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As the global demand for digital infrastructure accelerates, the data center construction sector is busier than ever. A key area of contention in the negotiation of the construction contracts for these projects is the extent to which the contractor will be liable for the consequences of delays, defects or non-performance.
This is, inevitably, a topic of concern for both developers and contractors on any construction project: The parties must always negotiate a suitable balance of risk and liability exposure that renders the contract economically viable for both. However, this can be a particularly sensitive and contentious issue for data center construction projects, given the complexities and risk inherent in such projects.
Data centers differ from conventional construction projects in a number of ways. Constructing a data center is not just about building a facility – the systems involved in these projects are technically complex and sensitive, with power infrastructure and advanced cooling systems. Developers and end users will often impose bespoke designs and high performance standards. Small mistakes can have enormous operational and financial consequences – even, for example, if the cost of fixing a defect is relatively low, the resulting costs of any downtime can be substantial, and the losses are unlikely to be covered by insurance policies. From the contractor’s perspective, then, there is significant pressure and high exposure if things go wrong.
The starting point for a developer, naturally, is that the contractor should stand behind its obligations and be liable for the losses that flow as a result – but there is an understanding, particularly in this sector, that it is in no one’s interests to expose a contractor to unrealistically high levels of liability. No contractor would sign such a contract. The liability clauses will, therefore, be fertile ground for negotiation when agreeing on the construction contract.
In data center construction contracts, it is generally understood that a contractor is unlikely to accept full exposure to certain types of losses – most notably, damages associated with loss of use, loss of profit and similar business losses, which are sometimes known as indirect and consequential losses. In the context of critical infrastructure like data centers, these losses can be significant – even crippling – and potentially disproportionate to the contractor’s error. The parties may agree that the contractor’s liability for breach of contract excludes liability for those losses, or perhaps that such liability is capped (with such cap likely to be framed as a percentage of the overall contract value).
- Limitations and exclusions of contractor liability are a critical (and often contentious) area of negotiation in data center construction contracts
- The consequences of defects and delays can be significant in data center projects … but no contractor can bear those consequences in their entirety
- Negotiations focus on financial caps and exclusions of certain losses