Scholarly Paper

Role of Blockchain-Enabled Smart

Contracts in Automating Construction
Progress Payments
Hesam Hamledari, S.M.ASCE 1; and Martin Fischer, A.M.ASCE 2
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Abstract: The construction industry has long been plagued with late and nonpayments. Despite the desired benefits of payment automation
and today’s increased access to digitized progress data, too often payment applications still rely on inefficient workflows and documents that
are time-consuming to prepare, review, approve, and execute. This paper argues that current payment applications, even if computerized,
cannot support reliable automation of progress payments due to their reliance on centralized control mechanisms and lack of guaranteed
execution. The paper examines why blockchain-based and decentralized smart contracts can address these limitations. It explores the con-
ceptual underpinning for the design of an automated payment system and investigates the role of smart contracts in enabling reliable and
autonomous conditioning of cash flow on product flow status. To illustrate these points, a use case is presented for smart contract-based
progress payments in the context of unmanned aerial vehicle-based progress monitoring. The paper concludes with a discussion of chal-
lenges facing blockchain-based payment automation and the broader implications for dispute resolution and construction law informatics,
namely zero-trust computing and the creation of an auditable single source of truth for projects. DOI: 10.1061/(ASCE)LA.1943-
4170.0000442. © 2020 American Society of Civil Engineers.

Introduction payments, a major risk factor in construction (El-Sayegh 2008) that

Construction progress payments are crucial to a project’s successful
delivery and the financial well-being of its stakeholders (Barrie and
Paulson 1992; Navon 1996). The construction industry still relies
on the use of traditional contracts and information-intensive pay-
ment applications that are time-consuming to prepare and essen-
tially rely on human-centered workflows. As a result, project
stakeholders commonly suffer from late or nonpayments (Peters
et al. 2019), making the architectural, engineering, and construction
(AEC) industry credit heavy and cash poor. Payment problems are
even more consequential for stakeholders down the payment chain
such as suppliers and subcontractors (Kaka 2001). A 2019 survey
of 1,138 firms reveals that it takes engineering and construction
companies 85 days to receive payment (PwC 2019), a 10-day in-
crease compared to the previous year (PwC 2018). The McKinsey
Global Institute identified traditional contracts as one of the seven
major barriers to high productivity in the construction industry
(McKinsey 2017); improvement in contracting practices was esti-
mated to increase productivity and cost savings by 8%–10% and
6%–7%, respectively (McKinsey 2017).
Automating construction progress payments can benefit the
stakeholders involved in the construction supply chain including
lenders, property owners, general contractors, subcontractors,
material suppliers, and equipment rental firms, among others.
Automation can result in cost and time savings and reduce untimely
1
Ph.D. Candidate, Dept. of Civil and Environmental Engineering, Stan-
ford Univ., Stanford, CA 94305 (corresponding author). Email: hesamh@
stanford.edu
2
Kumagai Professor of Engineering and Professor in Civil & Environ-
mental Engineering, Dept. of Civil and Environmental Engineering, Stan-
ford Univ., Stanford, CA 94305. Email: fischer@stanford.edu
Note. This manuscript was submitted on January 13, 2020; approved on
July 21, 2020; published online on October 7, 2020. Discussion period open
until March 7, 2021; separate discussions must be submitted for individual
papers. This paper is part of the Journal of Legal Affairs and Dispute Re-
solution in Engineering and Construction, © ASCE, ISSN 1943-4162.
has dire consequences for projects including cost overrun, delays
(Assaf and Al-Hejji 2006; Durdyev and Hosseini 2019), and re-
duced trust (Manu et al. 2015). This resulting lack of trust further
slows down the processing of payments, creating a vicious circle
(Hawley 2012; Manu et al. 2015).
Today’s increasing access to digitized as-built progress data,
empowered by robotics, building information modeling (BIM),
and machine intelligence (Bilal et al. 2016; Ham et al. 2016;
Santos et al. 2017), further motivates a move toward automation.
However, payment automation is far from reality and current pay-
ment applications neither support the use of progress data nor can
they enable automation. Smart contracts enabled by blockchain
technology have demonstrated promise in addressing the inefficien-
cies of payment systems (Penzes et al. 2018); however, it is not
clear as to what distinguishes this technology from already-
available means of automating payments such as a computerization
of current payment applications. The authors believe that exploring
the why of blockchain in the context of construction progress pay-
ments is crucial to its successful adoption and takes precedence
over its how. Tackling this fundamental question is a critical step
toward a more objective implementation of smart contracts, one
that is motivated by the industry problems and not a passing interest
in a new technology.
With that goal, this paper first employs John Searle’s theory of
social reality to explore the underlying barriers to automation;
it analyzes construction contracts as social constructs in relation
to construction supply chain flows. The paper then argues that
blockchain-enabled smart contracts can address the identified bar-
riers due to their decentralized and guaranteed execution of contract
terms, introducing reliability into payment administration. To fur-
ther illustrate the work’s thesis, a case study is presented for smart
contract-based progress payments in the context of unmanned aer-
ial vehicle (UAV)-based progress monitoring. The paper concludes
with a discussion of challenges and broader implications of smart
contract use for payment administration.

