Construction companies have struggled to find ways to efficiently pay subcontractors on projects for as long as they have been in business. Often subcontractors end up waiting months to receive payment on invoices because of manual processes that are paperwork-heavy. However, there may be some relief soon as a lot of companies are investigating using Blockchain to facilitate this payment cycle more electronically.
Problems with the current process
Each month a subcontractor is required to submit a pay requisition to the general contractor. This pay application, usually due to the GC on the 20th, is to include all of the work for the current month including projections through the end of the month. Once that pay application is received, it is reviewed by the GC and either approved or rejected. Unfortunately, this is not what triggers the payment to the subcontractor. That pay application gets lumped together with other subcontractors and then submit to the owner on a pay application of its own. This process often requires several reviews by the owner, architect, and lender on the project to ensure it is entirely l accurate. Most contracts need the GC to submit their pay application by the 25th of the month, and after approvals, they will have funds within thirty days. However, approving the pay application is only part of the paperwork. GC’s, Subs and second tier subs are also required to provide additional documentation like lien releases, sworn statements and project updates before they can receive payment. This process can drag on for 30-120 days causing cash flow problems for subcontractors to buy materials and pay labor. The current method has flaws, and we need to find a way to fix it.
Where Blockchain could help payments
As you can see from the process, many gates must be passed through in the payment process, and many of those gates have manual controls. Using Blockchain could potentially solve this problem. Many companies are specifically interested in the use of Smart Contracts, which allow users to automate information reconciliation. If parties have a connection to the Blockchain then documentation and work status could be checked automatically, it could eliminate the need for manual inspection. Also, we could link these contracts together, automatically funding subcontractors as soon as a GC contract is funded, eliminating the need for unnecessary delay in between. By connecting the contracts, you could enable additional types of 3rd party financing and supply chain options. Linking this type of information together on either a public or private Blockchain would potentially change the processing of construction payments.
What needs to happen for Blockchain to work
Many things would need to occur for Blockchain to enable faster payments in construction.
Increased digitization of the industry: This won't work if we can’t digitize the verification of work, application process and documents associated. Unfortunately, construction is one of the least digitized industries.
Subcontractors will need to be more transparent: Since the chain will track payments up and down, the chain of all involved will need to be ok with more transparency into their financials.
The industry will have to adopt regulations to support Blockchain: Our industry is full of individuals who are trying to defer risk. Many legal processes would need to be adapted to support and accept blockchain payments and to release risk.
These barriers are not insurmountable. However, it is going to take time and effort to evolve to support this type of thinking. Groups such as the Construction Blockchain Consortium are actively working to transform our industry. It is undoubtedly an exciting time to be in construction.