Opinion
Data Center Construction Contracts: Key Points Owners and Contractors Must Know
Amid the data center construction boom, developers need to clarify construction contract strategies early in the project. This article explores the differences between EPC and design-build contracts, key terms in design and procurement agreements, common pitfalls such as delay damages and tariff risk allocation, and recommends balancing flexibility and risk control through a master agreement combined with phased authorizations.
Ryan Gilchrist and Ashley Sherwood are attorneys and partners at the Chicago law firm Seyfarth Shaw. The views expressed in this article are solely those of the authors.
Data centers are built not only on steel and megawatts, but also on contracts that allocate risk and ensure billions of dollars flow as planned.
In the data center construction boom, competition is increasingly fierce, and developers must emphasize speed and flexibility. According to McKinsey, global capital expenditure on data infrastructure is projected to approach $7 trillion by 2030, with 40% expected to occur in the United States.
Developers hoping to compete must establish a clear construction plan from the outset, including determining the contract model for the project. To improve efficiency, stakeholders need a deep understanding of the details and common pitfalls of construction agreements, which determine whether a data center project accelerates, stalls, or hits a short circuit.
Types of Data Center Contracts
To move quickly and successfully on a data center project, developers need to sign multiple contracts in a short period. First and foremost, ensure that design, construction, and infrastructure agreements are ready to enable timely delivery. Because the terms of these agreements interact, they must be negotiated through an overall strategy rather than in isolation.
The first decision is the extent to which design and construction responsibility is borne by the developer. Data centers typically use EPC (Engineering-Procurement-Construction) or design-build contracts, both of which transfer some or all design responsibility to the construction contractor.
Risk and Control
EPC and design-build contracts typically achieve the fastest project delivery and place significant responsibility (and corresponding risk) on the contractor.
EPC contracts are popular in the data center sector because they allow the owner to specify desired outcomes and rely on the EPC contractor to deliver a turnkey facility that meets core requirements.
Design-build contracts are similar, but the owner has more oversight over the design and may include elements beyond the design-builder's control, such as the owner procuring certain critical infrastructure systems itself.
The main difference between EPC and design-build contracts is that EPC contracts require almost no involvement from the owner, while design-build contracts involve more collaboration between the owner and the design-builder, including the owner's input on specific design elements and project completion.
Regardless of the contract type, partnership and trust between the owner and the builder are crucial, as the owner relies on the builder to complete, construct, and deliver the design on time and within budget according to the owner's requirements.
Design and Procurement Agreements
Key points of contention in design agreements typically involve the scope of the designer's freedom and the designer's potential liability if the project goes wrong. Design professionals often propose clauses that allow maximum flexibility while limiting their own liability. Typically, designers are unwilling to concede on these limitations, so this traditional approach may not suit developers of large, complex projects.
Beyond design, two critical parts of data center construction are procurement and specialized technical installation. The cost of cooling units, backup generators, servers, and UPS systems can exceed the total cost of some smaller development projects. Some purchase orders need to be placed early in the project to avoid long-lead-time equipment affecting the schedule.
Owners should consider placing early orders for a limited scope of procurement and later covering the full scope of services through change orders or separate agreements. Owners should also clarify from the outset which party is responsible for procuring, transporting, unloading, installing, integrating, and testing systems. Suppliers may be unwilling to provide full-service offerings, and contractors may lack the specialized equipment or training to handle such work.
Common Pitfalls in Data Center Contracts
Given that speed is critical in data center construction, delay clauses in contracts are particularly important. To prevent unreasonable delays, all development contracts should include liquidated damages clauses that set a daily rate to charge the contractor for delays beyond the scheduled completion date.
The tricky part is setting a reasonable liquidated damages rate: it must be sufficient to protect the developer but not so punitive that downstream subcontractors and suppliers inflate their bids to hedge against risk.
Because these projects typically cannot afford delays or suspensions, dispute resolution clauses in contracts should ensure that construction continues while disputes are being resolved.
Tariffs are another issue. Developers and contractors need to clearly allocate the risk of unexpected price increases in materials due to tariff impacts and whether supply chain disruptions extend the contract schedule. These should be clearly defined in the contract to avoid subsequent disputes.
Project Planning
The final consideration is the approach to project planning. Many data center developments include multiple phases. Whether to engage the general contractor for the entire project, individual phases, or multiple phases is a critical decision. A best-of-both-worlds approach is to sign a master agreement with the contractor and plan separate work authorizations for each phase.
This approach applies general terms and conditions throughout the project but provides an exit mechanism if early phases perform poorly. One risk of the phased approach is that parties will inevitably renegotiate prices in later phases, which could be favorable or unfavorable depending on market conditions.
The success of data center development depends as much on wise contract management as on technical execution. By clearly allocating risk and planning for speed, developers can avoid costly mistakes and keep projects on track in an increasingly competitive market.
