Infrastructure and buildings play a key role in driving economic growth and enabling a high quality of life. Research by Arcadis highlights that almost 40% of global GDP is derived from built assets.
However, the industries that deliver this essential investment are often inefficient. Based on a report by McKinsey & Co, for example, large capital projects typically cost 80% more than budgeted and run 20 months late. Globally, construction productivity has not improved in 20 years, but as the Fourth Industrial Revolution accelerates, it is increasingly clear that the creation, use and operation of infrastructure will be disrupted by digitisation. The elimination of business process waste associated with construction alone has the potential to drive savings of at least 5%, potentially worth $200-400 billion across global markets.
One of the most potent disruptive technologies is blockchain. Distributed ledger technology (DLT) could potentially transform the way in which infrastructure is created, financed and consumed.
By eliminating transactional costs associated with fragmented supply chains, blockchain drives value by simplifying processes. By providing greater transparency, blockchain will facilitate greater trust and collaboration in a sector which is fragmented, adversarial and, in some markets, vulnerable to corruption. By increasing the availability of data, blockchain will contribute to the wider adoption of digital in the built environment industries.
A big problem with blockchain is the hype, in part because of extravagant claims for the transformation potential of disintermediation and process automation. Construction and blockchain have great potential, but effective applications are likely to focus on simple transactions rather than complex design processes or dispute resolution. However, for any DLT solution to work in construction, there are performance, cost and environmental impact issues associated with blockchain’s ability to handle large volumes of data and its consensus methodology that need to be addressed.
Until that is the case, DLT solutions will be restricted to niche applications, where the use value of records, such as the validation of the sourcing of diamonds, far outweighs the transaction cost of using DLT.
In this review, we focus on 8 simple interventions at different stages of the asset lifecycle, highlighting how very high costs of waste and duplication could potentially be eliminated, including use cases such as the creation of blockchain-backed markets for standard digital component designs, as well as keeping records of work to ensure the safe operation of an asset throughout its lifecycle.
What is blockchain and how can it be used in the built environment?
A blockchain is a decentralised data repository. It provides an immutable record of transactions performed across a network. Blockchain potentially eliminates the need for intermediaries and many businesses are betting that blockchain will enable new means of delivering services through disintermediation. In addition, value propositions associated with the attribution and hosting of data may create new ways to operate infrastructure more effectively.
Some DLT applications are run privately, but most are designed to be accessed by a wider group of stakeholders. Public blockchain applications including many cryptocurrencies require no permissions to participate. Other hybrid solutions such as IBM’s hyper-ledger are public, but access is restricted using permissions.
Permission-less blockchains have unique characteristics that create the potential for networked markets and trust-less transactions. These include:
Distributed networks. A blockchain is hosted on multiple nodes across a network. This capability facilitates market disintermediation.
Blocks. Blocks are a set of transaction records, creating a compete, permanent, tamper-proof record. This capability facilitates new markets underpinned by data.
Verification and security. In public blockchains, new blocks are validated using consensus mechanisms such as the proof of work methodology which supports trusted transactions. Blockchain also benefits from very high levels of encryption.
Permissioned blockchains share many of these characteristics but use methods such as the periodic testing of duplicate blockchains held on different nodes to demonstrate the integrity of the ledger. This reduces the cost of operation but to an extent compromises the extent to which a blockchain can be considered trust-less.
Given the fragmented nature of most global construction industries and low levels of technology adoption and productivity growth, it can easily be argued that the built environment industries are unlikely to adopt blockchain quickly. However, there are many aspects of the built environment industries that will benefit from transformation through blockchain. Examples include:
- The potential for DLT to deal with data sourced from across complex business networks. This is well aligned to the fragmented construction supply chain or to multiple asset users such as apartment residents;
- The role of the immutable ledger in storing a recognised single version of the truth, subject of course to the limitations imposed by data privacy.
- The role for smart contracts enabled by blockchain to automate many of the simple, transaction-based exchanges that are part of routine construction and asset management.
Identifying opportunities for blockchain in the built environment
Our assessment of the potential for DLT points to the need for a selective approach to identifying the best opportunities for blockchain in the built environment. These are likely to be simple use cases that create value by eliminating waste, which can be widely adopted across construction business networks.
In our analysis, our focus is on a series of use cases across all stages of an asset lifecycle to identify whether there are opportunities for DLT to transform and add value. Rather than thinking of blockchain as a single, all-encompassing solution, we have unpacked the capability of blockchain – highlighting that different use cases rely on distinct characteristics of DLT-based solutions. The capabilities which we call out in this paper are:
Transparency – Ability to make full sets of information available to selected parties;Immutable records repository – Confidence underpinned by a time-stamped, tamper-proof and assured data set;
Dis-intermediation – Elimination of intermediaries and latency in transactions and acceleration of disruptive innovation;
Automated trust-less transactions – such as the recording of exchanges between organisations and individuals within complex, fragmented marketplaces;
Smart contracts – automated low-cost, pre-set transactions triggered by changes in the blockchain; Currency – digital payment avoiding costs of intermediaries.
Repeated analyses have highlighted the slow take-up by businesses in construction and the built environment of technology solutions. There are many reasons for this including the low capitalisation and low profitability of the industry.
However, there are good reasons to predict that DLT will contribute significantly to the transformation of the industry. Three characteristics highlight a strong alignment with blockchain-based solutions. These are:
- The distributed nature of owners, suppliers, users and stakeholders, which favours the use of networked data platforms;
- The role of intermediaries at all stages of the asset life cycle;
- Low levels of trust and transparency, result in unnecessary costs and process latency.
However, the fragmentation of the industry which underpins these opportunities also creates substantial barriers to adoption. For example, the sheer volume of transactions that take place on a construction project will place a huge burden on a DLT unless some hybrid combination of blockchain and database is adopted. Furthermore, until the costs of blockchain transactions fall, and until data protection measures are in place, there will be little opportunity for the technology to add value to a fragmented, low-margin industry.
In conclusion, blockchain is at the peak of the hype cycle, based on the idea that wholesale aspects of business process can be transformed or eliminated using DLT. In sectors that process huge volumes of identical transaction types, such as retail, financial services or manufacturing, the potential for private blockchains is clear. In the fragmented built environment sector, the opportunities are harder to identify. Finding simple, worthwhile opportunities to eliminate waste will be the best blockchain prescription for built environment industries.
Peter Oosterveer, CEO for Arcadis, said: “Business process change with the help of blockchain technology will create enormous efficiencies through the reduction of vast amounts of waste in construction processes. It will not just improve the quality of the built environment, it will also help to keep assets much more affordable over time.”
Simon Rawlinson, Partner, Head of Strategic Research and Insight, Arcadis
Michael Max Buehler, Head of Infrastructure and Urban Development, World Economic Forum
Hani Dakhil, Community Lead, Infrastructure and Urban Development, World Economic Forum
Houman Shadab, Director, Center for Business and Financial Law, New York Law School
Nadia Hewett, Project Lead, Blockchain and Distributed Ledger Technologies, World Economic Forum