Digital transformation: fasten your seat belt

Technology is pervading all aspects of design, procurement, construction and operation – the whole life cycle of both new buildings, assets, and infrastructure, as well as existing. As Stacy Sinclair explains, it is already proving to be the enabler and provider of solutions to the very serious issues we face today; for example, climate change and connectivity and connection in the era of Covid-19.

The sheer amount of technology which exists today is astonishing: from machine learning and AI to data analytics, digital twins, drones, and design configurators, to “smart contracts” and contract review/automation platforms. The challenges, or barriers, to digital transformation are not necessarily around the availability or the existence of the technology. Rather, the industry is grappling with the issue of “adoption”. The who, what, when, why, where and how of adoption:

  • Who will help and advise us in the adoption and implementation? 
  • What technologies should we adopt to digitally transform?  What issues (technically, legally, and otherwise) do we need to be aware of?
  • When should we adopt these technologies, now or later after others have proved it?
  • Why should we adopt it; is it really a gamechanger?
  • Where do we start and where are we adopting this – across the entire organisation and across all aspects of our business and the design/construction/operation process?  
  • How do we technically implement and encourage usage?

Whilst there are no easy answers to any of the above questions, we first must keep in mind Steve Job’s advice, delivered at an Apple Worldwide Developers Conference in 1997 in response to severe criticism from a member of the audience:

“You’ve got to start with the customer experience and work backward for the technology.”

As with the technologies we employ here at Fenwick Elliott, the first questions to address, even before any of the questions around “adoption”, are: What problem are we trying to solve? What process are we trying to automate or digitise? And what is the customer experience (whether this be our client’s experience or our own internal users’ experience)? Whilst this initial understanding is fundamental, of course, solving the issues around adoption are key to a successful digital transformation. A number of organisations globally, including the UK government, are leading the march by publishing guidance, setting strategic outcomes and tackling head on those issues which seemingly are barriers to adoption and implementation.

This article looks at three of the recent developments over the past year which have aimed to advance, enable and contribute to the digital transformation of the construction industry: Version 1.1 of the UK Government’s Construction Playbook, the latest UK publication on the legal status of smart contracts and FIDIC’s newly formed Digital Transformation Committee.

UK Government Construction Playbook – Version 1.1

At the beginning of September 2022, the UK government released an update to its Construction Playbook (Version 1.1).1 The Playbook was first published in December 2020, providing government guidance and best practice on sourcing and contracting public works, projects and programmes, including setting out the government’s expectations on engaging the supply chain. In summary, the recent updates include:

  • strengthening its practical guidance;
  • attempting to remove ambiguities;
  • incorporating new legislation (e.g., Building Safety Act & the Environmental Act);
  • addressing whole-life carbon assessments, reducing waste, etc.; and 
  • seeing all activities through the lens of carbon.

In addition, a number of new guidance notes and model clauses have been provided:2

  • Modern Methods of Construction Guidance Note;
  • Longer Term Contracting Programmes, Projects and Portfolios in Construction Guidance Note;
  • Promoting Net Zero Carbon and Sustainability in Construction Guidance Note;
  • Market, Supplier & Supply Chain Engagement in Construction Guidance Note;
  • Summary: Recommendations in Constructing the Gold Standard: An Independent Review of Public Sector Construction Frameworks;
  • HMG Model Clause – Conflict Avoidance; and 
  • HMG Model Clause – Subsurface Data Sharing.

One theme which remains at the heart of the Construction Playbook, and indeed has been enhanced, is “digitalisation”.  Notably, 3 of its 14 key policies are:

  • “Harmonise, digitise and rationalise demand”;
  • “Further embed digital technologies”; and 
  • “Payment mechanism and pricing approach”.

Harmonise, digitise and rationalise demand: the Playbook expects processes associated with design, delivery and operation to be increasingly digitalised as this will develop and accelerate the “platform approach” and modern methods of construction.

With regard to the “platform approach”, the Playbook notes that the government “will look to procure construction projects based on product platforms comprising of the kit of parts, production processes, knowledge, people and relationships required to deliver all or part of construction projects”.3 The Playbook references the “Product Platform Rulebook”, published by the Construction Innovation Hub in May 2022, for further detail on platform approaches.4 The Rulebook defines a “product platform” as:

  • “The kit of parts, associated production processes, knowledge, people and relationships required to deliver all or part of construction projects using a platform approach:
  • A product platform provides a stable core which is configured and combined with complementary components (via defined interfaces) to suit a particular project.
  • A product platform also includes the processes, tools and equipment required for assembly”.

