures that users truly own their digital currency and removes the double-spending problem from the picture.  

As more people used cryptocurrencies, blockchain technology evolved into a transparent and immutable record that can’t be changed without everyone in the blockchain network knowing. 

The main benefits of blockchain technology are reflected in its three principles – security, decentralisation and scalability.  

Multilayer encryption using mathematical functions hides data in a coded string of characters that is very hard to crack. Asymmetric encryption is used to ensure the integrity of transactions.

The distributed ledger technology provides that events such as transactions are processed and stored across many different computers, known as nodes. The nodes are decentralised, and trust is replaced with proof as a shift to a trustless ecosystem where intermediaries become redundant.

Nodes automatically check transactions on the blockchain which leads to a digital trail of verified records. Finally, data is not located on a centralised server so it can be scaled to fit various large projects.

What does this mean for the construction industry?

You can think of blockchain as a literal chain; each link presents a separate transaction within a construction project. For example, if one supplier fulfils their contractual terms, the completed contract is finalised and added as a new block in the chain. This makes it easy to trace information. 

Potential applications of blockchain technology are far-reaching. As explained above, construction projects include the coordination of various actors, all of whom need to be paid for their part in the process. The current system is slow and susceptible to fraudulent activities.

How can blockchain technology help the construction industry?

Taking into account that a blockchain system is designed to continuously track materials, transactions, and updates of digital records, it presents a technology that could revolutionise construction management and the way construction project teams work in the future.

Let's take a look at some of the key benefits of using blockchain technology in the construction industry. 

Building International Modelling (BIM)

One of the main novelties within the construction industry refers to the use of the Building Information Modeling (BIM) technology on project sites. Information exchange in BIM is important yet complex due to the number of parties involved.  

Although BIM promotes digital cooperation, information sharing, and data management, it falls short in certain areas such as tampering with digital records, including changing the metadata operations within the model.  

This happens because the BIM software was initially built with the focus of managing information related to building design, and construction management. The main focus was not to guarantee the integrity of data or traceability over time.  

BIM tools allow participants to make changes to project data, but they don’t include advanced security components or tamper-proof mechanisms that are required to guarantee data authenticity, along with the inability to track the changes. In other words, it is difficult to find out who made a change and when it was made.

Combining BIM and blockchain technology

A combination of BIM and blockchain technology has the potential to become a game changer for construction projects. For example, the fusion of BIM and blockchain could make smart contracts more efficient.  

Blockchain technology can be used as a secure and transparent way to support BIM and the sharing of information among parties. It can complement BIM by mitigating risks regarding the lack of data traceability. 

It can also enhance BIM’s advantages by enabling engineers and architects to design on the same BIM model with determined ownership, while construction and design-related data can be recorded on the blockchain for future research and liability matters. 

This can be done by incorporating the BIM model into the contract between multiple stakeholders. Smart contracts that implement the BIM model could also condition payment based on the project’s conformance to the blueprint.  

Several researchers examined whether blockchain technology can enhance distributed and collaborative Computer-Aided Design (CAD) environments, including the BIM model and Geographical Information Systems (GIS). The researchers found that blockchain can help in enhancing these environments by providing a reliable way to store data and ensure project data ownership.

Supply chain management benefits

Blockchain implementation brings several benefits to supply chain management within the construction industry. Generally speaking, blockchain technologies can increase transparency, reduce costs, and provide a greater degree of flexibility and risk mitigation. 

For example, a blockchain network is able to highlight at least five key features of a product such as nature, quality, quantity, location and ownership. 

You probably wonder how blockchain technologies can digitally integrate supply chains such as the construction supply chain. Several studies gave a theoretical answer to that question.  

We can highlight four key entities within a blockchain-powered supply chain. First, there is the registrar that provides digital IDs to the nodes in the network or the parties involved. Standard organisations are accountable for policies and technological requirements. Then we have certifiers that provide certification to participating parties. Main actors within a supply chain can be identified as, for example, contractors, customers, manufacturers, retailers, project owners, and customers. They all need to require registration by a certifier. 

