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18 December 2018
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SMART CONTRACTS: THE SMART OF THE DEAL

Smart contracts have the potential to deliver greater transparency to the client-supplier relationship as well as dispute-free automation of payment for services, writes Nicholas Newman.

p56_smart-contracts

06 August 2018 Nicholas Newman


While still in its nascency, particularly in FM, blockchain technology (see boxout ,p.58) and smart contracts (see boxout, below) hint at a future in which transactions surrounding daily maintenance and servicing activities are automated, providing transparency and convenience as well as improving efficiency and reducing costs.


“Blockchain offers the real estate sector, first and foremost, security, traceability and transparency since documents, including leases, freehold transactions and provision of good title could be recorded and uploaded into a blockchain, which cannot be changed without the participants of the chain being aware,” explains international property consultant Jonathan Hutt at J Rands Hutt.


Currently, blockchain is still in its early stages of development and its potential applications for facilities management and real estate are being explored and trialled by Oxford University, PricewaterhouseCoopers and IBM.


David Shrier, associate fellow at Saïd Business School for Facilities Management in Oxford, says: “Blockchain is good at automating complex repeating tasks that involve multiple parties and require documentation and an audit trail which makes it well suited to estate transactions.”


Shrier adds that rent collection and service charge accounts could also be run using blockchain, which would make money-handling processes more secure, transparent and simpler.


The smart contract misnomer

Shrier says the term ‘smart contract’ is a bit of a misnomer as it is neither smart (in the sense of AI), nor a contract (in the sense of being a legally binding document). Smart contracts are in fact self-executing apps, using a set of specific instructions, conditions and outcomes that are issued, met and achieved through blockchain technology.


These contracts could, in time, replace conventional legal contracts or paper agreements. They will be able to determine how funds should change hands and then automatically execute fund transfers after certain conditions are met. 


Jeff Garzik, co-founder of the blockchain services start-up Bloq, says: “[Smart contracts] guarantee a very specific set of outcomes. There’s never any confusion, 

and there’s never any need for litigation. It’s simply a very limited, computer-guaranteed set of outcomes.”


Smart contracts, initially at least due to current levels of technological innovation, will be particularly suited to regular micro-payments – i.e., recurrent sums of less than £5,000, usually for paying for service and maintenance contracts, small purchase orders or equipment - and not more complex and bigger Capex spend such as major equipment upgrades and large installations. However, this challenge will likely be overcome with time.


Maintenance contracts 

Building services engineering (BSE) equipment, whether boilers and chillers, pumps and fans, or switch gears and transfer switches, needs regular maintenance and servicing and, often, each category and component has its own maintenance and service schedules. 


The first requirement would be to have the private blockchain (see boxout 3) keep track of regular maintenance and service visits from contractors, providing traceability and accountability. 


The smart contract would then release payment once the work has been verified via sensors or smart interfaces, which many HVAC and electrical equipment in commercial buildings already has. (See boxout 4.) 


Small purchase orders

According to Osman Saleem, senior consultant at Toronto-based Intelligent Buildings, few property management firms issue purchase orders to their contractors for small amounts. 


“Some of our clients simply email their contractors and ask them to invoice the cost of the work,” Salem explains. “This process, or lack thereof, causes issues when the work is completed and needs to be revisited at a later time.


“Property Managers and contractors resort to older correspondence for details and a lot of time is wasted. In many cases, there is no official record for this type of work and, if property managers or operations staff switch jobs, the information is lost.”


By using a building automation system (BAS), along with data analytics and AI, the small sequences of operation changes as programmed in HVAC equipment, for example, can be verified, and the smart contract on a private blockchain could release payment. 


The blockchain would provide a complete record of work and payments. Currently, we do not have seamless connectivity between blockchain, smart contracts and AI. (See Boxout 5 for discussion of smart contracts and AI.)