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J. Leg. Aff. Dispute Resolut. Eng. Constr., 2021, 13(1): 04520038

 Point of Departure
The primary points of departure for this work comprise the writings
by Nick Szabo, the legal scholar, computer scientist, and cryptog-
rapher and the social reality theory by the philosopher John Searle.
This section explores the former to discuss the background litera-
ture underlying the concept of smart contracts. The latter is intro-
duced in the following section; it is used to examine contracts as
social constructs, a perspective that is key to the development of
this work’s main thesis.
Szabo (1994) first introduced the notion of the smart contract in
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his 1994 work. He described smart contract as “a computerized
transaction protocol that executes the terms of a contract.” His def-
inition suggests the use of an automated protocol for (1) satisfying
contractual agreements, (2) minimizing both malicious and unin-
tentional errors, and (3) eliminating the role of intermediaries in
contract enforcement.
Computerized contracts necessitate the formalization of
human relationships and this, he argued in his 1997 work, increases
the security of contractual relationships and agreements (Szabo
1997b). Szabo (1997a) stated that protocols, running on public net-
works, are better means of formalizing relationships, as opposed to
paper-based and traditional contracts.
Szabo (1997a) proposed three desired features for smart con-
tracts: (1) observability, (2) verifiability, and (3) privity (protection
against third parties). The observability feature ensures that neither
party suffers from hidden knowledge before (ex ante) and after (ex
post) entering a contractual agreement. Parties must be able to ob-
jectively decide on the optimal course of actions. The verifiability
ensures that it can be proven to an adjudicator that a party has de-
faulted on their terms of agreements, relying on the smart contracts’
formalization of rules and relationships. The privity feature neces-
sitates that the smart contract’s performance must be encapsulated
from third parties unless they act as adjudicators.
While Szabo discussed a few potential applications of smart
contract such as smart property (Szabo 1994) and secured property
titles (Szabo 1998), the concept did not gain traction due to lim-
itations regarding its real-world implementation; it was the inven-
tion of Bitcoin (Nakamoto 2008) and the advent of blockchain that
again gave rise to the notion of smart contracts in the 2010s. It is not
surprising that Szabo is alleged by many, including the first author
of this work, to be the Satoshi Nakamoto, the anonymous figure
behind Bitcoin.
Advent of Blockchain
Blockchain is one of the building blocks of Fintech (Hileman and
Rauchs 2017) and the primary reason behind the recent successes
of cryptocurrencies such as Bitcoin (Nakamoto 2008). It introduces
a decentralized protocol for reaching consensus in peer-to-peer
(P2P) networks (Narayanan et al. 2016). It combines tools from
both cryptography and game theory to generate and maintain a
tamper-proof and distributed shared ledger of transactions without
the need for centralized authorities such as banks (Swan 2015).
Bitcoin’s decentralized consensus protocol eliminates the need
for trust between parties involved in a transaction; this is considered
by many to be the key factor differentiating cryptocurrencies from
their unsuccessful predecessors (Swan 2015; Vigna and Casey
2016) such as b-money (Dai 1998) and Nick Szabo’s Bit Gold
proposal (Szabo 2005).
A blockchain comprises of a series of data blocks, each storing
several transactions along with a cryptographic summary of its pre-
ceding block (hence blocks are chained together). This makes the
chain of records immutable and auditable. The Ethereum protocol
© ASCE 04520038-2
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(Buterin 2014; Wood 2014) took the concept of blockchain further
by introducing the possibility of decentralized applications (DApp).
Ethereum has its own blockchain and native cryptocurrency
(Ether). However, it goes beyond decentralized exchange of money
and can be thought of as Blockchain version 2.0 (Diedrich 2016).
Its protocol and its nearly Turing-complete language allow for the
execution of programs on a decentralized world computer, the
Ethereum virtual machine (EVM).
This network of computers executes the code underlying each
DApp and publishes the outcome to the underlying blockchain us-
ing a consensus-based mechanism similar to that of Bitcoin. The
decentralized nature of this world computer makes smart contracts
impossible to censor and eliminates down time.
Smart Contract Application in the AEC Industry
Construction management applications were among the seven po-
tential research areas identified in a recent review of distributed
ledger technology and blockchain (Li et al. 2019a). To understand
the benefits of smart contracts in the construction sector, focus
groups were used to develop socio-technical frameworks (Li
et al. 2019b). In the real estate industry, for example, smart contract
is estimated to reduce cost by 9% (Dakhli et al. 2019). Token-based
payment systems were identified as one of the six potential use-
case categories for smart contracts and blockchain (Hunhevicz
and Hall 2019).
These findings have motivated a focus on the possibility of in-
tegrating blockchain and smart contract with building information
modeling. Blockchain can supplement current approaches to cen-
tralized modeling of building information by improving prov-
enance tracking and increasing the trustworthiness of project
records (Turk and Klinc 2017).
One study sees smart contracts as an extension to BIM-based
processes (Mason 2017), while such integration is not considered
an immediate research problem in another study (Gabert and
Grönlund 2018). Others discussed arguments both for and against
such integration (Mason 2019). An industry survey further argues
that smart contracts are not suitable for complex construction
projects where changes are common (Gabert and Grönlund 2018).
