Block by block: Smart contracts in South Africa

  • Block by block: Smart contracts in South Africa
About this article
Alain Alexander


Alain Alexander


Perspective 2023 vol 2

In a highly competitive industry like construction, smart contracts can provide a secure and reliable way to conduct transactions when traditional contracting may fall short.

In South Africa, where regulation, limited resources and low profitability cause many headaches, smart contracts could create a new competitive advantage. Picture a contract that executes itself and sustains trust by lines of tamper-proof code. That’s what smart contracts do – and these smart contracts are set to transform construction.

Smart contracts are decentralised digital agreements, eliminate the need for intermediaries and ensure secure and transparent transactions. One recent systematic review of 81 studies on smart contract applications in construction found their biggest benefits included flexibility, security, automation, transparency, reliability and traceability.

In South Africa – where construction employs more than two million people and is a major economic contributor – smart contracts could meet several challenges.

South Africa’s construction industry is highly regulated and competitive. Successful operation requires extensive knowledge and skill, and construction firms often vie for limited resources and labour. It is also one beset by structural challenges, ranging from low profitability to lack of access to capital.

From traditional to high-tech, high trust contracts

A traditional construction contract is an agreement between the parties involved in a construction project. It outlines the scope of work, the terms of payment and other important details. It also serves as the legal basis for any disputes that might arise during the project. While traditional construction contracts are essential for protecting all parties involved in the project, they can also be a source of challenges.

One of the main issues is the lack of flexibility. With a traditional contract, the parties are bound to the specific terms of the agreement, which may not be suitable for dynamic projects. In addition, the contracts can be lengthy and complex, making them difficult to understand and enforce.

One possible solution to these issues is the use of smart contracts. A smart contract is an automated agreement that is executed using computerised protocols. It is designed to ensure that all parties are bound to the terms of the contract, and that any dispute can be resolved quickly and efficiently. Smart contracts can streamline the execution process and reduce the need for manual paperwork.

Global construction projects are already using smart to automate.

  • Payment escrow: Hold funds until specific project conditions are satisfied, with the funds then automatically released to the contractor.
  • Progress tracking: Release payment to the contractor at predetermined milestones.
  • Quality assurance: Incorporate quality standards or warranty terms into the code.
  • Contract administration: Eliminate manual tasks, such as distribution, tracking changes and managing approvals.
  • Dispute resolution: Resolve conflicts based on the terms of the agreement without manual intervention.
  • Supply chain management: Trigger payment to suppliers once the delivery of materials is confirmed.
  • Insurance: Incorporate insurance policy terms into the code. If a claim is made, the contract can trigger the payment of benefits to the policyholder.

Cracking the code in South African construction

In the South African context, smart contracts offer several potential advantages. Firstly, they can help to reduce contract complexity, resulting in less time wasted on paperwork and more time spent on actual construction.

Secondly, they can improve the transparency of the process, as all parties involved in the contract can view the terms and conditions in real-time. This can help to reduce disputes and ensure that the project is completed on time and on budget. By eliminating the need for manual paperwork, contracts can be monitored more closely, resulting in greater transparency and accountability.

However, there are also some disadvantages to the use of smart contracts that could hamper their adoption in South Africa. For one, they require a certain level of technical expertise and this may make them inaccessible in some pockets of the market. Additionally, smart contracts are still relatively new, and their legal implications are not yet fully understood. This could potentially lead to costly disputes if the terms of the contract are not properly enforced.

As South Africa’s construction industry grapples with a host of challenges, smart contracts are emerging as a viable solution to streamline execution, reduces the risk of disputes, and ensure compliance with regulations.

It’s early days for smart contracts in construction, and the industry will need to upskill to boost its technical expertise and legal understanding. Despite the challenges on the horizon, smart contracts could be a fundamental building block to better construction.