Blockchain-Based Smart Contracts in Construction

In 1997, my journey as a Civil Engineer began almost by chance, coming from a rural background with little exposure to the field. From marine projects in Paradip to urban viaducts in Delhi, my early career was a whirlwind of diverse experiences.
Blockchain-Based Smart Contracts

Revolutionising Construction Contracts with Blockchain-Based Smart Contracts

In the realm of law, the formation of a contract hinges on the triad of offer, acceptance and consideration. This fundamental principle transcends borders, constituting the bedrock of contract law worldwide. Whether in personal matters or within any industry, the management of contracts demands meticulous attention. At its core, a contract serves the purpose of guiding actions and decisions, transforming the contract itself into the ultimate arbiter, even when the individuals involved are not directly engaged.

The hallmark of a successful contract lies in the unwavering adherence to its clauses by all parties involved. Yet, on a global scale, the construction sector has seen only a handful of monumental triumphs in contract execution. The intricate nature of the industry, coupled with the extensive network of ancillary sectors intertwined with the primary contract, presents formidable challenges that hinder widespread success.

Blockchain-Based Smart Contracts
An insightful overview of a construction contract unveils its essence:
  1. Project Genesis: The genesis of a construction project typically begins with the developer or end user, often referred to as the owner, who delineates the project’s foundations and forges a contract with the principal contractor, commonly known as the main contractor.
  2. Scope Dissection: The main contractor, in turn, dissects the scope of work outlined in the main contract and disperses it among various subcontractors through subcontracts.
  3. Interdependency of Clauses: The symbiotic relationship between the clauses of the main contract and subcontracts is evident; for instance, if there is a delay in payment stipulated in the main contract, regardless of the terms within the subcontract, the payment for subcontracting is impacted as well.
Cost and time overruns emerge as the principal sources of contention in construction contracts, often precipitating disputes that culminate in arbitration proceedings.

Transformative Impact of Smart Contracts

To mitigate disputes and imbue contracts with impartiality and self-sufficiency, the concept of smart contracts emerges as a solution. Smart contracts epitomise the evolution of contract management towards automation and autonomy.

By transforming contracts into self-executing entities, integrated with both input and output parameters, smart contracts leverage blockchain technology as their foundation. Each clause of the contract becomes a node within the blockchain, accessible solely to the involved parties, thereby rendering any tampering or modification of contract conditions impossible. This inherent security fosters a trustful environment, curbing instances of contract fraud.

In the event of a contractual breach, smart contracts swiftly issue warnings or notifications. For instance, if Party A is responsible for issuing design drawings to be executed by Party B within a specified timeframe, any delays by Party A are promptly recorded and verified by other nodes, establishing an impartial record of input timing. Consequently, if Party B were to exhibit delays in the future, the breach is objectively documented.

The digitisation of contract clauses eliminates the necessity for physical presence during drafting, rendering virtual participation of parties sufficient. Additionally, traditional wet signatures are replaced by digital signatures, streamlining the process of confirming and signing contract clauses. This amalgamation of technological advancements not only enhances efficiency but also fortifies the integrity and reliability of contract management in the digital age.

Blockchain-Based Smart Contracts in Construction

Engaging in a blockchain-supported smart contract trust platform provides real-time data accessibility to all pertinent parties involved in a project, including the owner, main contractor, subcontractors and associated consultants. Consequently, beyond merely monitoring project progress—an inherent benefit of smart contract execution—owners can also verify cash flow.

Nevertheless, the primary hurdle lies in instilling industry-wide discipline to transition towards digital workflows and ensuring the integration of all contract-associated parties onto the same blockchain platform.

Smart Contract Application: Realtime Example

Consider an illustration of a smart contract application within a construction project, focusing on a clause concerning force majeure.

Traditionally, delays attributed to force majeure entitle both the contractor and subcontractor to an extension of time, albeit without compensation. However, proper notification and evidence of this extension to the main client or owner are imperative. In a blockchain-powered smart contract scenario, all parties involved—owner, main contractor and subcontractor—have encoded their contract clauses into blocks.

Now, suppose a force majeure event occurs, leading to delays in certain activities. The main contractor inputs this event as a sub-block within the force majeure block. This action undergoes verification by nodes within the blockchain, akin to the scrutiny of an impartial third party. Consequently, the occurrence of the force majeure event is validated within the platform and the requisite documentation is securely stored within the block.

Subsequently, the subcontractor executes a similar operation. Thus, the entire process related to the force majeure clause—from occurrence to verification to execution—is meticulously recorded within the contract, requiring minimal human intervention and zero bias. Remarkably, this process is accomplished in a fraction of the time required by conventional paper contracts, without incurring any third-party charges.

The overarching advantages are manifold: automated documentation, significant time and cost savings, and a streamlined process with minimal human involvement. Indeed, that exemplifies the ingenuity of smart contracts.

author
Sowmya V

Author

Author Bio

V Sowmya is a seasoned professional with extensive experience in supply chain management and project coordination within the construction industry. Currently serving as Senior Manager, Supply Chain Management at L&T Construction’s HCI IC since May 2017, she oversees various aspects of subcontracting, procurement and contract management across metros, hydel and defence projects. With a keen focus on process improvement, Sowmya has spearheaded initiatives to enhance efficiency through dynamic document repositories and procurement bulletins, facilitating real-time monitoring and reporting. Her previous roles at L&T Construction, spanning from August 2005 to May 2017, encompassed diverse responsibilities such as design engineering, project procurement and master planning coordination.

Sowmya’s achievements include implementing innovative solutions for concrete supply optimisation, supplier diversification and cost savings, resulting in significant benefits for project execution. A qualified civil engineer with additional certifications in commercial arbitration, contract management and legal studies, Sowmya is committed to advancing her skills and expertise in construction project management and supply chain operations. She is a proud member of esteemed professional organisations such as the Indian Concrete Institute, Indian Institute of Bridge Engineers and the Association of Supply Chain Professionals, among others.

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