Smart contracts are the next frontier for construction projects

Mining companies face many roadblocks before they can officially break ground on a large-scale project – from long and detailed application processes, to studies on profitability and reducing expenses. However, those challenges can sometimes pale in comparison to the obstacles posed by complex contracts that underpin any project.

When contract terms are vague and left open to interpretation, conflicts can arise between all parties involved resulting in project delays, added costs and other negative knock-on effects – none of which are good for the bottom line. The situation only gets more complicated when you consider how often earthworks are subcontracted to various project companies for execution. Without a clear and explicit contract, the potential for misalignment and delayed timelines is high.

One way to overcome these challenges lies in a “smart” contract: a blockchain-enabled program that holds key terms of the project, and the terms between its owner and its vendors in a computer code. It’s a high-tech alternative to more traditional mining contracts, and with a huge upside: it’s highly secure and transparent, and can self-execute various transactions based on the “if/then” principle.

To say this technology could be transformative for mining projects would be an understatement.

Take a steel producing company, for instance. Let’s say the company developed a 3 million-ton greenfield facility, containing various units: a coke oven plant, sinter plant, blast furnace, iron plant and a steel workshop. Imagine that each of these units was subcontracted to a project company to execute. And on top of that, the project owner also decides to hire a project management consultant to certify work being carried out on a weekly basis.

Now for the first order of business: complete a large quantity of earthworks before the next phases of the project – structural, mechanical, electrical work, etc. – can begin.

However, the work certification process often turns out to be long and slow, resulting in significant project delays. In fact, subcontractors have recorded an average delay of ten days per month (and certified by the project management consultant). These delays cause a snowball effect, pushing greater setbacks with the invoice verification process.

The use of smart contracts in this scenario would provide a multitude of benefits. First, it would help to drastically reduce delays in the invoice verification process, as all invoices are digitally stored in the database and the review process would be automated.

Second, post-work certification and transactions between the construction company and the contractors would be executed in real time. This would eliminate the role of the bank, thereby reducing transaction and working capital costs. Arbitration costs would also decrease, since all transactions are secured in a private ledger.

Additionally, there’s significantly less risk of fraud and related losses with the use of smart contracts, since the identities of all key players – from the construction company to each contractor – are verified in the database.

The integration of smart contracts using blockchain can help steer the mining and metals industry towards more efficient, economic and transparent business. With many benefits to the bottom line, more mining companies need to consider investing in smart contracts now. By waiting, they risk losing more revenue due to vague contract terms, slow work certification and missed deadlines.

JOHN PENNER is a partner in EY Canada’s Advisory Services practice. He is based in Calgary. For more information, visit ey.com/ca/digital.