Open access peer-reviewed chapter

Automating the Chaos: Intelligent Construction Contracts

By Alan McNamara

Submitted: July 9th 2019Reviewed: December 5th 2019Published: May 13th 2020

DOI: 10.5772/intechopen.90764

Abstract

At the centre of all construction projects is the contract between the client and contractor and, as any construction project is a relatively complex process, the industry has demanded contracts of greater sophistication as the sector has evolved. The construction industry has a reputation for being adversarial and motivating dispute and the deep-rooted cultural aversion to trust. It is postulated that the solution to the trust issue is to make contracts trust-less. Truly autonomous, intelligent contracts would minimise the need for conventional human management. Put simply, intelligent contracts (or ‘iContracts’) are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. The proposal of embedding the terms and conditions of an agreement into a digital entity contrasts immensely from a traditional paper contract which is generally only used only as a reference when parties are in dispute. By creating an all-encompassing contract process—that: ensures all parties adhere to the terms agreed; offers protection of payment, insurance and data; as well as the potential to increase efficiency and reduce risk—it should make the successful implementation of iContracts the top priority for the construction industry.

Keywords

• iContracts
• intelligent contracts
• digitalisation
• automation
• blockchain

1. Introduction

Globally, construction spending is projected to reach US$12.4 trillion by 2022 [1]. In the United Kingdom alone, it is estimated £600bn will be spent over the next 10 years on public and private infrastructure resulting in efficiency and productivity improvements in the delivery of construction projects becoming strategic priorities for the UK Government [2]. The construction sector faces many challenges including; low productivity, poor regulation and compliance, lack of trust, inadequate collaboration, information sharing, and poor payment practices [3, 4]. Whilst productivity is a major problem it also presents as one of the biggest areas for potential improvement with McKinsey Global Institute [5] reporting a global productivity gap of$1.6tr that can be addressed by improving the performance of the industry. The industry is perceived as slow to innovate, particularly in its adoption of digital technology but digital transformation is slowly gaining traction with increased use of Building Information Modelling (BIM) and emerging technologies based on Blockchain, Internet of Things (IoT) and Smart Contracts being touted as a solution to the industry’s problems [6]. However, the integration of these digital concepts and technologies has not yet been achieved due to the embryonic nature of the field with further developments required to build a case for widespread adoption.

The construction sector is becoming more digitalised with BIM being the main catalyst for digital transformation seen in the sector in the last 15 years [7]. Smart contracts are seen to be one of the key complementary concepts to BIM due to the increased capabilities the automation of contract clauses will afford any user [8]. New digital technologies are emerging to address some the key concerns hindering collaboration in the construction industry and have the potential to change the way the sector operates, leading to better auditability and traceability encouraging more collaboration and information sharing [9]. In an industry that has historically lacked technological advancement and innovation, the construction industry is slowly being dragged into the digital age but there are many challenges to be addressed before true digital transformation is realised. Examining barriers to implementation and prevailing stakeholder attitudes are also crucial in envisioning this departure for construction and engineering contracts.

This chapter will define the iContract technology along with a state of the art of current research. It will highlight the challenges and barriers implementation of the concept will face, along with the opportunities it would bring as the construction industry enters further into the digital age.

2. Background

2.1 Striving for collaboration through contracts—is standardised really the standard?

The level of collaboration and the nature of a contractual relationship are usually dependent upon the proximity of the parties. Historically only simple contracts are adopted where person to person relationships are created and where high levels of trust already exist. The evolution of society and commercialism has now meant that more personable relationships are harder to come by or do not exist at all, and it is necessary to express more aspects of any commercial relationship through more defined contracts. Open competition and globalisation of contracting activity can be a barrier to developing trust leading to the creation of more sophisticated and detailed contractual arrangements in lieu of existing trusting relationships.

Standard forms of contract, so lauded by the construction industry, have the downside of restricting the freedom to contract upon one’s own terms and therefore are contrary to an open market approach. Standard contracts certainly have their place in bringing consistency to the industry’s contractual practices, but it must be remembered that most construction projects are a one-off prototype that require more specific terms. Standardised contracts would have a greater impact in a more heavily planned and regulated sector, which the construction industry would certainly benefit from but does not possess. The alternative, to adopt non-standard forms of contract, produces higher transaction costs and loses the benefits of familiarisation leading to extended contract formation and negotiation periods. However, digitalisation offers solutions to these problems and can improve the efficiency and communication process promoting instant collaboration and mitigating the level of disputes.

The reliance upon looseness of language and implied terms in an attempt to achieve flexibility, and reduce the content of contracts, is a practice that offers the double-edged sword of alternative interpretation and opportunity to act against the spirit of collaboration. A road well worn by construction companies put under pressure. This practice is only worth considering if the implied terms are such that they are well known and fully understood by all parties, which is generally only built from past engagements. Digitally coding such terms may assist but there are limits to the help this would offer and the logical coding of flexible arrangements has its challenges.

