Data Center Construction: Why Schedule Risk Drives Disputes

Bart W. Reed
Partner, Construction

Abstract

Data center projects face heightened legal risk because delays can directly threaten revenue, storage capacity, and customer commitments. Bart Reed, a partner in Stoel Rives’ Seattle office and co-chair of the firm’s data center service group, explains why schedule certainty, budget certainty, and clear risk allocation are especially critical in mission-critical data center development.

Reed discusses how contract structures, liquidated damages, performance requirements, long-lead equipment, modular data centers, and commissioning milestones can become flashpoints for disputes. He emphasizes that early legal involvement can help owners, developers, and contractors define project objectives, allocate risk, and build contract mechanisms that reduce the likelihood of claims later.

Transcript

Hi, I'm Bart Reed. I'm a partner in the Seattle office of Stoel Rives working in the construction and design group. I'm also co-chair of the firm's data center service group.

Why do date center projects tend to run into legal trouble more often than traditional construction projects?

Yeah, so data centers are often mission critical type projects where schedule certainty becomes critically important. Data centers are often mission critical projects where schedule certainty and budget certainty is so critically important. If you don't bring online that data center as the schedule dictates, then the data center developer or owner, the end user as well, is often at risk of major revenue loss because storage capacity could be interrupted. And they certainly are mindful of that issue with regard to their customers. And that is why typically in these construction contracts, it's critically important to impose some incentive measures within the contractual bounds like liquidated damages that will incentivize or disincentivize the contractors to ensure timely performance.

What contract structures do people underestimate in data center projects?

So, in order to lead the charge and really, I guess, achieve schedule certainty and budget certainty, the new trend or the increasing trend is for data center owners or developers to champion an alternative contracting method. And instead of the traditional design-bid-build approach where the owner-developer hires an architect or engineer for the design and then bids it out for contractors, owners are looking at offloading that risk onto contractors via alternative contracting means like design-build contracts.

Where do performance requirements like uptime and redundancy cause problems?

We often see those requirements crop up when a project is nearing completion, especially in the integrated testing phase or the commissioning phase. Those issues will arise and we'll have to usually advise the contractors or the developers to look back at their contracts and see how the risk is allocated between the parties.

How does 'time is money' pressure affect data center disputes?

With the increased pressures on time or schedule certainty in achieving those scheduled milestones, be it IST completion or operational completion, there is immense pressure on owner-developers to bring those data centers online. So they have to look back and really exert the pressures from the liquidated damages provisions in their contracts to ensure that those contractors are timely performing. Otherwise, those type provisions can be used as leverage tools, right? Either in negotiation of claims that arise either from the contractor side or the owner side.

Why do long lead times for equipment cause disputes?

There is an increasing trend in the data center world in the all-important efforts to achieve schedule certainty to go outside the contract and have these owner-furnished, contractor-installed modules called module data centers, MDCs, fabricated elsewhere, and then brought in basically a plug-and-play type approach. And that will, at least theoretically, help to move the project along consistent with the schedule. That can pose issues because you're relying on a third party to fabricate very technical devices and you're relying on third parties to transport those devices for installation in the field. Managing that process can come with some unintended consequences.

Why is commissioning a flashpoint in data center projects?

Substantial completion is an often litigated and disputed term in a contract. It will then pose as the trigger for certain other requirements or milestones, and it will oftentimes serve as the trigger for when liquidated damages are to start running and be imposed against an untimely performing contractor. So, that becomes a major flashpoint in the dispute process between a contractor and an owner.

What's the #1 issue to address early to prevent disputes?

So, if I could flag one issue to prevent disputes from arising later, that would be the ability to bring parties in early in the process so we can help to identify and clearly define the owner's programmatic objectives and to ensure that there are proper mechanisms within the contract to allocate, manage, and mitigate risk.