Smart Contracts & The Construction Industry

Late Payments are a problem in the construction industry. A Subcontractor is typically at the mercy of the Contractor or General Contractor for prompt payment. Even after work is completed it can be months until payment is received for the work. The typical parties involved are an Owner, General Contractor (or Prime Contractor), Subcontractor, Sub-Subcontractor, and sometimes a Sub-Sub-Subcontractor and so on. The farther the party is separated from the owner (Payer) the longer the potential payment delay. This is due to the fact that a human decision is typically at every hop along the payment chain. Any Subcontractor and anyone down the payment chain is familiar to receiving payment long after work has been performed.

According to the Designing Buildings Wiki:

“A survey of 250 small construction companies in November 2012 found that 97% felt unfairly treated by main contractors, and just 5% of all work was paid for within 30 days. In March 2016, the Euler Hermes Quarterly Overdue Payments Report found that late payments in the construction industry rose by 27% during 2015.”

There are a handful of reasons why payment could be delayed . The contractor

  • may themselves be waiting to receive payment
  • may not actually have the money at the time
  • may be too many calls on the working capital that they have
  • may prefer the smaller contractor, their supplier, to bear the burden of providing finance rather than incurring bank or borrowing charges themselves

Solving this problem is tricky and may almost be impossible. However, this is only in context of the current broken system. The solution the BuildCoin Foundations offers is not to fix the old way of doing things, but to replace the system in its entirety with smart contracts tailored to the construction industry. To understand this solution, one needs to understand smart contracts and to understand smart contracts one needs to have a basic understanding of blockchain technology.

According to Wikipedia, Blockchain is “A blockchain, originally block chain, is a growing list of records, called blocks, which are linked using cryptography. Blockchains which are readable by the public are widely used by cryptocurrencies.” As for smart contracts, they a built on a specific type of Blockchain, one that is turing complete. Which really just means it is a blockchain that has if/then logic built into it; it is programmable. A Smart Contract is defined as “… a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible

By implementing the use of smart contract for managing payment, each party can benefit from its predictability, programmability, transparency.

For the Owner the benefits include:

  • Efficient payment processing; automation reduces overhead
  • Compliance to payment specifications such as “force work” procedures. As these can be programmed into a smart contract
  • Eliminating the need for lien waivers due to Blockchain’s transparency. All involved can see the state of cash flow

For the Subcontractor and Contractor the benefits include:

  • An increased likeliness of getting paid due to transparency. All parties are able to know, without a doubt, who has been paid and who has not
  • Predictable cash flows

Imagine if contract language was written once and was set in to motion once all parties agreed to its terms. If changes on the job were to occur, then the smart contract language would include the necessary terms to change its outcome. Some may think this kind of system may be too rigid given the nature of construction work. However, this thought process is still in the context of the current broken system. A system in which those who can bend the rules will do so. By eliminating these complex variables and replacing it with a predictable one, contractors can focus on building instead of contracting.

If you would like to learn more about the BuildCoin Foundation and join us in building a better world one block at a time, please email us at info@buildcoinfoundation.org or reach out to us on Telegram.

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We look forward to hearing from you.

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BuildCoin — Building a Better World, One Block at a Time

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