There is an apparent trade-off between a standard contract which in a general sense is understood but does not meet the real needs of the parties, and one that meets this need by producing a bespoke and detailed contract. Some commentators have argued that users do not ‘really’ understand standard forms of contract. The compromised situation of producing bespoke contracts with common clauses may actually improve standardisation and understanding when compared to the current practice of bastardising a standard form of contract beyond recognition to suit one’s needs.

2.2 Industry 4.0—the digital dawn

Industry 4.0 is the era where computer power becomes more embedded within society and possibly even inside human beings [10] and has been used to describe the 4th Industrial Revolution by pointing out its huge technological potential, comparable to technical innovations which led to the first industrial revolutions [11]:

1. the field of mechanisation;

2. the use of electricity and;

3. the beginning of digitisation.

In the United States, construction is the least digitalised sector and has been publicly perceived as an industry with poor productivity and a low level of technology implementation whilst the financial industry and business services show the highest levels of digitalisation [12]. Construction is one of the largest and most significant industries in Australia, contributing to economic growth and jobs (ca. 9% of jobs). In 2010, the industry was considered the fourth largest industry in the country [13].

The Farmer Report [3] outlines a case for digital disruption in the UK construction industry and sees the following as ‘critical symptoms of failure and poor performance’:

• Low productivity

• Low predictability

• Structural fragmentation

• Low margins

• Adversarial pricing models and financial fragility

• A dysfunctional training funding and delivery model

• Workforce size and demographics

• Lack of collaboration and improvement culture

• Lack of R&D and investment in innovation

• Poor industry image

This is set against an industry which is not applying for billions of pounds of R&D Tax Credits, set up by the UK Government to stimulate innovation [14].

Joseph Schumpeter explained the challenges when new innovations disrupt the traditional way of life as, ‘Creative Destruction… Just as the day Samuel Morse invented the telegraph was a bad day for the horse back messenger, significant technological disruptions can be destructive for older more established workflows that do not adapt’ [15].

From a technical point of view, Industry 4.0 can be described as the increasing digitisation and automation of the manufacturing environment as well as the creation of a digital value chain to enable the communication between products and their environment and business partners [16]. The industry specific definition of the Industry 4.0 concept for construction comprises a large range of technologies to enable the digitisation, automation and integration of the construction process at all stages of the construction value chain. Central technologies like BIM, Cloud Computing or the IoT are only a few of them some of the main, well known technologies. Typical base technologies and concepts of Industry 4.0 are: The IoT/Internet of Services (IoS), Cloud Computing, Big Data, Smart Factory, 3D-Printing and the Cyber-Physical Systems (CPS) or Embedded systems. There are also emerging technologies: Augmented Reality (AR)/Virtual Reality (VR)/Mixed Reality (MR) and the Human-Computer-Interaction (HCI) are major components of Industry 4.0 to enable a digitised and automated construction environment.

These technologies are at different levels of maturity. Scheduling, communications and BIM, among others, have reached market maturity and thus are currently available whilst others, such as IoT and AI, are still at the formative prototype stage. Despite the maturity and availability of many technologies, their widespread adoption by the construction sector has been slow but there are signs that there are practical ways for the successful adoption of new technologies to digitise and automate the construction process. Even though these technologies can have hard to predict cost savings due to the increasing need for data security and data infrastructure. From the technical point of view, there are several unsolved problems and challenges to be met due to the lack of standards for many new technologies and the higher standard of IT infrastructure required to run them. Regulatory compliance and legal uncertainty are other issues to be considered. Considering all these challenges, it is clear that companies must be motivated to commit to the adoption through government initiatives or funding programs [17].

4.2 Challenges and barriers and possible solutions

4.2.1 Innovation adoption in the industry

The construction industry is seen to be typically slow at adopting new technologies and historically resistant to change. Some commentators offer the opinion the sector is not yet ready for the level of collaboration and information exchange required for a digital automated contract to be successful [39]. Some believe that due to the technological state of the industry being insufficient, implementation of blockchain and other digital solutions is likely to be costly [40]. Generally, digital technologies are presumed to increase productivity, but this is not always the case as, if it is not combined with efficient and streamlined processes or when organisations lack a collaborative environment, it can struggle to make an impact.

The key to evolving construction will be having a robust enough central management system that will allow digitalisation and automation to flourish. The construction contract between the stakeholders of any construction project is the central point that all data must flow in order to be analysed and actioned. The construction contract must therefore have a greater capability in operating in a digital world, where the abundance of data to be considered will only continue to increase. The industry must overcome the institutional inertia that is ingrained its culture to present the appropriate digital environment for the iContract to flourish.