Other works have listed potential benefits of BIM and blockchain
for postdisaster recovery (Nawari and Ravindran 2019). Crypto-
BIM (Hamledari et al. 2018b) uses blockchain technology and
the InterPlanetary File System (Benet 2014) to create a content-
addressable, immutable, and distributed view of building informa-
tion data.
Despite the potential applications found in the literature,
successful adoption calls for a more careful analysis of the match
between industry problems and smart contract’s key features
(Hunhevicz and Hall 2020). While blockchain and smart contracts
can provide promise in the context of progress payment automation
(Yang et al. 2020) and in relation to supply chain flows, it is not
clear what distinguishes this technology from a computerized pay-
ment application or other potential means of achieving automation.
We lack an understanding of the why of blockchain in the con-
text of payment automation; there is a need for analyzing the under-
lying barriers to automation and their relationships to the defining
characteristics of blockchain and smart contract.
Construction Contracts as Social Constructs
Construction contracts grant the project participants certain rights
with regard to payments, and “as a right is a social construct, if the
community or group fails to recognize the authority of the right
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 holder, the right will fail to endure” (Talbot-Jones and Bennett
2019). Therefore, contracts used for progress payments are social
constructs. Their interpretation, execution, and enforcement rely on
human agreements and the collective intentionality of project
participants.
This work uses John Searle’s The Construction of Social Reality
(Searle 1995) to characterize social constructs in terms of their
underlying data and rules. Searle’s (2010, 1995) work was moti-
vated by a fascination with human beings’ capability of introducing
objectivity into constructs that are purely social (e.g., money and
governance) and “in a world that consists entirely of physical par-
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ticles in fields of force, and in which some of these particles are
organized into systems that are conscious biological beasts, such
as ourselves” (Searle 1995).
Progress payments rely on data that describes the state of
progress at jobsites [as-built three-dimensional/four-dimensional
(3D/4D) BIMs], project information (e.g., schedule of values),
and the exchanges of monetary values and rights between busi-
nesses. This paper makes a distinction between the two types of
data/facts used in these workflows. This distinction is based on
the relationship between things and the observer; some facts hold
true independent of their observers while others rely on human
agreement and human institution. These two are respectively re-
ferred to as brute facts and institutional facts. In this paper, the au-
thors will interchangeably use the phrases reality and social reality
to refer to these two types of facts. Each progress payment is a
transition from jobsite observations (brute fact/reality) to an evalu-
ation of contract terms and the resulting exchanges of monetary
value and rights (institutional fact/social reality).
Progress payment scenarios comprise of several brute facts and
institutional facts. For example, the installation of insulation blan-
kets in indoor partitions is a brute fact that is ontologically objective
(i.e., their existence does not depend on being experienced and in-
terpreted by humans). There are steps involved before the insula-
tion installer is compensated for the work, and they consist of
several social facts that require human institution. For instance,
the recognition of an individual as the subcontractor, the evaluation
of contract terms, entitlement to a compensation, a potential right to
the property, and the concept of money are all ontologically sub-
jective and rely on collective group agreement.
How do project stakeholders translate the observations of brute
physical facts to institutional facts? For example, one needs to
translate the installation of insulation in partitions to the fact that
the subcontractor is entitled to a compensation. With that regard,
Searle introduced regulative and constitutive rules to explain the
relationships between facts. The former regulates an antecedently
existing activity, while the latter creates the possibility of an activ-
ity. For example, driving rules are regulative in that they are inde-
pendent of the act of driving; one may drive without abiding by
such rules. However, the rules of chess are constitutive. If one
(a)
Fig. 1. Construction contracts need to act as constitutive rules that translate brute facts (product flow) to institutional facts (cash flow).
© ASCE 04520038-3
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digresses from the rules, even slightly, one is not playing chess,
but a different game.
Constitutive rules must be used to arrive from brute facts to in-
stitutional facts [Fig. 1(a)]; such rules take the form of “X counts as
Y in the context of C.” For construction progress payment, for ex-
ample, this can take the following form: “in accordance to the con-
tract documents, the painter is entitled to $1,800, because 10% of
partitions were painted.” This statement includes three components,
listed in the order they appear: the context, the institutional fact, and
the brute fact.
Fig. 1(b) illustrates the role of construction contracts in relation-
ship with two construction supply chain flows critical to payment
applications: product (progress at jobsites), and cash (payment),
namely the reality and the social reality, respectively, in the context
of construction progress payments.
The automation of progress payments must involve the use of
elements that do not require human subjectivity; they include,
among others, computerized contract codes and autonomous agents
used for jobsite progress monitoring (e.g., unmanned aerial or
ground vehicles and other remote technologies). In the absence
of human subjectivity, the contractual structures used for bridging
the gap between the physical reality (product flow) and social real-
ity (cash flow) [Fig. 1(b)] need to act as constitutive rules.
The authors argue that current contract documents and payment
applications are only regulative in nature. They cannot act as con-
stitutive rules due to (1) reliance on centralized mechanisms for
capture, modeling, and communication of product and cash flows;
and (2) the lack of self-enforceability and guaranteed execution that
results from the centralized mechanisms. These two topics will be
discussed in the following two subsections.
