ACADEMIA Letters Blockchain: The Next Stage of Digital Procurement in Construction Srinath Perera, Western Sydney University Samudaya Nanayakkara Thilini Weerasuriya 1 Introduction Construction procurement is a process that enables clients to obtain goods and services for construction work. This process should be fair, transparent, competitive, and cost-effective in order to deliver value for money [1]. However, construction industry is heavily fragmented procurement processes are complex, time-consuming and sometimes lead to disputes with significant expenses involving middlemen [2]. Large volumes of data are generated in procurement activities, which are challenging to capture, store, process and transmit via traditional construction procurement methods, causing inefficiencies, errors, and reduced trust [1]. Traditional procurement systems rely heavily on contracts that are adversarial and require third party administration [3], with lowest bid appointment practices jeopardising built asset quality [4]. Several of these challenges of paper-based procurement can be mitigated by introducing digital technologies. e-Procurement or digital procurement is a paramount function of present supply chains in any domain. Services covered by e-procurement include indent management, e-tendering, eauctioning, supplier management, catalogue management, e-purchasing, and e-contract management [5, 6]. e-Procurement can be categorised into three distinct eras. The first era, in the 1980s, used digital storage media and emails to transfer procurement-related documents. In the second era, which was web-based e-procurement in the 1990s, suppliers communicated Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 1 directly with the client’s e-procurement portal. The third era involved cloud computing and system-to-system inter-communication in the 2000s. In the third era, standardised application processes enabled supplier’s systems to communicate directly with client’s systems, thereby eliminating human errors, increasing cost savings, accuracy, and performance [7]. However, low trust on traditional systems on cloud environments is a challenge to fully employ digital technologies for procurement. Furthermore, there are currently no unified systems to support all construction procurement processes and data exchanges and connect the varied stakeholders in the procurement process including manufacturers, suppliers, contractors, clients, and others on one platform [1]. Building Information Modelling (BIM) improves the exchanging and managing of information and enhances communication and collaboration among stakeholders of a project [8]. BIM is most frequently used in the design stage for clash detection, 3D modelling, constructability analysis and cost estimation [9], but has failed to impact and solve issues related to procurement in the construction supply chains [18]. Blockchain technology is a disruptive technology that has impacted multiple industries and presents a great potential to solve issues in the construction industry, including the reduction of existing gaps in digitalisation of construction procurement [18]. The following two sections discuss the concept of blockchain technology and its features. Subsequently, potential applications of blockchain in construction procurement are presented, followed by the conclusion of the paper. 2 Blockchain Technology The blockchain is a secure and effective distributed ledger mechanism to share data across different geographical locations, without a central point of control, avoiding middlemen and ensuring trust in a trustless environment [10, 11]. To achieve these features, blockchain utilises a combination of concepts, including peer-to-peer protocols, hashing algorithm, cryptographic primitives such as public-key cryptography and consensus algorithms [12] as shown in Figure 1. Consecutive blocks in a blockchain ledger are interlinked by using hashing algorithms to form a chain of blocks to mitigate the tampering of data in the ledger. Blockchain networks may contain a few to thousands of computers called nodes. These nodes utilise peer-to-peer protocols to share data across the network. Blockchain networks typically utilise asymmetric public-key cryptography to digitally sign transactions in a pseudonymous environment, and a consensus mechanism ensures that a new block containing a set of transactions is valid before it is recorded to the ledger [13]. Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 2 Figure 1: Technologies and concepts behind the blockchain network. Source: Nanayakkara, et al. [14] Based on the network layer arrangement and consensus algorithms, three types of blockchain network commonly named as public or permissionless, private or permissioned, and consortium can be identified, as shown in Figure 2. A public blockchain is open to anyone who wishes to participate in the network and allows access to all transactions on the blockchain [15]. All the white nodes in Figure 2 belong to a public blockchain network. In a private blockchain, only authorised participants can join the network [16]. A single set of green nodes in Figure 2 belong to one private blockchain network. The consortium blockchain is also a permissioned network which works with multiple organisations. All three sets of green nodes in Figure 2 together comprise a consortium blockchain network. Public blockchains are suitable for public interest applications without any access limitations; a private blockchain is suitable for enterprise applications for which access permission is solely provided to an organisation’s internal systems; and consortium blockchain networks are suitable for interorganisational applications for which organisations have an overlap in their operations. Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 3 Figure 2: Skeleton of a public, private, consortium blockchain network. Source: Perera, et al. [17] 3 Features of Blockchain The blockchain has enhanced security, performance, robustness, resilience, auditability, accountability, equality and others compared to traditional internet-based information systems [18]. Blockchain technology consists of unique and enhanced features that increase the usage and expand the applicability of IT systems in many sectors [19], such as: • Decentralisation: The distributed ledger on the decentralised peer-to-peer blockchain network has no central administrator or centralised data storage, eliminating the risk of a single point of failure [11]. • Immutability: The peer-to-peer network and chain of blocks secure data on the blockchain, ensuring immutability. Transactions cannot be undone or tampered with after records have been added to the blockchain, resulting in an immutable ledger that only allows to create and read operations [20]. • Transparency: In a public blockchain, all transactions are transparent and informed to all nodes. Therefore, public blockchain systems can be considered as highly transparent systems [21]. • Security: Blockchain uses hashing algorithms to mitigate the tampering of data stored in the ledger, and the peer-to-peer network enhances data integrity and availability. Asymmetric public-key cryptography provides secure and fraud-resistant transactions with privacy [13]. Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 4 • Auditability: Transactions on the blockchain are validated, and a timestamp is recorded in the ledger, enablingusers to easily audit records by accessing any network node [22]. • Trust: The majority of participants in the network should achieve consensus to add data to the blockchain. Furthermore, autonomous smart contracts, immutable ledger and high audibility provide greater trust among all members [23]. 4 Application of Blockchain Technology in Construction Procurement Blockchain technology-based applications can be categorised into three sectors, viz Blockchain 1.0 for digital currency, Blockchain 2.0 for digital finance, and Blockchain 3.0 for digital society [17]. Blockchain applications in the construction industry are broadly identified under Blockchain 3.0, and some prominent application areas are discussed below; • e-Procurement: Blockchain-based decentralised e-procurement solutions have the potential to be the fourth era of e-procurement. Smart contracts, which are a set of selfexecuting contracts written into a blockchain network, empower trust in a trustless internet environment without a mediator [24]. Removing the middleman in the procurement process will automate transactions with high accuracy and lower costs [25]. Therefore, smart contract enabled blockchain solutions will mitigate human errors and disputes in a complex situation and ultimately save significant costs with highly efficient and effective procurement operations. • Payment management: The construction industry has a long-chained payment settlement culture, and many late, partial, and non-payments occur in the industry, incurring additional costs due to the cost of finance, risk and low trust among parties [26]. Implementation of smart contract enabled blockchain payment applications can provide greater trust on transactions with automation and effective operation to mitigate payment-related issues in the procurement process [14]. • Supply chain: The construction industry produces one of the most complex and largest objects with many internal and external suppliers connected through dynamic and lengthy supply chains [27]. Information Technology applications cannot completely eliminate uncertainty and transparency issues in construction supply chains, although information flow is made more efficient [28, 29]. Immutable blockchain records provide transparency of supply chain operations such as fast tracing of product provenance for quality Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 5 assurance and compliance purposes [30]. Therefore, blockchain can improve the efficiency, traceability, authenticity, compliance and trust in construction supply chains. • Project and product certification: Procured construction materials and products should meet relevant regulatory standards and be certified as being fit for purpose. Completed construction work is also inspected, tested and certified for quality compliance, throughout a project and before final delivery. Integrity and authenticity of documents related to construction quality is key to building trust [31]. Certifications regarding the quality of raw materials and products and quality and quantity of work progress can be stored in the blockchain so that all authorised stakeholders have access to authentic information [30]. Since the records on the blockchain are tamper-proof, it will assist in enforcing compliance of work and deter possible record falsification [32]. 5 Conclusions Blockchain, being a distributed ledger technology, has immense potential to emerge as the next stage of digital procurement in construction. The issues arising from manual procurement practices, such as inefficient handling of large amounts of data, errors due to complex processes, and high costs, can be overcome to a certain extent using traditional information systems, although low system interoperability and diverse stakeholders in a trustless environment still pose further challenges. Due to its many salient features such as decentralisation, immutability, trust, and auditability, blockchain technology can contribute to the removal of intermediaries, reduce costs, enhance trust on transactions and certifications, credentialing, improve information flow and traceability. The construction industry is one of the least digitalised industries [33], and adopting and integrating blockchain systems for procurement will be challenging for most construction organisations. For optimal function, all-digital systems, including blockchain systems, require accurate digital input. Construction procurement processes will need to be standardised and digitalised to produce interoperable data that can be used in information models and smart contracts to deliver efficient, automated outputs [4]. References 1. E. O. Ibem and S. Laryea, “Survey of digital technologies in procurement of construction projects,” Automation in Construction, vol. 46, pp. 11-21, 2014/10/01/ 2014, doi: https://doi.org/10.1016/j.autcon.2014.07.003. Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). 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Available: http://www.mckinsey.com/industries/ capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivityrevolution Academia Letters, January 2021 ©2021 by the authors — Open Access — Distributed under CC BY 4.0 Corresponding Author: Srinath Perera, srinath.perera@westernsydney.edu.au Citation: Perera, S., Nanayakkara, S., Weerasuriya, T. (2021). Blockchain: The Next Stage of Digital Procurement in Construction. Academia Letters, Article 119. https://doi.org/10.20935/AL119. 10