The product platform approach is a new way of thinking, a new way of designing, a new way of constructing and contracting – one which requires collaboration and an open mindset – but one which is already proving success.5

Further embed digital technologies: contracting authorities and suppliers should use the UK Building Information Management (BIM) Framework to standardise approaches to generating and classifying data, data security and data exchange – as well as support the adoption of the Information Management Framework and the creation of the National Digital Twin (“an ecosystem of connected digital twins across the built environment”). The Playbook recognises that the volume of data in relation to construction is rapidly increasing – though is often fragmented or not easily accessible – and improving the consistency and quality of data is essential.

Payment mechanism and pricing approach:  the Playbook expects suppliers to invest in automated digital payment and contracting systems and processes to improve transparency, information exchange, payment performance and contract management across the supply chain.6

The UK’s Construction Playbook puts digital working and digital processes at the forefront, an important step in the journey towards the digital transformation of the industry. 

Smart contracts and the law

Many organisations are currently looking at the digitisation and automatic generation of their contracts, as well as the technology-enabled automatic review and analysis of them, with the aim of increasing efficiency and productivity, minimising risks and errors, and generating insight for data-led decision making. Also, on the not-so-distant horizon, there is the automatic “execution” of these contracts, and/or the clauses within them: smart contracts.  

A “smart contract” is: 

  • “a legally binding contract in which some or all of the contractual obligations are defined in and/or performed automatically by a computer programme”;7 or
  • “computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to pre-specified functions”.8

In other words: if X occurs, then execute Y.   

Nick Szabo, a computer scientist and legal scholar known for developing the concept of the smart contract in the 1990s, illustrated the smart contract by comparing it to a vending machine. An automatic transaction is executed when two conditions are met (the money is received and the snack is selected):

  • money inserted + snack selection = snack dispensed. 

In the context of construction, an example might be:  if the concrete lorry turns up on site with the correct amount/specification (which is monitored automatically by the use of sensors and other image recognition technology), payment of a pre-agreed sum is automatically deposited into the concrete supplier’s bank account.  Whilst this is a hypothetical example, we are already beginning to see some use of smart contracts/clauses in certain sectors, and research both in industry and academia is well-progressed. 

For example, ‘The Weather Ledger’ was a successful collaboration funded by Innovate UK which created a smart contract (clauses), with the use of distributed ledger technology and the Internet of Things, to interpret and execute the weather-related Early Warning Notice and Compensation Event clauses in the NEC standard form of contract.  If predetermined weather thresholds were reached, using sensors and connected databases, a notification was sent to the appropriate parties.  After the Compensation Event is checked and verified, a compensation claim is raised with the client.9

Whilst there are a number of issues to consider for adoption and implementation of smart contracts, one perceived barrier was the legal status of a smart contract: is such a contract valid and enforceable?  There has been some debate of this in the UK, and ultimately the government’s LawTech Delivery Panel, along with the Law Commission, convened task groups to review, leading to the most recent findings in February 2022.

First, in December 2017, the Lord Chancellor asked the Law Commission to work on smart legal contracts. This was paused with the creation of the UK Jurisdiction Taskforce (UKJT), a task group under the government’s LawTech Delivery Panel. In November 2019, the UKJT published its legal statement on cryptoassets and smart contracts.10 It concluded that, in principle, smart contracts are capable of giving rise to binding legal obligations and are enforceable in accordance with their terms. Following this, the Ministry of Justice asked the Law Commission to undertake a scoping study on smart legal contracts, building on the findings of the UKJT legal statement.

In November 2021, the Law Commission published its advice to government.11 It confirmed that the current legal framework in England and Wales is able to facilitate and support the use of smart contracts without the need for statutory reform, and that current legal principles can apply to smart contracts in much the same way as they do to traditional contracts.12 The Law Commission helpfully summarised smart contracts and identified that they can take different forms, albeit that, regardless of the form used, the performance or execution of the contract (or a clause / obligation of the contract) is by code, i.e. with the use of technology. The forms of smart contracts are: 

  • Form 1: natural language contract with automatic performance by code;
  • Form 2: a hybrid smart contract; and
  • Form 3: a contract recorded solely in code.

The Law Commission sets out the main features of a smart contract: (1) some or all of the contractual obligations are performed automatically by a computer programme; and (2) the contract is legally enforceable. In addition, the Law Commission reviews the formation, interpretation and remedies when dealing with smart contracts, and includes a non-exhaustive list of issues that parties may wish to provide for in their smart legal contract.