Payment Applications Rely on Centralized Control
Mechanisms
Construction progress payment workflows (Fig. 2) involve close
collaborations between independent stakeholders with competing
business objectives. This trustless environment necessitates the
workflows to be heavily intermediated (Bitran et al. 2007). The
preparation, review, approval, execution, and the enforcement of
payments rely on centralized trusted mechanisms. In addition to
project stakeholders, banks are also important participants in the
construction supply chain that act as trusted middlemen handling
cash flow and transactions (Fig. 2). This high degree of centraliza-
tion has had major implications that hurt the feasibility of achieving
payment automation.
First, the supply chain flows (cash and product) are stored in
fragments among project stakeholders (Fig. 2, top row) and finan-
cial institutions such as banks (Fig. 2, bottom row). This hinders
construction supply chain integration (Briscoe and Dainty 2005)
and grows the product and cash flows further apart (Blount
2008). These centralized and siloed modes of data capture and
(b)
J. Leg. Aff. Dispute Resolut. Eng. Constr.
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Fig. 2. Construction progress payments are heavily reliant on centralized and intermediated workflows.
documentation eliminate the possibility of creating a trusted
single source of truth. As a result, different fragments of data
need to be verified for accuracy and cannot be used to automate
the transition from product flow (progress updates) to cash flow
(payments).
Second, a project’s cash flow data is generated and secured by
banks, external stakeholders whose investment in the project’s suc-
cess differs from major stakeholders such as contractors, owners,
and lenders. These external players currently have a central role in
the construction supply chain, giving them exclusive access to fi-
nancial data that is crucial to supply chain management, process
optimization, and supply chain visibility (Silvestro and Lustrato
2014). This reliance on banks has damaged supply chain integra-
tion (Blount 2008; John Mathis and Cavinato 2010; Silvestro and
Lustrato 2014), which is, however, a key step toward bridging the
gap between a project’s brute and institutional facts [Fig. 1(b)].
Note that the financial institutions themselves also rely on inter-
mediaries such as the automated clearing house (ACH) network
(McAndrews 1994), further hurting the desired integration and vis-
ibility (Fellenz et al. 2009).
Third, centralization highly skews the concentration of power,
creating bottlenecks that can slow down the payment process
(Manu et al. 2015). This skewed access to supply chain data further
adds to the information asymmetry and increases opportunistic
behaviors (Feldmann and Müller 2003). The resulting lack of trust
makes it impossible to automate payment processes, as parties need
to constantly verify facts for validity.
Payment Applications Lack Guaranteed Execution
There is no guarantee that contractual agreements and their terms
will be executed as agreed on by parties, resulting in defaults and
late or nonpayments. This is in part due to (1) the nature of tradi-
tional contract documents used by practitioners, and (2) the reliance
on centralized parties (e.g., court of law) for enforcing the terms of
contract and only after one defaults on the agreements.
This lack of guaranteed execution makes the timing and exact
amount of payments unpredictable, resulting in contractors’ inac-
curate forecasts of their cash flow and working capital (PwC 2019).
Overbilling is a byproduct of this uncertainty and contractors’ re-
sponse to slow-paying clients that can potentially force them into a
© ASCE 04520038-4
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state of negative cash flow and insolvency. This unpredictability
is more problematic for subcontractors, because their payment
does typically not only depend on the client but also the general
contractor. While timely compensation of all project members is
in the best interest of a project and its stakeholders (Kaka 2001),
there is no means of guaranteeing payment based on exact terms of
contract. For example, the payment to supplier or subcontractor can
still be delayed even after the owner pays the contractor; this can be
due to time-consuming processes associated with lien waivers or
due to contractor’s use of that fund to address their own cash flow
issues.
The industry has introduced nationwide and statewide laws that
aim to mitigate these limitations; these laws, while helpful in reduc-
ing payment delays, regulate behaviors (e.g., by penalizing late
payers) and cannot avoid defaults and cannot guarantee the execu-
tion of contract terms. The California Prompt Payment Act (US
Senate 2013) is one such law that requires owners to pay the gen-
eral contractor within 30 days of receiving application for payment.
However, the statistics within the construction industry tell a differ-
ent story. It took construction and engineering firms an average
85 days to receive payment in 2019, a 10-day increase compared
with 2018 (PwC 2018, 2019). Other solutions such as the mechan-
ics lien are used as last resort, and after a party defaults. Addition-
ally, many refrain from using it due to fear of damaging their
relationship with customers.
Smart Contracts Decentralize and Guarantee
Contract Administration
Contract documents, even when computerized, cannot support re-
liable automation of progress payments. This is due to two major
limitations: (1) reliance on centralized mechanisms for capture,
control, modeling, and communication of supply chain flows;
and (2) lack of guaranteed execution for contract terms. Successful
automation of progress payments necessitates the design of con-
tracts that act as constitutive rules.
Blockchain-enabled smart contracts can address this need
because of their two key characteristics. First, smart contracts
decentralize the execution of contract terms and disintermediate
the payment administration. Second, they provide guaranteed
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 execution of contract terms and eliminate unexpected outcomes for
parties.
These two characteristics distinguish smart contracts from other
solutions that could potentially be used to achieve payment auto-
mation. To illustrate this point, Fig. 3 contrasts the system’s archi-
tecture for two automated payment systems that operate without
[Fig. 3(a)] and with smart contracts [Fig. 3(b)]. In both cases, con-
tract documents are computerized and turned into an executable
code that conditions payment values on the progress data provided
as input. The following sections contrast these two modes of
automation.