Blockchain technology brings to the table various types of applications such as notarisation of documents, transaction-related applications used for automated procurement and payment, and provenance-related tools used to enhance the transparency and traceability of the supply chain. 

Why is all this important? Many times during the construction stage, products turn out to be defective. If we can utilise the main perks of a blockchain network, each product or service can be traced backward with authenticity from a quality assurance or compliance aspect. It becomes easy to trace the origins of the product because the distributed ledger technology stores all relevant data, making the product exchange process more efficient. 

Additionally, as a construction project develops, the technology would be able to automatically execute rules and regulations. For example, if a supplier fails to meet a delivery deadline, the blockchain system would keep track of that factor and enable appropriate retaliatory action to be taken.

Implementing such a mechanism might hold the parties involved more accountable while simultaneously being able to automatically enforce rules and increase efficiency.

Use cases of blockchain-powered supply management in other industries

A 2016 study tested the use of blockchain technology in the manufacturing supply chain for a cardboard box. The authors created a theoretical study scenario that consisted of several phases. At each phase, the approval of at least one participant was required, along with the data regarding ownership, location, time, and product specifications.  

For example, in the first phase, participants needed to specify the data of tree harvesting; the second step was to certify the harvested wood by a relevant organisation to ensure it meets all required conditions and norms. To sum it up, the use of blockchain makes it possible for everyone to audit data and reduce overall costs. 

Apart from theoretical studies, innovators have been testing the use of blockchain networks in other industries such as the pharmaceutical industry which is based on strict audits. The pharmaceutical supply chain typically faces a wide array of challenges such as a lack of transparency, difficulty tracking products and the delivery of expired products as well as the constant need to preserve reliable data about the origins of raw materials through drug production. 

Blockchain technology is used within the pharmaceutical supply chain to trace the origin of drugs, the transport and the procurement of raw materials. Since it reduces the number of intermediaries, it provides lower costs and increased security. 

Similar to the pharmaceutical industry, blockchain has been tested within the food and beverage industry to create a common network to verify quality. A study carried out by the food industry in Sweden demonstrated that blockchain technology has the potential to support issues such as food fraud, the regulation of legal requirements, and quality demands as well as an easier way to store related data. 

The use of DAOs in construction projects

The construction industry is becoming more digitalised. In the future, we might even witness the use of decentralised autonomous organisations (DAOs).  

DAOs have the potential to improve the whole construction process. DAOs can be used through various phases such as the early phase of the construction project, the construction phase, the in-use and maintenance stage.  

For example, construction companies working on the same project can create a DAO that will administer the rules encrypted in smart contracts at the start of the process through the in-use stage. It is believed that a DAO could manage the entire life cycle of a building. 

As for supply chain management, clients could be enabled to create groups of smart contracts based on the conditions and requirements of the project. Once everything is set in place, the DAO can begin carrying out tasks to execute each smart contract. Therefore, a DAO could facilitate the work between the client and various contractors, manage the logistics of the construction process, and oversee various aspects of a project such as tenders, design and approvals. 

After the work is finished, a DAO could implement a Building Maintenance System within the blockchain to maintain living standards. For example, it could hire contractors to repair or set out new fittings within the finished building, along with completing payments using cryptocurrency from its wallet which is linked to the crypto wallets of residents. 

To learn more about DAOs, check out this article: 'What's the benefit of a DAO?'.

Construction project management

Construction project management (CPM) presents a complex process which can potentially benefit from a more decentralised and flexible approach based on the use of blockchain technology. 

Blockchain technology and construction project management connect through four main processes – project modelling, smart contracts, delivery and inspection. These four steps explain the whole process in a simple manner.

The first step of creating something is project modelling; it needs to be defined how the final product is going to look and how it can be accomplished. Then each transaction is linked with smart contracts to keep track of and execute each stage of the process. Furthermore, each party that provided work or materials needs to be paid once the work has been approved. 

Several experts proposed the implementation of a blockchain-based CPM platform for facilitating peer-to-peer collaboration between project participants to enhance data flow, reduce costs and save time. The system should rely on up-front requirements with the use of cooperation protocols.  

