20 December 2016

Smart contracts are required to meet the needs of Digital Built Britain, whose report recommends that “The time has come for the construction sector to reform by seizing the opportunities offered by the Digital Economy.”

To meet the challenges of the future, the industry needs more than 'merely' adopt Building Information Modelling and discrete innovations such as smart cities, electronic-tendering and protocols (Wikipedia's definition of smart contracts provides a useful starting point). Digital Built Britain requires fully computerised construction so the industry will need to change the way it procures projects, not in terms of new paper collaborative contracts, but with smart contracts.

What is a smart contract?

The term smart contract refers to a computerised protocol that negotiates, verifies and automates the performance of a contract.

Smart contracts can provide better protection than traditional wet-signed paper contracts (digital archiving), be changed during the project (flexibility), and are easier to administer (decreased transaction costs) compared with current contracting procedures.

Misleadingly, the term is often used to describe contracts which can be negotiated, distributed and signed electronically - the paperless or electronic contract. Although electronic contracts are a major improvement on paper documents, they do not bring true innovation to the contracting process. They merely simplify how we create contracts, not how those contracts are planned or used.

Currently the best contract technology we have in the UK construction industry (for example, JCT Digital) - enabling us to negotiate, complete and sign contracts electronically – is just tinkering around the edges. We aren’t innovating when it comes to the content of contracts or the contracting process. True digital contracts are those which are negotiated, completed and archived wholly digitally, within a digital document sharing framework.

Until all the project and contract documents can be created, stored, indexed and recovered in an on-line system, paper will continue to blight the industry. As well as the up-front simplification, digital contracting will provide simple audit trails and records in real time which would simplify resolving claims and disputes.

A coherent, mature and fully digital contracting process would allow the planning (briefing and tendering), creation (choice, negotiation and award) and use (commencement, to completion and beyond) to be managed digitally.

Moving from digital to intelligent and smart

But digital contracts are neither smart contracts nor intelligent contracts. Intelligent contracts ask better questions of the contract users and use logic to plan, create and negotiate bespoke contracts based on the users’ answers. Intelligent contract systems could replace an entire suite of standard forms with one single access questionnaire portal. Depending on the answers given, the intelligent contract builder would adopt only the clauses relevant to the needs of the project and the users.

Such intelligent contract systems could be developed to import smart elements into longer digital contracts, such as using code to automate:

  • Delivering the agreed contracts to specified parties for digital execution
  • Updating the works programmes based on agreed variations or compensation events
  • Paying the supply chain based on (automated) certification of monies due
  • Releasing copyright documents (having scanned contracts incorporating licence agreements)
  • Withdrawing security access for staff no longer permitted on site eg due to termination
  • Submitting claims from companies based on weather data analysis, instructions issued by the contract administrator, or logged risk events.

As the failure of the supply chain to read, understand or operate construction contracts as intended is a major cause of global construction disputes, then intelligent and smart contracts will not only help us achieve the goals of Digital Built Britain, they will radically reduce the scope, type and size of contract disputes.