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Automation with Centralized Control
In a system operating without smart contract [Fig. 3(a)], one of the
project members must execute the contract code and broadcast the
computation results to the rest of the project’s P2P network [(a-1) in
Fig. 3(a)]. Afterward, the monetary transactions need to be further
processed by banks and financial institutions and based on output-
ted information regarding accounts payable and receivable [(a-2) in
Fig. 3(a)].
This results in a client-server architecture where the code exe-
cution, authentication, and authorization are all centralized with a
single stakeholder (the owner, for example) [(a-1) in Fig. 3(a)]. This
architecture suffers from the same limitations that make current
contract documents regulative: centralized control and lack of
self-enforceability. The server can deny service to other stakehold-
ers, delay certain operations (e.g., delaying transactions that com-
pensate a supplier), modify the underlying contract code, and
rewrite the project past records, including as-built BIMs and cap-
tured progress data. This centralized execution of the contract code
creates a single point of failure, increases the possibility of down-
time, and increases information asymmetry. Such payment automa-
tion is not reliable.
Orwell wrote that the person “who controls the past controls the
future” (Orwell 1949); the server’s centralized control over the ex-
ecution of current transactions and the possibility of rewriting the
past project records skews the concentration of power and increases
possibilities for opportunistic behavior. This architecture heavily
capitalizes on trust in a trustless environment where stakeholders
have competing business objectives. We argue that this is not a fea-
sible solution for automating payments.
(a)
Fig. 3. Contrast between automated payment systems (a) without; and (b) with blockchain-based smart contracts.
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Automation Enabled by Smart Contract
Conversely, in a smart contract-based system [Fig. 3(b)], the com-
puterized contract is deployed and executed on a public blockchain
and not within the project P2P network. For example, in the case of
Ethereum blockchain, the EVM [(b-3) in Fig. 3(b)] acts as a fault
tolerant world computer where each node runs the smart contract
(i.e., the computerized contract) and writes the computation out-
comes (e.g., account payables, account receivables, balances, and
lien rights’ status) to the underlying ledger (i.e., Ethereum block-
chain). This is a decentralized control mechanism where the project
stakeholders [(b-2) in Fig. 3(b)] have no control over the execution
of the contract once it is deployed, and they cannot modify or stop
the payment administration. The computerized contract, the smart
contract running on the public blockchain, is guaranteed to
execute.
The supply chain’s cash flow data is written to the same under-
lying blockchain utilized by the smart contract without reliance
on intermediaries or any of the project’s stakeholders [(b-2) in
Fig. 3(b)]. This is in contrast to the client-server architecture
[Fig. 3(a)] where payment processing is dependent on financial in-
stitutions and their continuous participation in the supply chain.
The benefits of this disintermediation include a closer integra-
tion of cash and product flow within the same platform (i.e., on the
ledger), enhancing supply chain integration, increasing supply
chain visibility, and reducing the transaction processing time and
fees charged by external institutions. However, this disintermedia-
tion introduces a new challenge for the P2P network, namely that
money is an institutional fact, and it relies on the operation of the
financial institutions; they now have a peripheral role and are not
immediately involved in flowing cash between supply chain par-
ticipants [(b-1) in Fig. 3(b)]. The blockchain consensus protocol
again comes to the rescue because it enables the disintermediated
exchange of monetary value via cryptocurrencies or overlays pro-
tocols that allow for customized definition of cryptoassets.
This contrast between the client-server and the smart contract–
based architecture (Fig. 3) demonstrates the importance of decen-
tralization and guaranteed execution, the two key features that
define the role of smart contracts in automated payment systems
and enable them to act as constitutive rules. What blockchain offers
is reliability at the cost of inefficiency. In the centralized architec-
ture, only the server is responsible for performing the computations,
while all the nodes in the EVM execute the same computerized
(b)
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 contract and are required to store a full copy of the ledger and its
past transactions. This provides a reliable system where it can be
guaranteed that the computerized contract can be executed without
reliance on any single party.
However, the current block times on public chains (e.g., 10 min
on Bitcoin and 10–20 s on Ethereum) are significantly lower than
the payment cycles in the AEC industry, even when the required
number of block confirmations are factored in. Therefore, this rel-
ative inefficiency of the consensus-based protocols is not problem-
atic because construction progress payments are high in value and
low in volume (as opposed to other industries such as retail, char-
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acterized with high volume and low value payments).
Analyzing the role of smart contract in the context of John
Searle’s works, we see that the client-server architecture fails to
act as a constitutive rule due to its reliance on the subjectivity
of the observer interpreting the contract terms (i.e., the server ex-
ecuting the computerized contract). In other words, the automated
payment workflows may result in different outcomes and transac-
tions depending on the choice of observer (project member acting
as server). The blockchain addresses this problem by utilizing sev-
eral observers and assigning each the same subjectivity, so that the
automated payment workflow and code execution is repeatable and
identical on all nodes. For example, all EVM nodes interpret the
smart contract in the exact same way. This eliminates the single
source of failure. The blockchain consensus protocol creates a sin-
gle state of a shared reality based on the collective output from this
group of independent observers.
Case Study: Unmanned Aerial Vehicle- and Machine
Learning-Based Progress Tracking
This section presents a case study of smart contract–based
progress payment in the context of robotic progress monitoring.
