Legally Speaking: Innovation in Construction Procurement: Legal Implications of Decentralized Databases and Blockchain

by James L. Salmon, Esq., Benjamin, Yocum & Heather, LLC

Procuring a substantial built asset requires an owner to engage dozens of entities via a myriad of contracts. Those entities engage others, including specialty designers, suppliers and trade contractors. Stakeholders, represented by individuals, then deliver on the promises set forth in that complex array of contracts. The antiquated legal framework used to procure most built assets often collapses under the strain, failing all parties involved.

ASA recently convinced the Kentucky Supreme Court to allow subcontractors in that state to pursue claims for unjust enrichment against owners under that legal framework. In a case styled, Superior Steel, Inc. and Ben Hur Construction Company, Inc. vs. the Ascent at Roebling’s Bridge, LLC, Corporex Development & Construction Management, LLC, Dugan & Meyers Construction Company and Westchester Fire Insurance Company the court adopted arguments set forth by Thomas Yocum of ASA-member firm Benjamin Yocum & Heather in an amicus, or friend-of-the-court, brief funded by ASA through the Subcontractors Legal Defense Fund. While ASA successfully defended the interests of trade contractors in Kentucky, the win may prove pyrrhic for the subcontractors and suppliers involved.

Those litigants, represented by law firms other than Benjamin Yocum & Heather, spent more than $1 million pursuing claims worth approximately $400,000. Precedent-setting litigation like this, while beneficial to many, remains prohibitively expensive and raises serious questions regarding the viability of the existing legal framework within which the built industry operates. ASA recognizes the challenges facing its members and seeks not only to understand those challenges but to overcome them. This article briefly explores the current state of procurement, emerging procurement processes and concludes with a look at the looming impact of blockchain technology on construction.

Rethinking Procurement Models

Consumers of services required to deliver built assets traditionally seek competitive bids for such services under the Design-Bid-Build procurement model. Pursuant to that opaque system design firms create construction documents in a silo and general contractors review those instruments in a vacuum, with no opportunity to explore the design with its creators. The winning general contractor tosses those documents created in a silo over the wall to key subcontractors and solicits hard bids for certain scopes of work reflected in those documents. In tough economic times bids received may be further shopped to tamp down costs, though when the construction market booms subcontractors return the favor by increasing prices. Estimates of costs, from materials to equipment and labor are notoriously inaccurate and actual construction occurs months or even years after bids are accepted. Accordingly, to account risks inherent in bidding early and building later, every bidder pads the bid a little. Meanwhile, the owner eventually gains an understanding of what is being built and invariably requests changes. In addition, subcontractors arrive on site and confront as built conditions that impact their ability to deliver their scope of work. These issues trigger requests for information, at a minimum and often require change orders that modify the controlling contract. When disputes arise the parties typically resolve those disputes via litigation. All of the foregoing actions are encouraged, if not mandated, by the contracts that represent the component parts of our broken legal framework. Conventional industry wisdom teaches novice owners that the hard bid process described above ensures best price. Nothing could be further from the truth.

In reality the built industry, operating primarily on the Design-Bid-Build procurement model, wastes more than 60 percent of the resources used to create built assets and expends approximately 10 percent of those resources on legal disputes. Addicted to extracting profits from that enormous waste stream, industry leaders cringe at the prospect of adopting innovative new procurement models that reward value rather than waste. Granted, in the late 1990s and early 2000s the use of modified procurement models like Design-Build, Construction Manager at-Risk and public-private partnerships increased, but Design-Bid-Build remains the dominate procurement model.

You get what you contract for and the contracts executed in the built environment require or reinforce fragmentation of the team, adversarial resolution of disputes and mistrust. To improve we must adopt, adapt to and deploy contracts that foster delivery of built assets by integrated teams that identify and resolve disputes proactively, as they arise in an environment characterized by trust based relationships. The baby-steps taken via the alternative delivery models mentioned above fail, utterly, to substantially modify the existing legal framework that controls procurement of built assets in the built environment. But bigger changes loom on the horizon.

The Blockchain Revolution in Construction

Innovative solutions percolating in the built environment pose dire risks to that broken legal framework and responsible professionals owe it to their clients and the firms to understand those solution. Two highly disruptive innovations, building information modeling and integrated project delivery, may soon threaten the status quo. While each developed independently, and in respective silos, combining the tools increases efficiency and productivity to an alarming or amazing degree, depending on one’s perspective. Alarming if your firm operates in an old school silo but amazing if your firm seeks to deploy BIM and IPD in a collaborative environment. BIM and IPD represent the tip only of the towering iceberg of innovation in the built environment. Blockchain technology, the software protocol that underpins Bitcoin and similar cryptocurrencies, threatens to blowup existing paradigms in the industry by enabling BIM and IPD on the Web.

