Riding the Wave: How the "Blockchain" Might Address Regional Industry Challenges

Can "Blockchain" (technically known as Distributed Ledger Technologies - DLT) solve common industry challenges in the region?

In my previous papers, I have explored several challenges that affect the performance, development and growth of the construction and engineering sector in the Middle East. Although the sector plays an important role in shaping the regional economy, authorities and companies in most countries are still reluctant to create a roadmap or set clear strategies to address these challenges. Issues such as poor management practices, poor regulation and compliance, lack of collaboration among project teams and information sharing, weak contractual governance structures, and poor payment practices are among the main reasons that have recently led to bankruptcies of some well-known construction companies in the region. Recent studies by MEED and Mckinsey show that insolvency rates in the industry were disproportionately higher than in any other sector last year. The same studies have tracked down the potential gaps and concluded that the construction sector is much slower than other sectors to move towards the age of digitalization, making the industry more vulnerable to the rapid changes that have taken place in recent times.

Despite several IT management initiatives have been introduced in recent decades to help the sector address some of the issues identified above, the construction sector, in general, is characterized by remarkably low levels of technological adoption and resistance to change and is notably lacking in the broader applications of Industry 4.0. Despite the significant role that such softwares play in facilitating practical project management tools, providing visual platforms and reducing costs, internal adoption of BIM or ERP in the region has been much slower than expected. Externally, local authorities only focus on compliance with local and international standards or funding requirements without adequately assessing the actual market capacity/capabilities or barriers their companies face when it comes to driving the?digital transformation. Therefore, a deep understanding of the complexity of the construction industry in this region is essential to understand the reasons for its shortfall.

"A deep understanding of the complexity of the construction industry in this region is essential to understand the reasons for its shortfall"        

Transparent and trustworthy data exchange is the main driver for many processes in the fourth industrial revolution. However, unlike other industries, the lack of trustworthiness and security in sharing information (e.g., about planning, procurement, construction processes, or operations between different teams and companies), as well as project time constraints and network cost-sharing, are among the most significant barriers to progress in the industry. However, DLT, commonly referred to as blockchain technology, has been the subject of much discussion recently. Many believe that it is the second wave of the industrial revolution that is also impacting the construction industry. The article shows how the main advantages of DLT, such as security, irrevocability, speed and immutability, will potentially overcome the above obstacles.

What is the Distribution Ledger Technologies??

The World Bank's publicly released guidance on the technology states, DLT refers there to a novel and rapidly evolving approach to recording and sharing data across multiple data stores (or ledgers). The technology allows transactions and data to be recorded, shared, and synchronized across a distributed network of different network participants. A "blockchain" is a specific type of data structure used in some distributed ledgers that store and transmit data in packets called "blocks" that are linked together in a digital "chain." Blockchains use cryptographic and algorithmic methods to record and synchronize data across a network in an immutable manner. For example, a new digital currency transaction is recorded and transmitted to the network in a block of data that is first validated by network members and then linked to an existing chain of blocks, creating a blockchain. Since the linear chain grows as new blocks are added, no network member can retroactively change previous blocks. It should be noted that not all distributed ledgers necessarily use blockchain technology, and conversely, blockchain technology can be used in different contexts [1]. See the Figure-1. ??

Figure-1 : Source: WBG (2017) (Adapted originally from: "Dubai Aims to Be a City Built on Blockchain", By Nikhil Lohade)

Experts are increasingly emphasizing that the DLT blockchain could match or surpass the value and impact of the Internet in the coming decades due to its unique features and valuable services [2]. It can potentially transform the way business is conducted by driving digital transformation in many, perhaps all, industries that rely heavily on financial transactions and information sharing, such as construction. Table 1 provides an overview of the key features and likely challenges of the application.

Table-1: DLT key features and likely challenges of the application.?

DLT trends and the impact on the Construction

An exciting paper titled Blockchain in the built environment and construction industry by Jennifer Li, David Greenwood, and Mohamad Kassem in automation in Construction Journal in 2019 provide a systematic overview, conceptual models, and practical use cases for the technology [3]. As shown in the grey boxes in Figure-2, the study established seven categories for the emerging applications of DLT; at the level of interaction between applications, I extended this model by dividing the applications into two categories (e.g., SmartCitizens, Right Regulations). In my opinion, citizens can share and use the best new practices if the right technologies are used with the appropriate regulations to achieve the desired technological outcomes. This is also true for the construction industry, but the construction sector must first adapt to, leverage, and support these new trends.

Figure-2: DLT application and the extended interaction model?

The current construction business model, therefore, needs to rethink its design principles and the tools and techniques used (e.g. introduction of automation) for newly built facilities or when renovating/repairing existing facilities [3]. This includes considering new strategies during contract negotiations. At the functional level, BIM is likely to be in greater demand as a precursor to the implementation of smart contracts (as will be discussed later). Researchers emphasize that BIM and DLT should be seen as part of the concurrent BIM revolution in construction that started a long time ago. If all goes well, the new environment (collaboration and trust) and increased technology adoption (transparency and automation) are likely to reduce the current high levels of bureaucracy, competition and complexity in the industry [2][3][4].