However, recording the transactions between vendors and contractors in a private blockchain would allow property management firms greater transparency for record keeping and provide traceability when older invoices and contracts need to be reviewed.

Emma Potter

Equipment warranties

With more IoT-connected BSE equipment reaching the market, the use of smart contracts, which would communicate with equipment via sensors, could automate warranties and provide refunds when equipment fails. 


The combination of these technologies will provide building managers with accurate, real-time information about every aspect of the building’s performance – thereby potentially reducing purchase and administrative costs.


Indoor occupancy tracking 

Blockchain could also be used to track occupants’ use of premises and services. For example, Zerado, a UK-based blockchain applications startup and member of the Chain of Things (CoT) consortium, is developing a pilot for the management of shared offices in buildings, particularly incubator, accelerator or co-working (IAC) space facilities.


The pilot, dubbed ‘Doorknob’, will grant registered members access to rooms, the gym, food and drink options in the facilities by tapping a contactless credit card or smart card to a reader. The data provides building managers with a profile of visitors’ use and behaviour, and comprehensive understanding of the community, as well new ways in which to engage and improve offerings. 


In the example of the gym, users would be equipped with sensor-enabled device, which would interact with sensors on gym equipment and, through the Wi-Fi, report to the building’s computer to identify a particular person, the time they enter and exit the gym, as well as the equipment they use and for how long. The smart contract could then automatically bill the gym user in what would essentially be a ‘gym-on-demand’ business model.


Moreover, Zerado also foresees that with a combination of blockchain-based micro-payments technology and a sophisticated stock-taking system, restaurants and bars will be assimilated into the facility operator’s internal technological infrastructure.


(It’s worth noting that Zerado’s offering was being discussed more than a year ago when FM World first wrote about the potential of Blockchain. What’s clearly missing is the connection between smart contract and actual legal admissibility - ed.)




How smart contracts and blockchain work together - in six steps


Karl Redmond, associate facilities management consultant at Rider Levett Bucknall UK, breaks down the process as follows:

  •  A sensor detects whether an asset (motor) is running over threshold and, via the IoT, sends data to a central source and writes it to the blockchain ledger;
  •  A part to fix the asset is ordered from the supplier, which is written to ledger;
  •  A part is shipped to the customer, which also goes into the ledger;
  •  The customer receives and checks the part, recording it in the ledger;
  •  The part is installed and repairs completed, which goes into the ledger; and 
  •  The work order is closed and written to the ledger.   

A smart contract between supplier and FM client could factor in reducing downtime, based on IoT-connected sensors detecting problems before they occur and pair that with an SLA guaranteeing (99 per cent) next day delivery of correct component.  


The agreement also included options to show the customer the number of orders raised, therefore, reducing procurement costs and enabling Just in Time (JiT) inventory assessment. 


The last entry in the blockchain ledger is the work order being closed, potentially highlighting improvements in reactive maintenance and productivity for the core business as well as the FM teams.


Customers could check the ledger every month or as and when an invoice is raised to ensure shipping orders and delivery are correct. But them being incorrect is just about impossible as everything is written to the secure blockchain ledger – offering one source of the truth for the client and all involved in the supply chain.  


Unambiguous transparency will break down cultural and project barriers between client and professional, which not everyone in construction, asset and facilities management will welcome as it will engage and empower everyone in the process, especially clients.


Tracking co-working spaces

For shared work spaces in office blocks, there is usually a fixed monthly fee for a desk or office. The administrative cost of charging  each user a different fee on a per-use basis is high and not wholly accurate. 


The blockchain and smart contracts could be used to bill customers for the actual amount of time and resources used, and charges could be applied according to peak and off-peak occupancy times. 


With a dynamic pricing model, a building manager could encourage efficient use of the building space throughout the day and avoid overcrowding.


 


Energy trading

Large commercial buildings are increasingly generating their own energy and selling their surplus to the grid. Any electricity trade, theoretically at least, could be tracked using blockchain but, in practice, this is still a rarity and lacking in scale.


