Optimization of payment automation in construction projects through blockchain-based smart contracts

Abstract

The construction industry continues to be plagued by financial transactions, contract management, and procurement issues that significantly impact project performance. While digital project management tools are widely used, they often fail to streamline payment procedures, resulting in administrative burdens and exacerbating stakeholders' financial uncertainty. The prolonged verification and approval processes are common in construction contracts, and they often impact project progress and increases disputes. The simultaneous execution of tasks and payment approvals is one of the significant challenges in construction payment workflows, which often leads to conflicts. Furthermore, traditional payment processes involve third-party intermediaries such as banks or financial institutions, adding layers of administration, and thus, delaying transactions and increasing expenses. These intermediaries provide security, but they limit automation and impede processes. Industry reports have identified contract inefficiencies as an important factor for productivity in the construction industry, requiring more efficient contract execution and financial workflows. These inefficiencies should be tackled to reduce costs and improve project performance. To overcome some of these challenges, Project Bank Accounts (PBAs) are considered one of the systems proposed to enhance construction payments. By ensuring that subcontractors are paid instantly, these PBAs promote transparency and reduce the risk of funds errors and payment misallocation. Nevertheless, these systems have some limitations, as they can be expensive, time-consuming, and limited protection against contractor bankruptcy. Due to these constraints, blockchain-based smart contracts have emerged as an alternative capable of minimizing human intervention, enhancing payment efficiency, and automating contract execution. Blockchain has gained prominence in several industries due to decentralization and immutability features. Smart contracts, which are employed on blockchain networks, allow the automatic execution of contract terms only when predefined conditions are met. Smart contracts can reduce conflicts over delays and minimize the need for manual intervention, as they automate payments based on verified project milestones by integrating blockchain with existing payment workflows. According to studies, implementing smart contracts can reduce costs by 6-7% and increase productivity by 8-10% in construction projects, making them a useful technology to enhance financial management. The purpose of this thesis is to explore how blockchain-based smart contracts integrated with advanced management tools can optimize payment procedures in construction projects. To achieve this purpose, the study first determines the limitations of the existing tools and explores for ways blockchain technology can be used to enhance contract management, milestone tracking, and financial workflows. It also assesses the ability of blockchain technology to optimize accountability, real-time tracking, and decision-making. Accordingly, Primavera Cloud and Primavera Unifier tools are selected for this research due to their widespread use in the construction industry. Primavera Cloud is beneficial for managing complex projects since it offers an advanced hierarchical structure and enhanced resource allocation capabilities, features that most other project management tools lack. At the same time, Primavera Unifier provides payment and contract management features for financial monitoring. However, these tools have limitations, such as inflexible workflow structures and limited support for decentralized automation, which restrict flexibility in payment procedures. Therefore, blockchain integration might be a promising solution to enhance payment automation and transparency. Besides, Oracle Blockchain Platform (OBP) is selected to integrate blockchain, as it offers smart contract service and operates within Oracle's cloud ecosystem. By integrating these platforms, the study will develop an improved automated payment system that amends contract execution by streamlining financial transactions and optimizing the transparency of payment procedures in construction projects. The thesis follows a systematic three-phase methodology. The first phase is a systematic literature review; the Scopus database is used to review recent journal papers on blockchain and smart contract technologies related to the construction industry. Based on relevance, twenty-four papers are then selected for analysis and review. A meta-classification framework is then used to analyze research trends, challenges, and gaps. These twenty-four papers are analyzed to identify key limitations and opportunities for using blockchain to manage construction contracts. The second phase is developing a conceptual framework based on the analysis and findings. A hybrid integration of blockchain-based smart contracts with Primavera Cloud and Unifier framework is introduced to address critical issues like payment delays and lack of transparency in contract execution. Internet of Things (IoT) sensors and digitally signed inspection reports are also used in the framework to verify that payments are automatically initiated only when project milestones data is reliable and validated. In the third phase, interviews are conducted with both industry practitioners and blockchain experts to validate the proposed framework and evaluate its real-world applicability. The insights of these interviews provide the potential implementation challenges and allow for a practical assessment of using blockchain in construction project management. Practitioner interviews revealed several major issues integrating blockchain with contemporary project management processes. Workflow instability is one of the major challenges, as enforcing blockchain-based smart contracts through Primavera Unifier for approval processes needs modifying traditional workflows, which might lead to compliance issues and impede adoption. Another concern is the compliance of rigid blockchain regulations with industry practices, particularly in countries where informal agreements and flexible contract management are commonly practiced. Furthermore, practitioner interviewees illuminate the need to select an appropriate blockchain platform that can be effectively integrated with Primavera systems and existing project workflows. Blockchain-based solutions could lead to emerging new inefficiencies instead of solving current ones in case of improper alignment. From a technical perspective, expert interviewees emphasize the reliance on centralized systems like Primavera, which contradicts the decentralized nature of blockchain, one of the major issues addressed by blockchain experts. Expert interviewees emphasize that decentralization is a critical challenge for implementing smart contracts efficiently. Otherwise, blockchain implementation becomes redundant. Data accuracy is also a critical challenge as executing smart contracts relies on reliable and verifiable data, and If input data are manipulated or inaccurate, blockchain efficiency diminishes. To enhance contract execution reliability, experts emphasize the importance of integrating multiple data resources, such as including IoT sensors as an additional resource to Primavera's digital documents. Another important challenge is the high computational cost of blockchain. Despite the high-security levels of public blockchains like Ethereum, they are impractical for large-scale construction projects because of their high transaction costs. Experts recommend consortium blockchains for construction projects. This type of blockchain balances decentralization and cost-effectiveness because multiple stakeholders share the network infrastructure and operational costs. They also recommend exploring consensus mechanisms for less cost and faster transactions. Blockchain experts mentioned that while OBP employs a Practical Byzantine Fault Tolerance (PBFT) consensus mechanism, it compromises its decentralization as it is a permissioned blockchain. Future research could explore alternative architectures that balance cost and decentralization. In addition, other mechanisms with incentive design could be explored in future research. From an organizational and social perspective, stakeholders' resistance is a significant challenge to blockchain adoption in the construction industry. Implementation complexity, lack of technical expertise, and concerns about losing control of contract execution are the main reasons organizations fear adopting blockchain technology. According to experts, blockchain technology features should be taught to organizations to support blockchain adoption, including cost savings, increased security, and efficiency enhancement.,. Furthermore, government support and regulations could accelerate adoption. However, overlying restrictive regulations and bans on specific blockchain applications prevent innovation and investments in blockchain technology. According to these findings, blockchain-based smart contract technology will not be able to solve all limitations of construction contract management. However, interviewees emphasize issues that must be addressed to implement blockchain technology successfully in the construction industry. Further investigation on blockchain architecture and pilot studies are critically required to shift seamlessly from traditional systems to blockchain-based smart contract systems.