Kyle Gretel, Attorney, Cotney Construction Law, LLP
The way roofing contractors view contract negotiations and ensuing disputes over contract terms is about to change thanks to the advent of blockchain technology. Through blockchain, modern construction contracts will
no longer be necessary in paper form; instead, they will exist digitally. These new "Smart Contracts" will work to provide a number of benefits. Smart Contracts will reduce payment and coordination issues, "paper trail" litigation, and disputes with employees regarding payment for labor.
In order to build a better understanding of what Smart Contracts are and how the roofing industry will benefit
from their use, a quick overview of blockchain will help. Blockchain is a database that tracks transactions, in the
order they occur, and records the transactions on a permanent ledger that is not susceptible to alteration. One
of the more common examples of how blockchain works is Google Drive. Google Drive allows multiple users to
access a document at the same time and make changes or additions in real time. These changes are recorded and a note is made of which user made which changes.
Smart Contracts are based on the same concept as Google Drive and provide additional benefits through the use of the if/then principle. For example, if a roofer completes the installation of a new roof on a project, then
an inspection is requested to review the roofer's work. If the roof passes inspection, then the escrow company or third-party will be told to release contract funds to the roofer for successfully completing his/her portion of the project.
The primary benefit that Smart Contracts offer is a major reduction in disputes over payment. Smart Contracts
take much of the human error out of the equation and instead relies on an automated system to ensure payments are distributed at appropriate times.
We often have clients requesting our services in order to track down payments that have been earned but not
paid. One common culprit that adds to the payment issues is the pay-when-paid clause. The pay-when-paid clause is often included in subcontracts, and payment to the subcontractor is made by the general contractor on the condition that the general contractor receives payment from the owner. This creates havoc for the roofing contractor on a large project because even if the roofer fully performs its scope of work, there is always a chance the owner will withhold contract funds for issues unrelated to the roofing work.
Through the use of Smart Contracts, not only will pay-when-paid clauses become unnecessary, they will likely
disappear completely. This is because construction funds will be placed with a third-party (i.e., an escrow company) and will be distributed when portions of the project are completed and receive approval, instead of remaining in the hands of the owner who has discretion in making payments. As previously discussed, once a
portion of the project is complete, funds will automatically be released to the contractor who successfully completed the work.
Another benefit of using Smart Contracts to manage construction projects is a reduction in "paper trail" litigation. "Paper trail" litigation, as most roofing contractors are familiar with, is litigation over scope of work, timing, payments, and a host of other contractual issues that arise during most construction projects. It is often the party with the most detailed email history or collection of handwritten change order forms that is victorious in the courtroom after a dispute over payment or work has occurred.
Smart Contracts will exist on blockchain in an unalterable form. Further, these Smart Contracts will provide
permanent records of the terms and conditions of the agreement. Since Smart Contracts are not susceptible to change, there will be no dispute over the terms of the agreement. Both sides of the agreement will have access
to the same document on the blockchain and will be bound by its terms.
Roofing contractors should be optimistic about the future of construction project management and payment
distribution through the use of Smart Contracts and blockchain technology. Smart Contracts offer a potential
solution to many of the inefficiencies that plague today's projects.
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