Payment processing

The construction industry is plagued with delayed payments and cash flow problems. Such practices can put the whole supply chain and the construction project at risk, especially when it comes to small and medium-sized enterprises that cannot bear broad upfront costs without a healthy cash flow. 

Another issue can be spotted in contractual clauses within the centralised construction industry. For example, ‘pay when paid’ clauses of construction contracts stipulate that the liability of the client to pay the money to the second party such as the contractor depends on the bank as the intermediary. Both parties don’t have control over receiving payments until the intermediary releases them which could lead to a delay in payments. 

While this provision serves as a security tool, especially regarding international payments, it is considered that the use of smart contracts would be more beneficial. Automated contracts that save time and money are about to make a big splash in the business world.

Apart from conventional contracts, a smart contract can be programmed to release funds to a contractor when certain milestones are met such as the completion of a foundation. Smart contracts rely on milestones; when each milestone is achieved, payment processing proceeds automatically.

The potential advantages of smart contracts compared to their traditional counterparts can be seen in their cost-saving feature, business efficiency, and the fact that they are not susceptible to unlawful manipulation or alteration. The use of blockchain technology also eliminates processing fees and enforces payment schedules.

Asset management

Construction businesses may differ from other organisations; they are project-based entities with end-users that have divergent preferences and requirements. Because of such features, it is important to ensure proper quality control through the entire lifecycle of the final product and proper asset management.  

Blockchain adoption within construction projects can aid in proper certifications of materials, manners of transport, and identities of manufacturers. This enables clients to find proper suppliers and ensure transparent tracking and handling of materials.  

Apart from transparency, the use of blockchain in construction can help construction companies facilitate a system that operates in a timely manner as well as reduces waste and lowers costs. 

Another main use that blockchain technology can help with is inventory management. Currently, most construction companies don’t know whether the needed supplies are in stock at the start of a project. An inefficient inventory system frequently leads to delays and higher costs. 

A proper asset management and inventory system should contain all the necessary data related to assets that need to be tracked at every stage of the process. Construction projects are typically scattered across various geographical locations, supply procedures, and the involvement of many parties and temporary companies. 

Blockchain technology can bring a lot of benefits to the table as no record will be lost, and all the project data generated from divergent parties will be held within a single blockchain network. 

Real estate and ownership matters

Blockchain applications enable a transparent and immutable record of real estate ownership and transactions. Verification becomes much easier as it doesn’t require complex procedures and the use of intermediaries. Blockchain technology in the construction industry has the potential to transform the real estate sphere by reducing paperwork, the preparation of contracts and the time needed for property assessment. 

It is believed that in the future each property could come with a universal set of data including background information such as past sales and repairs. A digital record of transactions could increase transparency and eliminate fraudulent activities which would be beneficial in countries where public authorities are plagued with corruption. 

Furthermore, real estate properties could be tokenized within the blockchain system. Tokenization could potentially help in facilitating foreign investments more easily, and facilitate liquidity since users would be able to trade tiny shares of assets. Blockchain adoption has the potential to facilitate access to housing by minimising the role of middlemen and reduction of costs.

Managing subcontractors

We have already explained how the construction industry is different from other industrial fields based on various temporary projects that need to communicate with one another. It encompasses the frequent use of subcontractors as employees who are not permanently involved in the construction project yet managed by main contractors to perform particular tasks. 

Since there are frequently several subcontractors within a single project, managers face several difficulties while measuring the amount of work done and interim finances. This can be easily solved by blockchain adoption and the linking of subcontractors’ activities to the blockchain with verifiable milestones and associated payments.  

Once everything is implemented on the blockchain, all orders, deliveries, and payments will be handled by smart contracts. Smart contracts would automatically execute payments once their work is done.

The creation of smart cities

A smart city refers to an integration of systems based on task-oriented technologies to enhance infrastructure needs and resolve urban challenges. When it comes to smart cities, blockchain technology can be used in the sectors of energy, water, transportation, and governance. 