(a)
(b)
(c)
Fig. 4. Autonomous and decentralized administration of progress payments using UAV-captured visual data: (a) smart contracts development based
on contractual agreements and their deployment on blockchain; (b) autonomous payments to stakeholders; and (c) on-site UAV-based data capture
and BIM-based progress documentation.
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It is intended to illustrate the concepts discussed in the previous
section.
Fig. 1 depicts the primary workflows involved in a smart
contract–based payment system, where on-site observations (prod-
uct flow) are translated into payments (cash flow). This process
does not rely on parties preparing applications for payments and
invoices, but it is governed by a script living on the blockchain
(i.e., smart contract) that autonomously executes the terms of agree-
ment in a decentralized manner. The smart contract acts as a con-
stitutive rule and translates each data capture to a series of payments
and changes to the status of lien rights.
In the initial phase of the project [Fig. 4(a)], the smart contract
code is developed based on the terms of contract and agreements
between parties. Once approved by the parties, it is deployed on
blockchain. This process [Fig. 4(a)] is repeated when there are
changes to the underlying agreements (e.g., contract addendum).
Stakeholders can interact with the smart contract that represents
the latest agreements, either to provide information (e.g., data cap-
tured on site) or to inquire about the status of payments and relevant
project information.
Throughout the project [Fig. 4(c)], visual data is captured using
camera-equipped UAVs (Hamledari et al. 2018b) and automatically
analyzed using computer-vision-based solutions (Hamledari et al.
2017a). This results in progress data in the form of task percent
completion and classification of elements into several states.
The progress data is automatically incorporated into 4D BIMs
(Hamledari et al. 2017b, c) to enable model-driven and integrated
communication of progress.
Based on the captured progress, payments are made to the
project members performing the construction work [Fig. 4(c)].
The captured data, the project information used for the valuation
of the work (e.g., schedule of values), and the resulting payments
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 are stored and time stamped on blockchain (either directly or in the
form of verifiable cryptographic summaries) (Hamledari et al.
2018b). The access to these auditable records is further coordinated
by the smart contract and based on permissions hardcoded into its
underlying code by project stakeholders. In the case of faulty pay-
ments, either due to poor quality of the captured data, inaccurate
data analytics, or concerns about the quality of work, the smart con-
tract makes corrective payments once new data is provided. The
cryptocurrency used for payment can be custom-designed by the
project team or chosen from publicly traded ones; the instances
of the latter suffer from price volatility that pose a challenge to pay-
Downloaded from ascelibrary.org by "Indian Institute of Technology, Bombay" on 04/03/23. Copyright ASCE. For personal use only; all rights reserved.
ment systems. However, increased adoption of these native coins
will be key to stabilizing the prices and addressing this issue in the
long-term. Alternatively, payment can be made using stable cryp-
tocurrencies (Calcaterra et al. 2019; Gu et al. 2020), for example,
those backed by real-world assets.
The execution of the computerized contract on the blockchain
nodes cannot be manipulated by project stakeholders. This separa-
tion of EVM and project P2P network secures the payment
administration and protects it from malicious actors. When execut-
ing the project’s computerized contract, miners do not have incen-
tive to act untruthfully and in the favor of a certain stakeholder. The
smart contract security is further discussed in the following section.
Broader Impact on Disputes and Contractual
Performance
In addition to its key role in automating progress payments, smart
contracts and their underlying blockchain technology have broader
implications for construction law informatics, dispute resolution,
and contractual performance. This section focuses on two major
impacts: (1) the increased autonomy and the reduced need for trust
in stakeholder collaborations; and (2) the creation of an application-
independent, life-cyclic, and shared view of the project’s informa-
tion, a single source of truth.
Code is Law: Zero-Trust Computing Paradigm
Smart contracts hardcode the rules into the system and their self-
enforceability characteristic guarantees adherence by stakeholders.
This reduces the reliance on trust and instead enhances the design
of systems used to facilitate collaborations between project stake-
holders entering a contractual agreement; this enables zero-trust
computing. The resulting autonomy, empowered by secure proto-
cols, in turn reduces the need for manual verification of data accu-
racy, a factor proven to impair trust in AEC (Gad et al. 2016).
Decentralized and autonomous contract administration does not
merely regulate but in fact creates the possibility of conducting
business; it dramatically reducing the friction and makes con-
ducting business more efficient because it reduces unexpected out-
comes by design (De Filippi 2018). Each stakeholder entering a
project is unavoidably agreeing to the contract terms, as memori-
alized in the smart contracts that govern the project’s delivery. Such
formalization of relationships reduces ambiguity, crucial to avoid-
ing conflicts in AEC (Abdul-Malak and Hamie 2019; Jagannathan
and Delhi 2019; Padroth et al. 2017; Parchami Jalal et al. 2019).
The autonomy in contract administration, coupled with smart
contract inheritance, provides an effective enforcement mechanism
for ensuring compliance to guidelines and best practices. For ex-
ample, a regulatory body can publish its guidelines in the form of
smart contracts deployed on blockchain. To abide by these regu-
lations, project members need to ensure that the smart contract
memorializing their progress payment agreement inherits its rules
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J. Leg. Aff. Dispute Resolut. Eng. Constr., 2021, 13(1): 04520038
from the mother contract published by the regulatory body. Each
time there is a change in regulations, the regulatory body broadcasts
the new smart contract’s address; and the project members update
their smart contract code to inherit from the new address.