In February 2022, LawTechUK published “Smarter Contracts”, a report documenting the outcome of its project which identified important examples of how technology is transforming contract use across various key industries. The report sets out case studies which demonstrate digital-first solutions to real-world problems: electronic signatures, contract automation and management, insurance, renewable energy, financial services, trade, sale of goods and services, logistics and transportation, the digital ownership of physical assets, sport sponsorship, home buying and selling and the digital company.13

As with the UK’s Construction Playbook, the Law Commission’s and LawTechUK’s publications are an important step for the digital transformation of the construction industry, providing much needed guidance and know-how. We can expect to see more applications of smart contracts and smart clauses in the near future.

FIDIC’s new Digital Transformation Committee

In April 2022, FIDIC announced the formation of its new Digital Transformation Committee (DTC).

The purpose of the new committee is to monitor and identify changes in digital technologies that futureproof FIDIC’s products and services (such as the FIDIC contract suite), identify issues and trends in the digital space that could be potential disruptors to FIDIC and or its members and the wider industry, develop FIDIC’s value proposition for digital services, and advise and monitor large digital programmes.  The strategic priorities, as outlined in the terms of reference, include: 

  • advocating and guiding on the use of new and existing technologies across the consulting engineering industry; 
  • completing and publishing guidance on digital platforms that would be of use to FIDIC members;
  • advising and assisting FIDIC in the exploration of digitising and developing the FIDIC contract suite to aid productivity and user friendliness; and 
  • exploring new technologies, products and services that FIDIC could offer its members and the wider sector. 

I am delighted to have been appointed Chair of the DTC, working with 12 other expert committee members from across the engineering and digital communities who are passionate about the transformation of our industry.  

At FIDIC’s Global Infrastructure Conference in Geneva in September 2022, on behalf of the DTC I chaired the Digital Transformation Forum, comprised of six panellists. We explored the following two key topics:

  • “Digital Transformation: optimise traditional or paradigm shift?”
  • “Data & Digitalisation: the foundation for transformation”

The panel presentations were inspiring and thought-provoking, with excellent discussion and feedback from the audience which will help to inform the DTC’s thinking and way forward. 

Whilst the DTC is very much at the outset of its journey, in a period of listening and learning and establishing its activities and Task Groups, its enthusiasm and energy is clear, not only from within the DTC, but also within FIDIC, its members and its global contract users. The launch of the DTC demonstrates FIDIC’s recognition of the fundamental role that technology will play in the future of the industry, as well as its commitment to supporting its members on this journey.  Again, this is another important step in the digital transformation of our industry.

Please do reach out if you would like more information or would like to be involved.

Conclusion

Whilst each organisation is moving at its own pace and has its own roadmap, it is clear that the speed of digital transformation across the industry, as a whole, is set to increase dramatically – to date, we have only just scratched the surface.  

This article set out but three examples of initiatives over the past year that are supporting and advancing the transformation, addressing the issues of “adoption” through their guidance, know-how and expectations – investigating and assisting with the perceived barriers to adoption and implementation.  

And there are many more examples out there.

In Clayton Christensen’s ‘The Innovator’s Dilemma’, he sets out how disruptive technology in the US mechanical excavator industry of the 1900s destroyed a number of well-established, leading companies.14 The excavator industry of the 1800s and early 1900s was dominated by the steam-powered shovel and earth-moving equipment. Eventually, by the 1920s, the gasoline-powered engines took over. From the 1940s to the 1960s, the hydraulic-actuated systems replaced the cable-actuated systems. By the 1970s, only 4 of the 30 (or so) established manufacturers of cable-actuated systems managed to transform themselves into hydraulic-actuated systems.  Those that failed did so because it didn’t make sense to them to change, until it was too late.  

We also saw a similar situation, as many have documented, when Kodak did not transform from traditional film to the digital camera. Equally, some have pondered that the same failure would have happened to Microsoft had it not moved to the Cloud (which was a real possibility at the time). 

If the frequent Microsoft updates and iPhone releases are anything to go by, the pace of change is much faster than the previous century.  At the recent FIDIC Conference in Geneva in September 2022, which I mentioned above, the President of the World Economic Forum, Børge Brende, spoke of the pace of change in technology: there is no place for complacency, and we must fasten our seat belts.  

Do not wait until it is too late. Take on board the guidance available, take advice, address the issues of adoption and fasten your seat belt...

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Stacy Sinclair

Tel: +44 (0)20 7421 1986
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