"The construction sector must first adapt to, leverage, and support these new trends"        

DLT on-hand Applications?

As mentioned above, one of the key benefits of DLT for the industry is that it can help overcome the observed lack of trust and facilitate information sharing internally and between counterparties. The strong potentials of DLT integration within construction functions are, therefore:

1-?????Contracts Management?

The construction industry is well known for its long list of disputes between the parties involved. As mentioned in one of my earlier articles, the weak contractual governance structure and commercial nature in the region, as well as the problem of non-payment or late payment, play a prominent role in this regard. According to experts, Smart Contracts will help overcome or reduce this persistent challenge. Lamb (2018) has defined Smart Contracts as a computer program consisting of if-then statements that divide work into smaller measurable work packages (usually within a defined work breakdown structure) that automate the process of compliance and payment. Put simply, the algorithms and rules used by DLT for contract terms automatically trigger the agreed-upon fees when milestones are reached or work packages are completed [5]. This significantly is likely to reduce disputes over contract terms, as the terms and payments for the work are clearly defined by the automated governance structure.

?Such an approach will disrupt our traditional forms of construction contract management and the way we understand our obligations, requirements and liabilities as set out in contracts (i.g, The coded conditions and terms, transactions executability). Emerging DLT approaches, including security and traceability, are expected to help the industry reduce costly administrative costs, better control and manage contract obligations, improve communications, and mitigate risks associated with current contract administration systems [5][6]. Recent financial speculation about currencies aside, smart contract transactions have been substantial over the past five years and continue to grow (see Figure 3). American Bankers believe this trend will accelerate over the next decade [7].

Figure 3: Adopted from (AmericanBanker.com)

2-?????Procurement, Supply Chain and Logistics Management ?

There is no great potential to integrate DLT into construction processes, such as Supply Chain Management. The complexity of the Supply Chain there involves dealing with a multitude of stakeholders (i.g., suppliers, transporters, authorities, materials and services providers, etc.). Although, conceptual procurement processes in various regional companies are still characterized by rigidity, many handwritten records, manual data entry of quotes and purchase orders, and insufficient transparency and tracking measures. Despite the important role played by procurement in strictly time-bounded projects, Alireza (2019) points out that most of the related procurement and supply chain management transactions in construction are fragmented and lack transparency and security [5]. Therefore, a decentralized and digitized network such as DLT will suit the workflows in the industry and can help companies manage supply chain data and improve their current supply chain performance.

?For example, DLT can help the construction industry with challenges related to the traceability of materials. Integrating the Internet of Things or RFID tags with DLT (i.e. Blockchain) can provide a real-time material monitoring system that leads to efficient site management and increases operational efficiency, i.e. meeting contract deadlines or responding quickly to any risks. On the other hand, smart contracts open up numerous opportunities to solve trust issues in construction supply chains. The use of these types of contracts would make it easier for suppliers to quickly submit their identity certificates to the clients or authorities. Buyers can quickly validate these identity certificates and view the vendor's track record to verify its reputation and capacity against past work [4][5]. As a result, a buyer and a seller/supplier can complete a transaction or communicate with each other without knowing and trusting each other - see Figure-4.

Figure-4: Blockchain Schematic flow in one of the Construction firms ( Source: www.enstoa.com)??

3-?????Finance and Accounting ?

It is proposed that cryptocurrencies such as Bitcoin or Euthrium be used as payment or collateral in smart contracts and/or supply chain transactions. Despite the current fluctuations in the value of these cryptocurrencies, experts believe they will help overcome the corruption often seen in the regional construction sector due to lack of transparency. By integrating existing payment accounts and the blockchain network, as well as scheduled payments, risk management, and authentication, DLT provides companies with a trusted and secure platform for managing cash flow and financing construction projects. For instance, Swam (2015) highlights that DLT networks operating strictly on a peer-to-peer basis will replace the need for traditional capital financing systems for projects. Therefore, they are expected to solve the problem of mistrust between investors (in the case of fundraising or crowdfunding) and megaproject clients and provide significant access to financing for large-scale projects in cities and countries where barriers currently exist (i.e. developed countries) [4][8].

4-?????Building Information Modeling (BIM)

There is no doubt about the revolutionary introduction of building data modelling in the construction industry. The BIM is a digitized process supported by various tools, technologies, and contracts that involve the creation and management of digital representations/visualizations of the physical and functional characteristics of the project's construction. For large projects, BIM plays a vital role in supporting the decision-making process. However, the centralized storage and maintenance of shared data from BIM, where all information is stored in a common project file, and the trust issues pose a major challenge for adoption. To illustrate, the existing centralized BIM platforms have a limitation in recording and tracking design changes. There is no chronological record of the changes made, and the revisions made are usually updates and replacements of existing data. Therefore, the designer must coordinate the conservative changes separately with the other consultants and the contractor, which requires additional resources and is time-consuming. If the design coordination is not done correctly, the situation can get worse [4][5][7][9].