The EU Metaverse strategy highlights the importance of smart cities' development, along with smart communities and virtual public services. To learn more about the EU's recent communication, we suggest reading this article: 'The EU's Metaverse strategy: Europe's vision of the Metaverse'.

The concept of smart cities has become popular as urbanisation has increased significantly and has a broader level of livability. Many countries are trying to set out a strategy to transform cities into smart cities and minimise the potential risks faced by urbanisation. However, smart cities need to be constructed in a secure and transparent way. That is why we need blockchain in construction.

As for infrastructure, it is considered that utility contracts powered by blockchain applications could resolve several concerns. For example, budget issues could be resolved by smart contracts as each investment token could be customised at each stage of the project to improve accountability and planning. When each contractor tokenizes its finished project, it becomes easier for clients to audit bidders. 

A city-wide implementation of blockchain would allow the development of smart contracts and linking the BIM system to the city’s blockchain. This would further ensure that all construction-related data, either current or historical, is transparent. Interested parties could track life cycle updates and procurement procedures for all completed or active projects.

Are there any obstacles to implementing blockchain within the construction industry?

Although blockchain technology brings to the table a lot of benefits and capabilities, it faces particular barriers to adoption. Let’s check them out. 

Scalability and integration issues

Blockchain-powered calculation processes are scalable in terms of their application in a wide range of possibilities for achieving certain goals. However, a few reports state that executing blockchain technology tends to be more challenging than expected.  

Further, the integration of blockchain with other systems is the primary tool for its mainstream adoption. However, there is a need for several blockchains to work in tandem to efficiently enhance data if more than a single blockchain network is deployed. Blockchain implementation can turn out to be time-consuming and raise high costs.

Standardisation complexities

When bringing blockchain technology to traditional IT departments, it can be spotted that they may lack standardisation. A lack of standardisation means that platforms cannot communicate in an efficient manner which slows down the whole process. 

The requirement to shift current IT systems to blockchain networks could represent a major concern and broad up-front expense for many industries. A few factors that could slow down blockchain adoption are integration issues, complex coding, and a lack of experts. 

Regulatory issues

Even though it is considered a revolutionary technology, a relevant legal landscape has not yet been established. Regulatory uncertainties are a major concern for many industries since the introduction of new technologies may not be compliant with existing regulations such as cryptographic signatures or smart contracts’ technology.

Additionally, blockchain ledgers may have a different impact in various jurisdictions due to the reliance on nodes located in divergent locations.

Market-based risks

To secure mainstream adoption, blockchains need to be created as platforms within a diverse range of industries. To fully remove barriers, the utilisation of blockchain-powered tools cannot be limited.  

Along with welcoming new suppliers to the market, blockchains will need to provide more trust and courage for construction organisations to invite new suppliers due to the accessibility of their blockchains.  

It occurs that the construction industry is based on long-term relationships which are often seen as upper-hands yet present deterrents for new participants. While blockchain technology aims to lower barriers, the construction market also needs to go through a transformation.

Expanding the user base

When it comes to blockchains, gathering a certain amount of users before activating the network is important. Since such systems are costly to implement and execute, it is vital to build a primary user base.  

This brings us to sustainability issues as well. Think of mining operations – complex calculations needed for extracting the blockchain requires a substantial amount of electricity. Despite the increases in network load, the financial benefits might not turn out to be significant enough.

A prosperous future ahead

Even though the implementation of blockchain technology is not without obstacles, they can be resolved over time with thorough preparation, dedication to innovation, and strategic partnerships. 

We have mentioned several case studies and real-world utilities of the use of blockchain technology within supply chain management, asset, and construction management. Constant efforts among industry participants are preparing a groundwork for uniform standards, procedures, and a wide implementation of blockchain. 

To sum it up, the use of blockchain in construction seems to have a bright future ahead. Accepting innovation takes time, and the construction industry is on the path to undergo a major transformation due to novel developments. As blockchain technology matures, it will enhance its capabilities to provide efficiency, security and transparency.