A pioneer in the space is renewable electricity supplier Irene Energy, which enables commercial, infrastructure or households to record their electricity consumption and sales on the Tellus token, based its energy platform Stellar.


With the micro-payments feature, Irene Energy is able to follow the intermittency of renewable production and guarantee to consumers what they bought, when, and from whom. Smart contracts could facilitate auto-payments when a buyer receives their purchased energy supply.


The adoption of blockchain technology and smart contracts to manage commercial and government buildings and estates remain some years away. However, when it arrives, the relationship between client and supplier will be forever changed. Greater transparency and automated payment for services rendered will disrupt FM sector by eliminating many middle and back office costs.  

 



Private vs public


A private blockchain network requires an invitation and must be validated by either the network starter or a set of rules determined by the network starter. Businesses set up a private blockchain using a permissioned network, which places restrictions on participants and transactions. Anyone can join a public blockchain network, which typically has an incentivising mechanism to encourage more participants. Bitcoin is one of the largest public networks in production today.



How does AI fit into ALL this?


Karl Redmond makes his predictions on the relationship between AI and smart contracts.


The natural extension and iteration regarding smart contracts and blockchain is the addition of AI, but the more complex the offering, the more difficult this will be to explain and implement.


To help understand we can use the example of a refrigeration unit in a hospital or doctors’ surgery with a need to maintain a constant temperature.


The refrigeration unit may need to maintain a temperature range between XX and YY degrees. If the temperature advances above YY degrees all items will need to be disposed of and new stock re-ordered from a range of sources and suppliers.


The AI-enabled refrigeration unit will be able to monitor the temperature range, identify and calculate trends; namely, incremental temperature increases over a period of time.


The AI unit could also aid with identifying the cause of the problem, suggest a solution and order the necessary parts required to fix the problem – all based on data received from the unit.  


Subsequent steps would be the automatic creation of a digitally produced work order. This is a fairly simple scenario, whereas lifts, motors and energy consumption, for example, will be more challenging.


AI will require lots of data to provide immediate benefits and this may be cost-prohibitive in the short term. However, it will soon become commonplace and refined in its implementation, making it more accessible for a broader range of clients and customers. 



Conclusion


The promise of smart contracts is their potential scaleability as much as their ability to measure equipment ‘transactions’ down to a single trigger. The ‘crowd-sourced’ ledger entry confirmation that powers smart contracts has led experts to suggest facilities management will be one of the areas of most significant potential. Seen in the context of the evolution of ‘smart cities’ or ‘intelligent buildings’, the theory is that the Internet of Things and the rapid dissemination of sensor-connected building services equipment will create entirely new ways of measuring and managing workplace equipment performance and maintenance. It’s the kind of seismic technological shift that has led to people such as Geoff Prudence, chairman of the CIBSE FM group, detailing the need for a broader skill set amongst FMs running building maintenance operations (see FM World, May 2018).


When you consider the impact of the performance of lifts, security cameras, boilers, air conditioning units and other such equipment on the energy consumption and environmental impact of organisations, the management of facilities’ equipment performance puts the potential for smart contracts in the shop window. At May’s BIFM ThinkFM conference, consultant Lionel Prodgers spoke of the need for FMs to be comfortable with their new relationship with data management.


“I like the idea that data is becoming tactile," said Prodgers. "We can now touch it and move it around with our hands; less effort is going into the management and visualisation of data. FMs need to manage a process to respond to these micro-events, tracking them from multiple sources, not just the help desk. In so doing events can be assessed by relative volume to uncover fresh maintenance requirements. And in the format of a smart contract, 


Security of equipment connected by sensor will be increasingly important in an IoT enabled world, and smart contracts could include mechanisms to ensure minimum levels of equipment performance to ensure such security. The suggestion is that smart contracts will add huge new scope to future maintenance service relationships.