Ralf Kubli & Ruslan Mahhov on “Blockchain in Construction”
Blockchain-based Solutions Can Revert Declining Productivity of The Construction Industry
ONE MISTAKE TURNS THE PROJECT TO A ZERO-SUM GAME
Imagine you are a real estate developer and a general contractor of a luxurious multifamily holiday house in an upcoming Alpine resort. You are constructing a modern building using prefabricated cross-laminated timber technology, with an outstanding design and an efficient process of assembly. Your company has outsourced the production of elements for the building in a low-cost European country. You are close to selling the remaining three apartments and already anticipate successful dividend proceeds from the project.
However, something unexpected happens. The building fails fire-safety inspection. It turns out that you need to remove some of the installed furniture, dismantle several layers covering a bearing wall in the building, put an extra fire-safety layer on the wall, and order furniture with new dimensions. This design mistake brings an additional 15% Swiss franc cost, wiping out your profits from the project instantly. You are at the zero-sum game with the project.
You do not know who to blame and how to compensate for the damages. Your insurance policy does not cover the risk of such a costly engineering mistake. You also know that your internal engineering team was working on the building together with a third-party engineering provider. Although they used BIM (Building Information Modelling) in their work, it is impossible to track who is responsible for the design of this part of the building.
It is a real-life example that happened some years ago in Switzerland. Had the company been using a more technologically complex design solution with project stage sign-offs based on advanced cryptography and blockchain, it would be possible to track the mistake down to the originator and compensate the loss through professional liability insurance.
THE CONSTRUCTION INDUSTRY IS THE LEAST DIGITISED ONE
The Construction Industry is significantly lagging in digital transformation, remains highly inefficient, full of friction, with the majority of projects facing cost overruns. Extreme fragmentation of suppliers, service providers and contractors contribute to a result in a highly complex, overall costly industry. While shareable platforms and standards are developed, such as BIM (Building Information Systems), most information remains siloed in firms and projects.
Blockchain-based applications promise to remove friction, enable accountability and introduce transparency to processes in the construction industry.
CV VC and industry participants have identified promising areas of use, eliminating the risk of zero-sum projects for the industry participants.
REDUCING THE COST OF REGULATORY COMPLIANCE
Safety is paramount in any small or large project, be this in industrial, commercial or residential construction. Owners and contractors are required to maintain licenses on a company level, and individuals also have obligations to be trained for specific construction sites and maintain professional certifications. Currently, validation of such certificates is mostly a manual process, error-prone and very costly. Blockchain-based applications will enable companies to ascertain that only the personnel authorised is present and executes tasks on a job site. Other applications may include verification that all safety managers maintain their license at this very moment.
LIQUIDITY IN THE SUPPLY CHAIN IS CRUCIAL
Another real-life example: A Swiss residential developer ventured into the development market in Germany, acquiring several large-volume development projects in various cities. The bankruptcy of a German general contractor in one single project has brought the entire Swiss development group into financial distress, creating a need for several investors to step in with new capital to execute a bailout.
Construction supplier financing and lack of working capital count as two of the most significant problems in the construction industry. The challenge for many subcontractors and suppliers is to prove that they have received contracts and purchase orders from a well-financed, massive project. Blockchain applications where lenders can access information which is verified and shared by all parties, already exist for complex industrial and trade finance environments. For the construction industry, this will mean that suppliers can prove that they have been awarded a project enabling lenders to extend credit on trusted information, such as contracts, verified purchase orders and similar data.
TRACK QUALITY OF SUPPLIES AND MATERIALS
Supply chain and quality control of construction materials is a serious challenge on all construction projects. Due to cost-cutting and margin pressures, owners often cannot be sure that the specified material at the required quality is being used.
Track-and-Trace solutions based on blockchain will ensure no fake or lower quality materials are supplied to the construction site. Also, suppliers can document quality certificates and verify that their manufacturing processes and respective supply chains meet the standards required. This is especially important, as the industry has turned increasingly to litigation, and sizeable claims are common.
Imagine, there is a failure of a structural part, for example of a ceiling. All parties involved would want to be able to document who designed the structure and when which changes were made to the load requirements, which parts were delivered for construction, and the companies active on site for this portion of the work. The transparency and accountability introduced by Blockchain applications allowing for this kind of information to be available, will reduce the exposure from claims to the industry overall.
AUTOMATED PAYMENTS BASED ON SMART CONTRACTS
The construction industry is notorious for issues around payments, especially lengthy delays causing significant stress for all participants. Smart contract-based payment flows will dramatically improve the situation. For example, a contractor’s hours worked, or scope completed can be recorded in blockchain-based applications, allowing for automated payments by smart contracts. A further benefit is the visibility of amounts in escrow (also in smart contracts) which means that contractors can be certain to be paid when their portion of work is completed.
The condition necessary for such a system to work, is that every party in a project recognises blockchain as a single source of truth.
SUMMARY
The application of blockchain in construction can be summarised in three parts: BIM and smart assets management, supply chain management, payment and project management.
Construction is the least digitised industry in the world. Changing the way how architects, engineers, project managers, construction workers think, and work — is not easy. However, disrupters will be rewarded with generously — the productivity on the construction industry has declined over 10% in the past 50 years, while the productivity of the rest of the economy has increased by 250%.
Blockchain based applications have the potential to dramatically reduce friction and enable innovation in the construction industry at an unprecedented scale.
About the Authors
Ruslan Mahhov, Head of Advisory at CV VC
Ruslan’s background is in technology entrepreneurship, banking, and private equity. For the past 16 years, he has been building companies, teams and raised capital in FinTech, Financial Services, Industry 4.0 and SaaS in the roles of co-founder, investor, executive and creditor. At CV VC he is working with startups, corporates and investors to accelerate the commercial application of the distributed ledger technology by defining winning strategies and matching startups with capital.
Ralf Kubli, Director of CV VC
Ralf Kubli is focusing on investment opportunities and advisory in the Blockchain space and is engaged in tokenizing assets, securities and ICO structuring. Ralf’s goal is to enable easy to use technology delivering on the promise of decentralization on global scale. Prior to joining Lakeside Partners (later CV VC), Ralf built the business of an artificial intelligence startup in the USA. In the legacy world, Ralf spent 18 years in the automotive, aerospace, and specialty chemicals in senior management positions. Since 2015, when he discovered blockchain and crypto through an angel investment, he cannot unsee the potential of Distributed Ledger Technologies. After browsing with Gopher and coding HTML in the early days of the web, he returned to tech with AI and Blockchain.