?Be that as it may, the features of DLT described above offer a potentially efficient solution to such challenges. For example, Blockchain is an always up-to-date distributed ledger system with high security. It can be used as an infrastructure for maintaining BIM models during the project lifecycle. According to scholars, it would improve collaboration among the many stakeholders on the site of a project and reduce business interruptions related to BIM claims or errors. The technology could also provide time-stamped, tamper-proof data, meaning it could pinpoint a party who made a mistake in the design or miscommunication. Any change in the model is recorded and communicated to others in the network.

?On the other hand, linking the model BIM of a project to a smart contract would require an information system that links project elements to reality and reflects project progress in the model. The Blockchain can be used separately or in conjunction with the smart contract control system to link the BIM model to the smart contract and update the BIM model according to the progress of the project, according to Alireza (2019). The smart contract program can be applied to the model elements of BIM and linked to the project reality through the Blockchain. The result is that the actual construction must match the model in order to receive compensation. If the contractor finds a conflict or error, they can send a change order or request, which is securely timestamped and recorded. Granular work progress can be tracked on the model with or without reality capture technologies. The inspection process can be performed manually or automatically using reality capture technologies such as 3D laser scanning or lidar [4].

For those interested, BIMCHAIN (www.bimchain.io) is an already established application that combines the concept of BIM with Blockchain. It aims to improve the current limitations of building information management BIM in terms of ownership, traceability and accountability [4]. As suggested by the researchers also, I believe that the future adoption of BIM will focus more on the integration of Blockchain with the Internet of Things (IoT) and RFID for the entire Supply Chain Management.

The Residual Challenges?

This article is not intended to show that DLT is the magic key to solving all of the industry's dilemmas. Rather, the technology is still in its early stages, and there are many implementation challenges associated with the adoption of any new technology/philosophy/strategy. Implementation barriers include the lack of governance and regulations around DLT transactions, the lack of required skills, the complexity of systems due to the involvement of many parties, a plethora of outdated contractual and procurement policies and procedures, and most importantly, the associated costs (given the pressure of lower profit margins faced by companies in the region).?

"Still the lack of required skills, the complexity of systems due to the involvement of many parties, tons of outdated contractual and procurement policies and procedures, along with the associated costs remain biggest chllanges to move forwared"         

?Worth noting still, the World Economic Forum has published a framework at White Paper to help executives assess whether a DLT-based solution is suitable for a company's needs and can fit with their business models [3].

Figure-5: Decision Tree to assess if a distributed ledger is required (adopted from Li, Wood & Kassam (2019))??

Concluding Remarks?

In my earlier articles, I have dealt with various problems of the regional construction industry. An in-depth analysis of the current state of the industry has shown that the sector lacks digitalization, which could be one reason for the recent challenges facing the industry. Among the potential solutions that are increasingly being adopted by other sectors is DLT, or what is commonly known as the Blockchain. As DLT applications are still in their early stages, this article aims to explain how the key features that DLT currently offers could allow the industry a unique opportunity to reform its highly bureaucratic practices, supporting technological advancement and overcoming many challenges.

References

[1]???World Bank Group. (2017). Distributed Ledger Technology: FinTech Note | No. 1. Washington, WBG.

[2]???Sharma, M. G., & Kumar, S. (2020). The Implication of Blockchain as a Disruptive Technology for Construction. IIM Kozhikode Society & Management Review, 177-188.

[3]???LI, J., Wood, D. G., & Kassem, M. (2019). Blockchain in the built environment and construction industry: A systematic Review, Conceptual Models and Practical Cases. Automation in Construction, 288-307.

[4]???Kiu, M. S., Chia, F. C., & Wong, P. F. (2020). Exploring the potentials of blockchain application in the construction industry: A Systematic Review. INTERNATIONAL JOURNAL OF CONSTRUCTION MANAGEMENT.

[5]???SHOJAEI, A. (2019). EXPLORING APPLICATIONS OF BLOCKCHAIN IN THE CONSTRUCTION INDUSTRY. Interdependence between Structural Engineering and Construction Management, Edited by Ozevin, D., Ataei, H., Modares, M., Gurgun, A., Yazdani, S., and Singh, A.

[6]???San, K. M., Choy, C. F., & Fung, W. P. (2019). The Potentials and Impacts of Blockchain Technology in Construction Industry: A Literature Review. Series: Materials Science and Engineering 495.

[7]???Pai, V. (2019, April 12). BankThink Smart contracts are an intelligent way to streamline payments. Retrieved from American Banker: https://www.americanbanker.com/payments/opinion/smart-contracts-are-an-intelligent-way-to-streamline-payments

[8]???Swam, M. (2015). Blockchain Blueprint for a New Economy. O’Reilly Media.

[9]??Kima, K., Leeb, G., & Kima, S. (2020). A Study on the Application of Blockchain Technology in Construction Industry. KSCE Journal of Civil Engineering, 2561-2571.

Disclaimer

The views and opinions expressed herein are my own and do not necessarily reflect the official policy or position of any of my Employers or any other group or individual. The information provided is collected from different literature sources, media news and only intended to be a general discussion to the public. It is not intended by any means to take the place of the written guidelines and regulations or professional advice specific to any company's situation or structure.?Last, for any citation to this piece of work, you are most welcome but don't, please forget to mention the source and the author's name