Frictionless Construction Contracts: can industry rise to the challenge?

With the digitisation of contracts destined to become the norm in the construction industry, the automation of contract management appears to be approaching the horizon line. This automation process is sometimes known as a ‘frictionless’ or ‘smart’ contract. But what exactly is a frictionless contract and how applicable is the technology in our current day to day work, and in particular to the most common construction industry contract forms, like the NEC family of contracts? At Procur3d, we’ve pulled together a short article to help de-mystify this new technology and raise some important practical integration challenges it will inevitably face…

What is a frictionless contract?

Essentially, it is an electronic contract that digitalises workflows and ‘handshakes’, enabling automated execution of a contract. One of the most successful, yet basic, examples would be Amazon, whereby simple contracts are agreed, executed, delivered, and sometimes disputed with little human intervention using very binary processes. In the physical environment, we will probably all find ourselves entering into a simple electronic contract to charge our electric cars at different car charging points in the nearby future.

Undoubtably Blockchain technology has a role to play in frictionless contracts too, and we are likely to see more products coming to market in the future which may have greater application in the construction industry. However, from a construction perspective, with the complexity of the works, myriad ‘friction’ points and the (sometimes antiquated?) ways of working, this makes frictionless contracts seem like a pipe dream. But is that true? And if so, what are the typical friction points challenging contract automation, specifically with the NEC form of contract?

Are NEC4 contracts suited to frictionless contracts?

At a cursory glance of the NEC 4 Engineering and Construction Contract, there are several ‘friction’ points:

For frictionless contracts to be adopted, they would need to effectively automate a series of small acceptances made by what can amount to a sizeable team of different individuals for larger projects. So, are NEC4 contracts really suited to frictionless contracts? In our opinion the answer to this is…. yes! But there are a few caveats...

The NEC has mapped its workflows in detail within its contract suites, so much so, that they have even created a set of flowchart books for their contracts. The payment process is a great example of a process flow that is well detailed (with a couple of Z clauses of course). This is great for building automated processes because developers can build programmes that understand that, for example if ‘X’ happens, then ‘Y’ is the result.

The NEC also demands quite a binary process to the management of its contracts. For example, where a submission is made to the Project Manager for acceptance, the Project Manager can either accept or not accept. Non-acceptance is limited to a number of pre-defined reasons. This is again advantageous for automation as the number of variables a programme must comprehend is limited.

Where the automation runs into trouble is the integration between existing software systems, variable contract terms and contract-specific specifications.?We often find:

• Without an upfront data strategy, a project’s software requirements are often procured intermittently resulting in misalignment and resource waste.
• The conditions of contract are often amended (via Z clauses) from project to project. Whilst this approach isn’t uncommon, the amendments often alter standardised workflows which can cause a challenge (albeit not insurmountable) to creating standardised software.
• The Scope/Works Information documents are often not structured to align with the workflows dictated in the conditions of contract, and details of key contract roles are often misaligned. In our experience, this area causes the biggest problem for automation but is easily solved with the correct structure and management during its development.

Industry Progress to date:

The construction industry has made important steps towards eliminating friction points in contracts like the NEC, with the introduction of:

• contract management software such as Asite, Cemar and Fast Draft,
• the adoption project bank accounts which help reduce payment delays to the supply chain,
• site inspection and quality assurance applications such as Autodesk Construction Cloud, Procore and
• contract development software such as our upcoming software, ‘Scope Assure?’, which can easily reduce the time required to develop Scope and review Scope changes due to compensation events.

These are of course in addition to BIM, but BIM is not the latest news by now hopefully!

A recent study by Morgan Stanley and Sirion Labs looked into the adoption of automation across ten different industries. They found that the construction and engineering industry second to last in most aspects when it came to contract automation, with only 34% of organisations studied stating that had an automated repository for signed contracts! This highlights that not only are there contractual challenges to frictionless contracts in our industry, but perhaps conventional ones too….

Summing up:

Our view is that whether we like it or not, technology is going to change the way we work with our construction contracts. The good news is that the industry is becoming more aware of the need to be more efficient in our contract management and there are tools becoming available to help the revolution take shape.

At Procur3d we are excited about how we can leverage technology to make our lives more simple, so get in touch if you want to find out how to prepare your business for the future!