Owners often believe their projects cost too much.
Contractors often believe that they’re not making any money. What does it say about the construction industry when both parties are right? Owners, contractors, suppliers, bankers and insurers all want essentially the same thing. They want predictability of ROI, capital efficiency, sustainable operations, fair and reasonable profit, minimized risk and timely payments.
Project owners have fewer people to achieve greater efficiency by delivering projects faster and cheaper. They must own decisions they make. If the owners push everything onto contractors, then they are delegating the fate of project outcomes to them. Meanwhile, contractors struggle with cash flow, facing an average 75-day delay between invoice and payment. As a result, they have to borrow money, usually at steeper rates than owners might otherwise borrow. Contractors are not banks — they’re builders. So why do we treat the construction supply chain as a bank?
We are in a race to the bottom with onerous, lopsided contracts built on suspicion and designed to protect positions. The supply chain hierarchy adds layers of protectionist money and mark-ups. For example, in the U.K., contractors are reportedly loading bids by up to 5% to account for uncertainty around payment timing. Meanwhile, multiple parties insure the same risk because the fragmented supply chain renders invisible the true insurance coverage inefficiently applied throughout the complex hierarchy. Is it any surprise that the average contract bidding process is around nine months, and the average project is 300% over-insured?
Complexity isn’t the problem; managing it is. Our industry is still largely thinking in 20th century terms. It’s time for urgent change in the form of punctuated evolution. Smart Contracts (SCs) have already been adopted and proven by the O&G industry, demonstrating 10% to 30% in cost savings for each party in the contract. SCs are essentially computer programs designed to automate the performance of the plain language contract, linked legally and irrevocably to it through an addendum.
Bank accounts are securely connected to SCs so payments can be made immediately when the services are completed, dramatically accelerating cash flow. SCs enable net one-day payment terms. Thanks to distributed ledger technology, all SC parties simultaneously have full transactional transparency, seeing the same information at the same time. Details are changed only by the agreement of all parties. It is a self-policing system, cross-checked between all computers and immutable on just one system: it’s a single source of shared and collaborative truth.
SCs eradicate human error and replace onerous, time-consuming tasks like compiling monthly invoices, reducing back-office costs and allowing deployment of people to higher-value tasks. All transactions are recorded and visible to all approved parties in real-time, resulting in a full project history at the end of the job — everything designed, bought, fabricated, tested, installed and commissioned.
In short, SCs drive out transactional waste and numerous inefficiencies, providing immediate value for capital projects by automating critical processes.
For more information, visit agpglobal.com or call (713) 481-4613.
