Owners believe that their projects cost too much. Contractors believe that they’re not making any money. What does it say about the construction industry when both parties are right?
Owners, contractors, suppliers, bankers, and insurers all want essentially the same thing. They want (and need) predictability of return on investment, capital efficiency, sustainable operations, fair and reasonable profit, minimized risk, and timely payments.
The long-term statistics speak for themselves:
- 98% of megaprojects (>$1 billion) overrun by 80%. (1)
- 95% of all projects fail to meet one or more business objectives. (2)
- 70% of all projects are not completed within 10% of budgeted cost or schedule. (3)
- Approximately $3.5 trillion in working capital is tied up at any given time due to unpaid invoices in the construction industry. (4)
Project owners have fewer people to achieve greater efficiency by delivering projects faster and cheaper. They need to own certain decisions. If the owners push everything onto contractors, then they are delegating the fate of project outcomes to them.
Meanwhile, contractors struggle with cash flow, facing an average 75-day delay between invoice and payment. As a result, they have to borrow, usually at steeper rates than owners might otherwise borrow. Contractors aren’t banks. They build. So why do we treat the construction supply chain as a bank?
We are in a race to the bottom with onerous, lopsided contracts built on suspicion and designed to protect positions. The supply chain hierarchy adds layers of protectionist money and mark-ups. For example, in the UK, contractors are reported to currently load bids by up to 5% to account for uncertainty around payment timing.(5) Meanwhile, multiple parties insure the same risk because the fragmented supply chain renders invisible the true insurance coverage inefficiently applied throughout the complex hierarchy. Is it any surprise that the average contract bidding process is around nine months and the average project is 300% over-insured?
But complexity isn’t the problem. Managing it is. Our industry is still largely thinking in twentieth-century terms. It’s time for urgent change in the form of punctuated evolution.
Smart Contracts have already been adopted and proven by the oil and gas industry, demonstrating 10% to 30% in cost savings for each party to the contract. A Smart Contract (SC) is essentially computer code designed to automate the performance of the plain language contract – linked legally and irrevocably to it through an addendum.
Data needed to verify and automatically execute the conditions of the Smart Contract can come from practically any digital source (3D models, GPS or RFID trackers, QA/QC systems, field reality capture, timesheet systems, or even a spreadsheet) provided it follows a pre-agreed data schema.
The benefits of Smart Contracts are clear:
- SCs can be used with existing corporate systems without significant upfront investment and without the need to “rip-and-replace.” It’s not like buying software licenses, as SC providers typically are paid based on value delivered through their service.
- SCs typically require only 8 to 12 weeks to launch, with savings rapidly outrunning any setup costs.
- Bank accounts are securely connected to the SC so payments can be made immediately when the services are completed, dramatically accelerating cash flow. SCs enable net one-day payment terms.
- Thanks to distributed ledger technology, all SC parties simultaneously have full transactional transparency, seeing the same information at the same time. Details are changed only by the agreement of all parties.
- It is a self-policing system, cross-checked between all computers and immutable on just one system – a single source of shared and collaborative truth.
- SCs eradicate human error and replace onerous, time-consuming tasks (for example, compiling monthly invoices), reducing back-office costs and allowing deployment of people to higher-value tasks.
- All transactions are recorded and visible to all approved parties in real-time, resulting in a full project history at the end of the job – everything designed, bought, fabricated, tested, installed, and commissioned.
In short, Smart Contracts drive out transactional waste and numerous inefficiencies, providing immediate value for capital projects by automating critical processes.
At PrairieDog, we’re about delivering higher quality, better productivity, faster payments, less complication, and greater transparency. Smart Contracts create transcendent value beyond today’s technology point solutions and platforms – providing a clear advantage in capital efficiency for owners and increasing the profitability for engineers, contractors, and other product and service providers.