A Smart Contracts Use Case: Built Environment as a Service. A discussion paper for the Construction Blockchain Consortium
There is a potential that the business model for the creation and use of built assets will be transformed by digital technology. The present model is that assets are owned, operated and maintained by investors, occupiers and public bodies and that their creators are paid a capital sum for them. The potential ‘servitized’ model is one in which occupiers lease assets from service providers who operate, maintain and recycle them: built environment as a service (BEaaS).
The argument for BEaaS is that it overcomes many shortcomings in the current business model, for both buyers and providers. Users would pay out of operating expenses for the delivery of guaranteed performance by the asset, rather than accepting underperformance. They would not need to find the capital sum required. Service providers would be incentivised to innovate to achieve high performance and low maintenance assets. They would finance the construction and receive an income stream rather than lumps of capital payment. Obsolete or underperforming elements would be recaptured by the provider for reuse or recycling.
This concept was tried in the 1990s as the Private Finance Initiative (PFI), but without any digital dimension. Public facilities were created by ‘Special Purpose Vehicles (SPVs)’ which financed, designed, built, operated and maintained the facility for a regular payment, over 25 years typically. The logic of the PFI was to avoid capital burdens on the public finances and to call on the creativity of the private sector to raise efficiency. The method worked partially but fell into disrepute. Liabilities could not be truly removed from the public balance sheet. Quality of product was not enhanced, and facility management was not well integrated into the process. Naïve public procurement exposed users to high payments for minor alterations. The inclusion of maintenance costs in the total payment agreements burdened occupier bodies which had traditionally ignored maintenance or misappropriated maintenance reserves. Finally, the public rebelled at the high profits generated by SPVs and their financiers.
The idea has circled back again in the era of Digital Built Britain. Built assets have been compared to manufactured ones like aircraft or trains which are increasingly leased as services. They are delivered on performance contracts with their providers retaining responsibility for them. This is now enabled by digital twins, the physical asset being connected to its as-built digital model by IoT sensors, analytics and actuators to allow better design simulation, maintenance down the line and software-based upgrades. Support to operator business performance is also possible. Semi-automation has already been achieved for such products.
The idea behind Digital Built Britain is that built assets would increasingly have digital twins alongside them so that briefmaking, design, construction, operation and use would be informed by a continuous flow of data between them. Digital twins could also be connected to enable smart cities and better national management. A smart building with a digital twin would make it far easier to deliver planned performance and to keep improving it, thus overcoming one weakness of the PFI. The DBFO (design, build, finance, operate) model would become interesting again. In this new manifestation, the occupier payments for delivered performance could be arranged as smart contracts, with payments flowing from measured achievement of targets, all recorded on a distributed ledger basis. Smart-contract-based BEaaS would be practicable.
It is a big jump to propose whole-building BEaaS from a standing start. But there are several, incremental steps into it. Between a quarter and a half of the capital cost of a building is in its engineering systems, depending on building type. More than three quarters of whole life cost flows from these systems, given that they consume energy and water and require most of the maintenance and replacements. These systems can however be leased. Lighting systems came first, with Philips offering to provide light, not lighting. LED lighting can be paid for as used and is monitored down the line by its provider, with intervention when indicated. Smart building networks are often based on the lighting system. Other systems like lifts, mechanical, electrical, telecom, control and workplace management systems could be similarly provided. They are monitored by a BMS and could report to their providers as well as their users. Cambridge University is leasing laboratory FFE (Furniture, Fixtures and Equipment), moving this specialist, short-life item from the capital account to the operating one and charging users for services. Solar energy suppliers like Arizona Power System in the USA are offering free installation to homeowners who then pay for net grid consumption and the capital employed out of their (reduced) monthly charge. Smart contracts can lie below all these business models.
There is thus a prospect that smart contracts could enable the progressive shift of building costs from the capital to the operating account, whilst at the same time improving service quality, carbon emissions, economic effectiveness and efficiency. Circular economy goals would also be met by providers retaining ownership of all materials used, recovering them as upgrades or replacements occur.
The incremental approach also fits with the new awareness that all built environment is a system of systems. A building is part of a city and within a building are many sub-systems, each able to be optimised. The electrical supplier Schneider has created digital twins of each component in their catalogue so that they can commission, monitor and maintain their installations. They could go further and provide them as a service based on smart contracts.
I see this line of thought as more productive for CBC than attempting to apply smart contracts to today’s way of delivering buildings. I look forward to discussing and developing these thoughts.
Richard Saxon 18.05.20.
BIM, PFI, Smart Contracts, IoT, SPVs, Digital Built Britain, DBFO, BEaaS, FFE
- Saxon, R., 2020. A Smart Contracts Use Case: Built Environment as a Service. A discussion paper for the Construction Blockchain Consortium. Zotero Construction Blockchain Library