Other possibilities exist for supporting the use of best practices
within the industry, organizations, and projects. The smart contract
protocol can require compliance with certain data standards and
workflows; for example, this can improve interoperability in data
exchange, a grand and costly challenge facing the AEC industry
(Gallaher et al. 2004; Leite et al. 2016). Smart contracts can be
hardcoded to exclude the data that does not comply with required
exchange standards or is missing certain information from the
project records. The instances of noncompliance, either intentional
or caused by error, are detected autonomously and objectively due
to blockchain’s decentralized consensus algorithm.
Additionally, blockchain-based solutions enable stakeholders to
build systems that cultivate trust by design. Successful blockchain
implementations capitalize on behavioral economics to effectively
align the users’ incentives, a factor proven to increase trust (Ariely
2012; Zhu and Cheung 2020). For example, cryptocurrencies use
this principle to incentivize miners to act truthfully. Block rewards
and consensus protocols incentivize all miners to play by the rules,
or else they suffer financial loss; this inherent characteristic of
blockchain-based consensus is key to the secure administration
of construction progress payment.
The use of smart contracts enables parties up and down the chain
to mitigate risks by reducing misalignments and by enhancing sup-
ply chain visibility. For example, in the current payment workflows
situations exist when one stakeholder can benefit from the other’s
loss (Kaka 2001), and this misalignment, coupled with a lack of
transparency, distort individuals’ understanding of reality; it re-
duces trust. More effective contracting is needed to align incentives
(McKinsey 2020). For example, subcontractors experiencing late
payment often do not know about the source of the problem. They
might speculate that the prime contractor is responsible and is uti-
lizing the money to increase its working capital and address its
own cash flow problems while the underlying reason could, in fact,
be a delay on part of the client or inefficiencies in the workflows
or a misunderstanding of the construction progress achieved. An
autonomous payment system can enable a direct translation of
progress data, captured on site, to payments and eliminate the in-
termediary steps that cause the misalignments between parties’
interest.
Single Source of Truth Enabled by Fat Protocols
Blockchain and the cryptographic protocols underlying smart con-
tracts make consensus possible without reliance on intermediaries;
they enable trustless P2P networks to reach an agreement regarding
the true state of a shared reality/content that is curated collabora-
tively. In the context of progress payments, automation necessitates
a shared understanding between stakeholders regarding brute or in-
stitutional facts such as state of construction progress, as-built mod-
els, the status of payments, accounts receivable or payable, the
terms of contract, the fulfillment of contractual agreements, and
the flow of funds between stakeholders.
Alternative dispute resolution (ADR) procedures rely on infor-
mation that is currently recorded in multiple copies and across si-
loes controlled by independent stakeholders. This makes certain
evidence inadmissible in the court of law and raises questions about
the authenticity of evidence. Blockchain enhances ADR by intro-
ducing a fat protocol mode of data communication and access
where information is securely stored and written to a common
data layer, accessible by independent application platforms.
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 This contrasts with today’s application-heavy ecosystem where
each stakeholder develops their own data siloes and for each inde-
pendent use case. In the fat protocol model, project stakeholders
write to and access a single source of truth, the access to which
is coordinated by blockchain and cryptography. In addition to in-
creased consistency and transparency, this lowers the barriers to
entry because new stakeholders joining the network will need to
only develop a thin application layer that pulls the data from
the common data layer, without the need to develop their data stack
from the ground up.
Parties involved in a conflict can more effectively utilize and
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reference the project data in presenting their cases. For example,
two independent parties performing quality assessment can provide
cryptographic hashes of the underlying data, time stamped and ref-
erenced on the public ledger. This enhances transparency and
makes computation results comparable. In contrast, the current eco-
system relies on parties using different copies or modified versions
of the same file, rendering the results incomparable. The party an-
alyzing the evidence can quickly verify the provenance information
for data used in calculations; this reduces the influence of the
observer’s subjectivity in assessment of cases and disputes.
Blockchain allows for an immutable, auditable, and crypto-
graphically secure single source of truth to be collaboratively
accessed and developed across the project life cycle, and this is
key to achieving an integrated information system (Fischer et al.
2017). Additionally, each stakeholder entering a contractual agree-
ment can audit certain aspects of other parties’ past track records.
This allows subcontractors and suppliers to identify slow paying
clients before entering into contract. Conversely, this can reduce
the barriers to entry for small or new players because these track
records help create data-driven reputation scores that introduce
more objectivity in the evaluations of one’s trustworthiness and
competitiveness.
Challenges and Limitations
The AEC’s adoption of this technology is in its infancy; successful
fruition calls for research on a few fronts including the technologi-
cal development, understanding the impact on project delivery
methods, and the smart contract security.
Design of a Smart Contract Protocol and Its Life Cyclic Use
The research questions relate to (1) the design of smart contract
protocols; (2) the storage of product and cash flow data such that
it supports smart contract functionality; and (3) the design of work-
flows involved in constructing, deploying, and maintaining the
smart contract over a project’s life cycle.
