By Lee J. Sacket, Esq.
The construction industry has traditionally been slow on change. Despite meteoric advances in technology, many construction project files are still paper based and disorganized, leading to inefficiencies, redundancies and sometimes, mistakes in services and delays in payment. Design professionals are typically reluctant to embrace all of the benefits of technology, which could facilitate a more efficient and profitable practice.
It is important to familiarize yourself with the trends in technology that are finding their way into the construction industry to stay ahead of the curve and determine if and how it might impact your practice. One such trend, which has been widely described as a “game changer”, is blockchain, which is already making waves in the construction industry through “smart contracts.”
Blockchain technology is a database technology that verifies and chronologically stores transactions. Each transaction is a block, added to the prior transaction or block. These blocks create a chain, i.e., blockchain. The buzz over blockchain is largely attributable to the success of Bitcoin, the world’s first form of cryptocurrency. Bitcoin utilizes blockchain technology to verify each data block and transaction, while limiting a user’s ability to duplicate, or misrepresent the value of the currency. Blockchains are designed to be faster and more secure than traditional databases and more cost effective, which is why the technology has become commonplace with banks and governments.
The blockchain database combines four central features, 1) it is public and not owned by any of the parties, 2) it is decentral, not stored on a single computer, but on many computers owned by different people located anywhere, 3) it is constantly synchronized to keep the transactions up to date and 4) it is secured by cryptography to make it tamper proof and hacker proof. The security aspect of the system is significant. The technology makes it difficult to change the rules that define the structure of a database or its content without consensus amongst the people who use it. The database can only have entries added; data can never be changed or removed because changing a single entry in an older block would mean rewriting the entire history of transactions subsequent to the block. This is the most obvious distinction between blockchain and traditional databases. Should someone tamper with the blockchain, all participants would know and it would be rejected by the network.
Some in the construction industry, most notably, design firms, have openly questioned the purported benefits of blockchain technology. For example, does blockchain really save time when each transaction requires multiple points of verification? Questions and concerns notwithstanding, blockchain has already made its way into the construction industry through smart contracts. While not a contract in the traditional legal sense, smart contracts serve as a method of controlling types of data and digital assets. Smart contracts can enforce the terms of an agreement by controlling the transfer of currency or other assets when specific conditions of the contract are satisfied. In the simplest terms, a smart contract is a computer program that works on the if/then principle. If the architect delivers the design development drawings, then he/she gets paid the percentage of compensation payable under the contract. If the contractor delivers the steel, then they get paid. These conditions are recorded on the blockchain and payment can be made automatically through cryptocurrency, without the need for a middleman. The automation of tasks that customarily are performed by people, in theory, reduces the time, costs and risks associated with them. Traditionally time consuming processes involving multiple parties, such as, change orders, requests for information and shop drawing review/approval, could theoretically become a thing of the past.
Blockchain technology and the use of smart contracts are working their way into the construction lexicon. While this technology is unlikely to become the standard bearer anytime soon, it is good practice to understand, investigate and consider industry-centric technologies, such as this one, to stay ahead of the curve and prepare your practice for the next big thing.
Originally published by Great American Professional Liability, Design Professional Risk Management Resource Spring 2019. Republished with permission .
About the author: Lee J. Sacket is a Partner at the law firm of L’Abbate Balkan, Colavita and Contini, LLP, with offices in New York and New Jersey. His practice focuses on commercial litigation and professional liability litigation, including the defense of architects, engineers and related design professionals. Mr. Sacket also drafts and negotiates contracts and regularly counsels his clients on risk management and presents seminars tailored to their specific practices. Mr. Sacket holds the Martindale-Hubbell® Peer Rating AV® Preeminent, its highest rating for ethics and legal ability. He was also named as a New York Metro Area “Rising Star” in 2015, 2016 and 2017 and has been rated as one of Long Island’s Top Ranked Lawyers by ALM and Martindale-Hubbell every year since 2015.
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