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Ryan Gilchrist and Ashley Sherwood are attorneys and partners at the Chicago-based law firm Seyfarth Shaw. The opinions are the authors’ own.
Data centers are built with more than steel and megawatts—they’re built on contracts that allocate risk and keep billions of dollars flowing into programming.
During the data center construction boom, the market has become increasingly competitive, and developers must emphasize speed and agility. Companies will invest nearly 7 trillion dollars data infrastructure capital expenditures globally by 2030, with 40% of that spending expected to be in the US, according to McKinsey.
Developers who want to participate in the game must have a clear construction plan from the very beginning, including the decision of the procurement vehicle that will be used for their project. To be most effective, stakeholders need to know the details of their construction agreements and the common pitfalls that determine whether a data center project is accelerated, stalled or short-circuited.
Types of data center contracts
Ashley Sherwood
Permission granted by Seyfarth Shaw
To move quickly and successfully on a data center project, a series of contracts will need to be executed quickly. First, a developer must ensure that agreements are in place for project design, construction and infrastructure ready for quick succession to ensure timely delivery. Because the terms of each of these agreements can affect the others, it is crucial to negotiate them through a collective strategy, rather than in isolation.
The first decision is how much design and construction responsibility falls to the developer by default. Data centers are often built using engineering-procure-build or design-build contracts, both of which delegate some or all of the design responsibility to the construction contractor.
Risk versus control
EPC and design-build contracts typically offer the fastest project delivery and place substantial responsibility (and therefore risk) on the contractor.
EPC contracts are popular in the data center world as they allow the owner to specify a desired outcome and trust the EPC contractor to deliver it, delivering a turnkey facility that meets the owner’s basic requirements.
Design-build is similar, but includes more owner oversight of the design and may include elements outside the designer’s control, such as leaving the acquisition of certain key infrastructure systems to the owner.
The main difference between EPC and design-build contracts is that EPC contracts are almost owner-free, while design-build contracts involve more collaboration between the owner and the designer, including owner input on certain design elements and project completion.
Whether using an EPC or a design-build contract, partnership and trust between the owner and builder are crucial, as the owner will need to trust the builder to design, build and deliver the project on time, on budget and in the manner specified by the owner.
Design and procurement contracts
Key points in a design agreement are likely to affect the extent of a designer’s freedom and flexibility and a designer’s potential liability if a project goes wrong. Design professionals often propose contract terms that allow them maximum flexibility while limiting their potential liability. Designers often won’t bend to these constraints, so this relatively traditional approach may not be well-suited for a developer of large-scale, complex projects.
Ryan Gilchrist
Permission granted by Seyfarth Shaw
Beyond design, two key components of data center construction are the acquisition and installation of specialized technology.
The price of cooling units, backup generators, servers and UPS systems can dwarf the cost of even some small development projects. Some purchase orders for these systems will need to be executed early to ensure long lead times do not derail the schedule.
Owners should consider advance purchase orders for the limited scope of purchases and modify those purchase orders or enter into separate agreements for the full scope of services at a later date. Owners should also consider early on which contracting parties will acquire, transport, unload, install, integrate and test the systems. Suppliers may not be willing to provide full services and contractors may not have the specialized equipment or training needed to handle this work.
Common mistakes in data center contracts
Since speed is very important in data center construction, contract delay provisions will be critical. To protect against unreasonable delays, all development contracts should include a liquidated damages provision, which sets a daily rate to charge the contractor for project delays beyond a planned completion date.
The tricky aspect of these developments is establishing a liquidated damages rate sufficient to protect the developer while ensuring that it is not so punitive as to lead downstream subcontractors and suppliers to artificially inflate their bids to protect themselves from downstream liquidated damages.
Because these projects often cannot afford to be delayed or suspended, contract dispute provisions should ensure that construction continues while a dispute between the parties is reserved or resolved.
Fees have been another issue. Developers and contractors must clearly allocate the risk of unanticipated material price increases resulting from tariff impacts, as well as whether supply chain disruptions will extend contract time. It should be clearly defined in the contract to avoid disputes in the future.
Project planning
A final consideration is how the project is planned.
Many data center developments include several phases. Whether the general contractor is hired for the entire project, one or more phases is a crucial decision. One way to offer the best of both worlds is to enter into a master agreement with a contractor and plan separate work authorizations for each phase of the work.
This includes general terms and conditions with a contractor throughout the project, but provides a buffer if an earlier phase goes wrong. A risk with a phased approach is that the parties will likely renegotiate their prices at each subsequent phase, which could be advantageous or disadvantageous depending on market conditions.
Successful data center development depends on both smart procurement and technical execution. By clearly allocating risk and planning for velocity, developers can avoid costly mistakes and keep their projects on track in an increasingly competitive market.
