LEGALLY SPEAKING: Innovative Legal Procurement Models Decentralizing Data in Construction

April 2018

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

 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. This 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 other law firms, 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 our existing legal framework. This article explores the potential use of blockchain technology as a platform upon which the built industry might erect a new and improved legal framework.

Rethinking Procurement Models

Consumers of services required to deliver built assets traditionally seek competitive bids for those services under the so-called Design-Bid-Build procurement model. Pursuant to that opaque system design firms create a cheap, incomplete set of construction documents in a silo, general contractors review those instruments in a vacuum, with no opportunity to ask the designers questions, and then the winning general contractor, aka the sharpest or dullest tool in the shed, tosses those same shoddy documents over the wall to key subcontractors and solicits hard bids for various scopes of work. 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 set forth in bid documents, from materials to equipment and labor, are notoriously inaccurate and actual construction often lags years behind the bidding process. All of the foregoing actions are encouraged, if not mandated, by the legal framework—such as statutes and regulations in the public sector and standard operating procedures in the private sector, as well as the project specific legal agreements underpinning the system. But conventional industry wisdom teaches novice owners hard bids ensure best price. Of course, nothing could be further from the truth.

In reality, the built industry, operating primarily on the Design-Bid-Build procurement model described above, wastes more than 60 percent of the resources used to create built assets. 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. By the mid-2000s integrated project delivery and Lean construction processes emerged as viable tools via which sophisticated owners procured built assets. Unfortunately, the baby-steps taken via these alternative delivery models fail, utterly, to substantially modify existing legal frameworks that reward and reinforce the waste based Design-Bid-Build method. But bigger changes loom on the horizon.

BIM, IPD and the Blockchain Revolution in Construction

Innovative solutions percolating in the built environment pose dire risks to the broken legal framework used to procure built assets and responsible professionals owe it to their clients and their firms to understand those solutions. 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 degree. Alarming that is, if your firm operates in an old school silo.

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 the virtual planning, design and construction tools and processes associated with BIM to create virtual assets that empower owners, designers, constructors, trades and suppliers to explore and critique built assets virtually before anyone ever sticks a shovel in the ground. Further, expect to see that robust digital asset tightly correlated with actual physical asset in ways that augment the users’ reality in powerful and useful 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 the legal framework that underpins the procurement of built assets.

Development of a new generation decentralized databases promises to provide interactive virtual software tools access to dynamic data to feed smart contracts built on innovative blockchains, the software protocols that underpin Bitcoin, Ether and other cryptocurrencies. 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. Specifically, computer processors and the memory and storage mechanisms that existed when designing databases and accompanying software and hardware in the 1970s and 1980s pale by comparison to speed of modern computers and the storage capacity of the cloud. In a dynamic, web-based world data is created, moved and leveraged at light speed. Storing, tracking and sharing data on blockchains and blockchain-enabled databases frees designers of databases, legal instruments and built assets to throw off the shackles and constraints imposed in the past and forge a brave new path forward. New generation decentralized databases, in particular blockchain enabled/compatible databases, promise to speed the exchange of data and enable innovation in the built environment only dreamed of in the past.

A blockchain compatible database in the Beta testing phase is provided by Fluree DB, a company based out of Winston-Salem, N.C. FlureeDB is a decentralized new generation graphic database that leverages blockchain technology. Traditional relational databases were all created when computer processing power was limited and storage space was expensive, among other constraints. Today, most enterprise level databases kowtow to those constraints from a software AND hardware perspective. Not to mention legacy users. FlureeDB seeks to replace legacy software and hardware with modern options.

FlureeDB leverages Cassandra, blockchain, sharding and a few other innovations to offer a flexible graphic database that can link to blockchains and traditional databases. Combined with blockchain and blockchain enabled computer code, FlureeDB may become a powerful tool upon which to write truly smart contracts that tie valuable real time data to those contracts.

Another interesting company to watch is Swirlds which provides a blockchain environment that utilizes a distributed consensus algorithms on a hashgraph to enables high levels of security on a distributed ledger/blockchain while simultaneously achieving throughput at rates of 100K+ per shard when the nodes of a network are sharded.

One last blockchain-based enterprise to watch is SweetBridge. That enterprise voices the audacious goal of placing the $54 trillion global supply chain on the blockchain. Sweetbridge applies decentralized, blockchain-based solutions to complex problems in real markets. By forming blockchain-oriented ecosystems made up industry stakeholders with a vested interest in enabling liquidity and faster, fairer exchanges of value they expect to change the scope and nature of lending on a global scale by enabling individual enterprises to borrow against existing physical assets on the blockchain.

Combining the solutions offered by companies like these might well enable real, fast cost effective use blockchain in virtually every area of the economy, providing access to a 21st Century internet platform that is secure, fast, cost effective and fair.

In addition to modern cloud/blockchain-compatible databases the built industry desperately needs to deploy smart contracts on the blockchain. Creating functional smart contracts, that work effectively on the blockchain, presents a number of challenges, including a means of identifying the contracting parties, sharing proprietary data on a need to know basis, getting the incentives right and properly leveraging immutability, transparency and high end security available through blockchain technologies.

Many blockchain facing entities are working to overcome those challenges. I say we join them.

The Future of Construction

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

Sit idly by while the foregoing innovations teardown the existing legal framework or get in the game. Collaborative Construction Resources, LLC, through its Smart Built Culture program intends to participate, actively, in the coming revolution. We invite ASA and members of ASA to join us! In future articles these columns intend to delve more deeply into Construction on the Blockchain.

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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Kahua Ad TCC-April 2018

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