4.2.2 Handing decision making to an automated process

When contemplating the prospect of an iContract process the question of whether a party has the right to challenge any decision made by the automated process and what protocols would be required to retain a user’s right to question a decision without negating the purpose of the automation in the first place. Commentators on iContracts have discussed the need for the ability to regain control of any automated system in the event of an unpalatable outcome to be perhaps agreed by all parties. Acceptance of the iContract certainly leans towards a semi-automated version of the iContract where the majority of the groundwork is carried out by the software with a human supervisor. This may offer an element of comfort as the concept evolves towards a more ingrained autonomous role in the future.

An element of surrender to an automated system has been identified as a limitation to the industry [39]. Traditional construction contracts require judgement and discretion which is extremely different to code. The benefits of iContracts are diluted by the logical ‘1 or 0’ process it must rely on. The alternative is that computers are a tool and can perform a good deal of the repeatable aspects of construction whilst allowing for human input on the more sophisticated tasks or act as a hold point for any critical decision. This is the semi-automated position advocated as likely to be the work around in the short to medium term.

A phased based approach, much like the BIM levels, appears to be the likely roadmap with a semi-automated process being developed using existing contractual procedures. Identification of the processes that would achieve the greatest cost/quality/time saving, whilst achieving confidence in the process by giving an element of human control, should make the concept more appetising for the industry.

4.2.3 Technological and data requirements

BIM’s establishment in recent years has laid the foundation for iContracts to operate. The counter-argument that iContracts would not need to align so closely with the BIM agenda due to basing themselves as not one multi-party contract but a collective of possibly thousands of contracts is also something to be considered.

Given the embryonic stage of the iContract concept and the lifecycle of new technology in general, it is expected that many of the challenges highlighted will be solved as existing technologies evolve. Through cloud computing it is possible to access and combine data from various emerging construction software applications through data virtualisation and an Application Programming Interface (API) that allows data from one application be used by another.

The appropriate regulatory and technological infrastructure must exist in order for the iContract to thrive long-term. Facilitating its adoption and integration with other established technologies such as BIM, scheduling software, communication and document control software and other Project Management tools will be critical to the success of any iContract platform. Figure 3 shows the possible relationships between the physical world, the construction information environment and an iContract based on a blockchain platform.

4.2.4 Perceived legal inflexibility of a digital contract

The adoption of an iContract faces many challenges from a legal perspective as the irrevocable nature of a coded document poses problems in terms of satisfying the contracted parties that the coding is operating within the same parameters of a traditional manual contract. The element of trust required in the system is something that is not required within the traditional model.

Manual construction contracts deal with uncertainty by containing wording allowing a flexible approach to be taken when situations arise. One of the main perceptions of automated contracts is that they will be incapable of dealing with the ‘wriggle room’ that exist in traditional contracts. A computer programme is made up of algorithms which are essentially ‘if x = y then z’ and the ability for iContracts to deal with change and uncertainty will be a major barrier preventing their adoption. The difficulty in replacing subjective ‘loose’ wording with computer code is a huge challenge in order to cover the multitude of variables encountered on any construction project but this is again where a semi-automated human-interaction hybrid model may ease sceptics of the technology.

The recurring theme in most commentary on the automated contract subject is that construction projects are unique, and the size and complexity of projects will be a substantial obstacle for the iContract to overcome. The degree to which they are truly unique is certainly open to debate as the industry evolves to a more manufacturing-based model and fact that all construction projects involve elements of repeatable processes that can be automated lends itself to automation.

5. Conclusion

Technological innovation is occurring at a growing pace as society has entered the digital age, and the construction industry is in a race to catch up with the digital capabilities of other sectors. Unfortunately, the construction industry has a historically short-sighted view on innovation with investment relying on immediate value. Knowing the antecedents of usefulness for any technology gives organisations the tools to present the case for adoption more effectively and convincingly. The iContract must present value to its users through the identification of the repeatable processes that it could be applied to. By the careful targeting of the technology to address the ‘low-hanging fruit’ problems of current contractual practices, the iContract can gain acceptance and begin to push the boundaries of digital automation into the contract process.

The notion that iContracts will be autonomously controlling construction projects based on data from advanced sensors acting as a certifying authority will not be achieved overnight. The advances in BIM, in multi-party contracts, in project insurance can all be seen as a pre-cursor for the type of paradigm shift required to achieve autonomous construction. Ultimately, addressing the current technological barriers is a waiting game for the iContract concept to reach the stage of maturity where it is indisputable from a legal perspective.

The iContract concept would bring enough disruption to reform contract practices within the construction industry and support its advancement into the digital revolution. This would allow the industry to better manage resources, reduce costs, reduce project durations and reduce dispute. As the iContract concept evolves, many of the challenges identified would be addressed and further opportunities will become apparent as trust in digitalisation increases.

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© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 License, which permits use, distribution and reproduction for non-commercial purposes, provided the original is properly cited.

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Alan McNamara (May 13th 2020). Automating the Chaos: Intelligent Construction Contracts, Smart Cities and Construction Technologies, Sara Shirowzhan and Kefeng Zhang, IntechOpen, DOI: 10.5772/intechopen.90764. Available from:

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