Planning, designing, constructing and operating a facility virtually first enables stakeholders to adopt, adapt to and deploy tools and processes never thought practical before. In the next 10 years expect to see built assets procured utilizing a new generation legal framework that leverages virtual planning, design and construction tools and processes to create a virtual asset that users explore and critique in advance followed by a physical asset tied to a virtual version that augments the users’ reality in powerful and practical ways. Decentralized databases that leverage blockchain technology, incredibly powerful computer processing speeds and vast amounts of cheap, secure storage space on the Web all promise to revolutionize our built environment. Decentralized blockchain-driven databases, in particular new graphic databases, promise to speed the exchange of data and enable innovation in the built environment only dreamed of in the past.

These new generation, decentralized graphic databases promise interactive virtual software tools that access dynamic data and feed smart contracts built on innovative blockchains. Traditional databases, created in the 1960s and 1970s, remain in use today and like their antiquated counterparts in the legal environment those traditional databases shackle users to constraints that no longer exist. In a dynamic, Web-based world data is created, moved and leveraged at light speed. Storing, tracking and sharing data on decentralized graphic databases powered by blockchain will free built industry professionals from the clutches of slow cumbersome databases, outdated legal instruments and our broken legal framework. Delivering built assets utilizing BIM, IPD and blockchain technologies requires participants throw off the shackles and constraints imposed in the past and embrace the future.

The Future of Procurement in Construction

Would you rather be on the cutting edge or the bleeding edge? It’s your choice. Many owners are choosing the cutting edge.

In Canada, innovative public owners seeking to procure built assets from integrated teams issue requests for qualifications to determine which planners, designers, constructors, trades and suppliers are ready and willing to play in the BIM and IPD sandbox. After identifying those entities those innovative owners then ask qualified firms to form integrated teams and respond, as teams, to requests for proposals for the planning, design and construction of built assets for which the owners created a relatively robust program. In the next phase of that innovative procurement process select integrated teams are asked to submit a guaranteed maximum price for fulfilling the requirements of a validation period contract. That validation period contract essentially asks the integrated team whether the owner’s program is viable. For a proposed fixed price each integrated team agrees to place the owner’s program under a BIM and IPD enabled microscope to determine whether the scope, cost and schedule, along with other priorities of the owner, make sense from a design, construction, supply and operations perspective. The owner then interviews three to five integrated teams and selects a team to complete the validation period contract. Low bid is NOT the deciding factor, though cost is a component. The team selected to complete the validation period contract reviews the owner’s program requirements, including scope, cost and schedule and reports back to the owner regarding the viability of the project. If the project proves not viable the owner terminates the process. However, if the project proves viable the owner and the integrated team proceed to negotiate and execute an integrated agreement for delivery of the built asset.

Canada isn’t the only place where BIM and IPD are being successfully deployed. Those innovative game-changing tools are here to stay. Now blockchain is coming, and the exponential increases in efficiency it threatens may decimate existing enterprises in the built industry. Many experts with knowledge of blockchain and its potential contend that every business on the planet is at risk of being disrupted by a blockchain version of itself. Entities operating in the built environment are no more immune from that risk than those operating in any other sector.

Blockchain technologies and smart contracts crafted and deployed on the blockchain promise profound change in the built environment and especially procurement therein. Lip service paid to collaboration in the past few years will give way to concrete action when the transparency, immutability and consensus decision making that underpin blockchain manifest themselves in integrated agreements signed by owners and integrated teams for the delivery of smart built assets accompanied by robust and smart digital assets. Big law, like the big banks and insurance companies may be slow to change but change it will, or it will find a whirling dervish of innovation tearing through it similar to the digital revolution that killed Blockbuster and decimated Sears, K-Mart and the rest of a recalcitrant retail industry.

Sit idly by while the foregoing innovations tear down the existing legal framework or get in the game. The choice is yours. Collaborative Construction Resources, LLC, through its Smart Built Culture program intends to participate, actively, in the coming revolution. We invite you to join us!

James L. Salmon, Esq., joined Benjamin, Yocum & Heather as a BIM and IPD consultant in 2010. As president of Collaborative Construction Resources, LLC, Salmon advocates the use of virtual planning, design and construction tools and integrated project delivery. Salmon also serves as an adjunct instructor of a master’s-level BIM strategy course offered by Middlesex University in London. Salmon is also a special advisor to the buildingSMARTalliance’s Thought Leadership Committee. Salmon advocates the use of integrated project delivery and the use of virtual planning, design and construction software tools. He relishes the challenge of replacing the built industry’s broken culture with a smart procurement culture. Salmon works with clients to modify existing legal frameworks to ensure support for the vision, skills, incentives, resources and actions required to achieve the changes necessary to adopt, adapt to and deploy a smart procurement culture throughout the built industry. He can be reached at (513) 721-5672 or jameslsalmon@gmail.com.

 

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