Making sure the contract fits the asset: construction risk in data centers
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Data centers have rapidly emerged as one of the most significant assets in the construction industry, driven by the explosive growth of cloud computing, artificial intelligence and the ever-increasing global demand for digital infrastructure.
Yet despite the scale of investment flowing into these projects, the contractual frameworks used to deliver them have not always kept pace with the unique risks they present. If you are a data center operator, the construction phase is often where your commercial risk is at its highest. The facility does not generate revenue until it is live. Your contract must be equipped to deal with (and offer adequate protection from) the delays and defects that can arise due to the complex nature of the design, performance requirements and long lead time equipment, or you could face significant exposure.
Data centers have rapidly emerged as one of the most significant assets in the construction industry, driven by the explosive growth of cloud computing, artificial intelligence and the ever-increasing global demand for digital infrastructure.
Yet despite the scale of investment flowing into these projects, the contractual frameworks used to deliver them have not always kept pace with the unique risks they present. If you are a data center operator, the construction phase is often where your commercial risk is at its highest. The facility does not generate revenue until it is live. Your contract must be equipped to deal with (and offer adequate protection from) the delays and defects that can arise due to the complex nature of the design, performance requirements and long lead time equipment, or you could face significant exposure.
What makes data centers unique?
- engineering-led assets, not traditional buildings - simpler physical structures, but complexity sits in power, cooling, fire systems, backup and connectivity - systems must operate with extreme precision and resilience - even brief downtime can have significant commercial impact
- complex commissioning and testing - requires full-load, integrated systems testing - process is lengthy and technically demanding - issues often only emerge at this stage
- intense delivery timelines and risk profile - operators commit to delivery dates before building completion - high liquidated damages and minimal tolerance for delay - late delivery can miss the commercial window entirely
- constrained, global supply chain - reliance on specialist equipment (e.g., transformers, generators and cooling units) - long lead times - often over a year - delays to a single component can hold up the entire project
What makes data centers unique?
- engineering-led assets, not traditional buildings - simpler physical structures, but complexity sits in power, cooling, fire systems, backup and connectivity - systems must operate with extreme precision and resilience - even brief downtime can have significant commercial impact
- complex commissioning and testing - requires full-load, integrated systems testing - process is lengthy and technically demanding - issues often only emerge at this stage
- intense delivery timelines and risk profile - operators commit to delivery dates before building completion - high liquidated damages and minimal tolerance for delay - late delivery can miss the commercial window entirely
- constrained, global supply chain - reliance on specialist equipment (e.g., transformers, generators and cooling units) - long lead times - often over a year - delays to a single component can hold up the entire project
Why some standard form contracts may fall short
- Not designed for data center complexity
FIDIC, NEC and JCT contracts are well-established, respected and widely understood. They provide a common language for the construction industry. However, they were understandably developed for a broad range of projects, and their unamended positions are not always suitable for an asset whose mechanical and electrical services routinely account for more than 60-70% of the total project cost and whose value depends on continuous, uninterrupted operation from the moment of handover.
- Early-access requirements not fully addressed
For example, one of the areas where standard forms fall short is in dealing with early-access requirements. Data center operators are under intense commercial pressure to give their end users access to the facility prior to formal handover so that they can commence early fit-out works. Failure to deliver these early-access requirements results in large liquidated damages penalties between the operator and its end user. Projects are commonly therefore required to utilize milestone/early-access delivery mechanisms that allow end users early access prior to the contractor handing over the completed data center. Whilst most standard forms offer basic sectional completion mechanisms, bespoke amendments are required to cater for milestone/early-access completion.
- Early-access requirements not fully addressed
For example, one of the areas where standard forms fall short is in dealing with early-access requirements. Data center operators are under intense commercial pressure to give their end users access to the facility prior to formal handover so that they can commence early fit-out works. Failure to deliver these early-access requirements results in large liquidated damages penalties between the operator and its end user. Projects are commonly therefore required to utilize milestone/early-access delivery mechanisms that allow end users early access prior to the contractor handing over the completed data center. Whilst most standard forms offer basic sectional completion mechanisms, bespoke amendments are required to cater for milestone/early-access completion.
- Limited approach to performance risk
Similarly, standard form liquidated damages provisions are typically limited to a daily or weekly rate for late completion. While delay damages remain important in data center contracts - and may need to be set at levels reflecting the very high cost of late delivery - they tell only half the story. Data center operators also need contractual protection against underperformance. If a facility is delivered on time but fails to achieve the specified power usage effectiveness rating, the operator will bear inflated energy costs for years to come. If system availability falls below the contractual target, the operator may face penalties under its own service level agreements with tenants. Bundling performance damages into generic liquidated damages provisions can cause ambiguity and a lack of sufficient protection for the operator.
- Insufficient treatment of commissioning
Whilst most standard forms do envisage testing and commissioning, this is often dealt with on a standalone basis at the end of the work. In a data center, commissioning is a multi-layered process involving individual equipment testing, system-level testing, integrated systems testing, and load bank testing under simulated operational conditions. Standard forms simply do not contemplate this level of complexity and the consequence of getting it wrong can mean serious financial repercussions for an operator that has already committed capacity to end users.
Tips for tailoring your standard form contract
There are several practical steps that operators can take to close the gap between the standard form and the reality of a data center project:
- Rethink what completion means. The contract should define completion by reference to the facility’s ability to operate, not just the physical state of the building, this is commonly referred to as “RFS” (ready for service). That means tying handover to the successful completion of integrated systems testing at full load, not simply to the finishing of construction work.
- Build a commissioning program into the contract from the start. Testing should not be an afterthought bolted on at the end. The contract should set out clearly what tests will be performed, what performance standards must be met, what happens if tests fail, and how retesting is managed.
- Deal with program risk transparently. If certain equipment has a long lead time, the contract should address who bears the risk of delay to that equipment and what happens if it arrives late.
- Think carefully about the interface between different contractors and packages of work. Data center projects often involve multiple specialist contractors working in sequence. The contract must address how those interfaces are managed and who is responsible when one package of work delays another.
- Calibrate your liquidated damages expectations and utilize other contractual mechanisms effectively. In an ideal world, liquidated damages for delay would reflect the actual commercial consequences of late delivery, including lost revenue from end-user contracts. However, contractors are highly unlikely to accept the same level of risk as the operator accepts from its end user. The program should provide a healthy contingency between the date for practical completion and the RFS date that the end user is expecting, and other contractual mechanisms should be used for ensuring the progress of the contractor is closely monitored.
Key takeaways
None of this requires reinventing the wheel. Standard forms remain a useful starting point—they provide a familiar structure, a balanced allocation of general construction risk and well-understood dispute resolution procedures. But the contract should fit the asset. In data centers, making sure it does fit the asset takes thought, technical understanding and a willingness to move beyond the standard form. The investment in getting the contract right is modest compared to the cost of getting it wrong.
Key takeaways
None of this requires reinventing the wheel. Standard forms remain a useful starting point—they provide a familiar structure, a balanced allocation of general construction risk and well-understood dispute resolution procedures. But the contract should fit the asset. In data centers, making sure it does fit the asset takes thought, technical understanding and a willingness to move beyond the standard form. The investment in getting the contract right is modest compared to the cost of getting it wrong.
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