Impact on Project Delivery
Once introduced into a project, the decentralized contract
administration not only impacts the payment workflows, but also
the stakeholders’ role. A lack of understanding regarding this
changing dynamic posits a major risk to smart contract adoption
(Piao 2020).
Smart Contract Security and the Formalization of
Relationships
The decentralized and guaranteed execution, even though desired
in the context of automation, also brings challenges and risks. For
example, this is the case if there exist flaws in the design of pro-
tocols or their implementation. Smart contract security was iden-
tified as a primary challenge for the adoption of this technology
in applications related to cities (Shen and Pena-Mora 2018).
The risks are twofold. First, the computation results are not
reversible, so faulty code can jeopardize the integrity of project data
© ASCE
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2021, 13(1): 04520038
or cause financial loss. The parties must ensure the soundness of the
computerized code before its deployment. To enhance the security
of smart contracts, the research community has focused on formal
verification techniques (Bhargavan et al. 2016) to ensure the func-
tional correctness of a smart contract. There is a need for the AEC
industry to standardize the design of protocols to ensure consis-
tency and the security of protocols used across projects. Second,
computerizing the terms of contract will prove challenging or
impossible in many cases; a machine-readable code cannot capture
all the complexity of agreements, and there is a need for a hybrid
model that encompasses both human-based interpretation of agree-
ments and autonomous execution of formalized relationships
(Narayanan et al. 2016).
Other risks exist because blockchains are prone to attacks from
their P2P network. To sabotage the blockchain’s consensus algo-
rithm, one needs to perform a 51% attack on the network. In block-
chains using the proof of work (PoW) protocol (Gervais et al. 2016;
Nakamoto 2008), this necessitates taking control of more than half
the hash rate and computing power, by acquiring other mining
pools or by amassing computation power equal to current hash rate
and participating as a miner. This does not guarantee a successful
attack but increases chances of sabotaging the consensus protocol
so that faulty data can be written to the public chain or certain trans-
actions are ignored.
While this is particularly a challenge for permissioned block-
chains and distributed ledger technology (DLT), the high hash rate
in public blockchains such as Ethereum and Bitcoin make the cost
prohibitive and render such an attack infeasible. In public chains
using proof of stake (PoS) consensus protocol (Vasin 2014), the
node carrying out the 51% attack will suffer financial loss. If
the integrity of a public blockchain is successfully challenged
by an attack, the native cryptocurrency will devalue; this is because
a cryptocurrency is valued based on both its utilization and per-
ceived potential among its users (Burniske and Tatar 2017). In such
a case, the node carrying out the 51% attack and jeopardizing the
security of a smart contract will absorb more than half the loss in
market capitalization.
Conclusion
The construction industry currently relies on traditional payment
applications that are slow and inefficient. This exposes projects
and stakeholders to a myriad of risks including late and nonpay-
ments, lien risk, reduced trust, and cost/schedule overrun. Despite
the desired benefits of payment automation and today’s abundance
of digitized progress data, progress payment automation is still far
from reality.
The theory of social reality was employed to identify the under-
lying barriers that hinder automation. It was argued that current
payment applications and their supporting contract documents,
even when computerized, cannot support progress payment auto-
mation due to two major limitations: (1) reliance on centralized
control and execution mechanisms, and (2) lack of guaranteed ex-
ecution. The paper then presented a case for why blockchain and
smart contracts have key characteristics that provide promise with
respect to identified challenges. Payment automation was analyzed
in systems that do and do not rely on blockchain.
Borrowing from the works of John Searle and Nick Szabo, the
role of smart contracts was established as a constitutive rule that
automates the translation of product flow (the observation of as-
built conditions) to cash flow (progress payments) without reliance
on the role of intermediaries. A case study application of a smart
contract was presented to further illustrate the previously discussed
04520038-8 J. Leg. Aff. Dispute Resolut. Eng. Constr.
 concepts in the context of robotic and BIM-based construction
progress tracking.
Broader implications of smart contracts and their underlying
blockchain technology on dispute resolution and contractual per-
formance include (1) the advent of zero-trust computing due to
the use of autonomous and self-enforceable code; and (2) creating
a life-cyclic, application-independent, immutable, and fully audit-
able record of project information. The former changes the under-
lying modes of collaboration by introducing systems that cultivate
trust and reduce possibilities of opportunistic behavior; the latter
improves dispute resolution and avoidance by creating a single
Downloaded from ascelibrary.org by "Indian Institute of Technology, Bombay" on 04/03/23. Copyright ASCE. For personal use only; all rights reserved.
source of truth accessible by all stakeholders.
Smart contract-based payment systems are still in the early
stages of research and development. Successful adoption necessi-
tates focus on (1) smart contract security and formal verification;
(2) understanding the impact of decentralized contract administration
on the incentive structure and the dynamics of project delivery meth-
ods; and (3) the design of smart contracts used for progress payments
and its deployment and maintenance strategy.
Data Availability Statement
Data, models, or code used during the study were provided by
third parties. Direct request for these materials may be made to the
provider as indicated in the Acknowledgments.
Acknowledgments
The authors are grateful the Center for Integrated Facility Engineer-
ing (CIFE) for its financial support of this work (CIFE Seed
2018-06). The first author is grateful to Parisa Nikkhoo and Alissa
Cooperman for having always shared their constructive and genu-
ine opinions on his Ph.D. work.
References
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