Utilizing Blockchain Technology in the Construction Industry
Is It Necessary? Will It Help?
By Paul Gozzo
New home construction is not broken. In fact, just the opposite; construction has evolved well over the last ten plus years. Builders of all sizes and specialties who build affordable houses all the way up to large custom homes, have adopted many new technologies into their processes. The majority of those innovations have taken place on the materials side of the building equation.
These technological advances have historically focused on one area of need with a specific intent to improve that ingredient of the build. This includes concepts ranging from smaller components like leak detection systems to much more robust applications such as alternatives to concrete, all of which will continue to evolve and grow until they become generally accepted pieces of the residential build environment.
Lagging behind these mostly material advancements and where we have yet to see any significant improvements is in the way new home construction is financed. We certainly have witnessed incredible amelioration with construction processes such as with prefabricated construction where entire sections of a new house are built off-site utilizing warehouse efficiencies including robotics.
The sections are then transported to jobsites and assembled like an adult version of the classic metal toy, Erector Set. And, 3D printing by innovators such as ICON continues to evolve, as well. In fact, Lennar, one of the nation’s leading homebuilders, has partnered with ICON to build 3D-printed homes at a project currently underway in Georgetown, Texas.
Yet, the process by which houses are actually built has not changed much at all. While existing processes are not necessarily flawed, there is room for improvement. I believe the advancement of blockchain technology will affect positive change when it comes to scattered site new home construction and specifically, the relationship between borrowers and lenders as it relates to workflow and payments.
Blockchain and the Lending Process
Historically, a borrower seeking a new home construction loan would submit an application to a bank or private lender and would need to have roughly 10%-30% of the total project cost including lot value in cash to get a loan. Plus, they would need additional equity to make the first set of payments to contractors and municipalities before being reimbursed in arrears through the archaic draw inspection process whereby an independent third party is engaged by the lender to inspect the home being constructed.
These inspections can occur 20-25 times during the building process. The inspectors then report back to their client confirming that the money being lent has been spent on that exact project so that the lender can release the next payment to their borrowing client.
With blockchain technology, the power to automate all components of the construction process now exists allowing for greater visibility and a faster construction process. For example, draw inspections alone can become obsolete as the need to confirm dollars spent on a project can shift from scheduling third party inspectors for approval to instant verification because blockchain can automate the contractual process and record all of the transactions along the way, including local building codes.
While process improvement and clarity between lender and borrower are helpful, the existing methodology works, so this is not a situation where something is broken and needs to be fixed.
However, among the many positive potential enhancements that blockchain can offer new construction comes in the speeding up and expediting of the process. For example, in most of the counties where I have built new homes, the municipalities inspect the job five to seven times during construction. This probably will not change any time soon, but if the draw inspection process can be built around these municipal inspections, then in theory the need for third party loan verification approval (20+ inspections) can be omitted and the build process can move along quicker and thus speed up project delivery.
Blockchain and Construction Data
Another benefit of blockchain technology infiltrating new home construction is in the collection and transfer of construction data at the time of sale. This means that all the details of the newly built house are transferred to the new and subsequent owners upon sale which can be tremendously helpful for homeowners and investor/landlords alike when diagnosing an issue at a later point in time.
Think of not only having the product name and serial number for a microwave or AC unit to determine what the warranty status is but having that information in much more detail for every aspect of your investment property. This would include not only data on each big ticket item beyond mechanicals to include plumbing, windows, and doors but also at a more granular level to include paint colors, fixtures, hardware, and lighting, to name a few. Then further out, any additional remodeling work can be documented on the blockchain resulting in a very clear and detailed view of the home from its inception.
As an investor, wouldn’t you like to see this level of detail prior to submitting your best offer?
Other potential applications include the way subcontractor work is tracked and payments are processed. This would include concepts such as what can be most closely associated with a “score card,” whereby vendors are rated similar to the way you and your Uber driver rate each other. In this case, blockchain can be used to track timelines and budget metrics for each subcontractor culminating in quantifiable performance reporting which is helpful not only to general contractors and builders, but also to contractors (at least the ones that perform well anyway.)
Smart Contracts
Additionally, if contractors can adopt the same technology as builders, then “smart contracts” can be used as an accountability measure defined in advance between builder and contractor and where automated payments can occur when predetermined milestones are met.
By definition, a smart contract is a self-executing contract with the terms of the agreement between the parties being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.
This is just another way that blockchain technology can speed up the residential new home construction process while also adding clear visibility, oversight, and accountability at the same time.
Blockchain technology will eventually make its way into residential homes and most likely through the new construction process.
With roughly half of the new homes in the United States being built by the largest 100 homebuilders, there are still a lot of small builders who on their own or through lending relationships will start to adopt blockchain technology into their processes. This will produce a more efficient build with added clarity for the next owner of each newly constructed asset.
Scattered location new home builders and investors do not need to wait for this technology to become the norm in order to begin adapting blockchain as a new way to implement a distributed ledger.
A distributed ledger that provides a complete history of an asset to include capture of each piece of material used and the contractor who worked with it, as well as that specific component and contractor warranty, will enhance the value of each newly built house that adopts this technology.
