Articles

The race to expand AI and hyperscale cloud infrastructure has created a boom in data centre development. Driven by surging demand, developers and contractors are under pressure to bring megawatt capacity online at speed, often resulting in contractual arrangements that fall short of established risk-allocation principles. While strong market demand and high developer margins currently cushion these shortcomings, a shift in market dynamics could expose several significant vulnerabilities in data centre contracts.

The pressure to secure hyperscaler leases has intensified competition for specialised data centre contractors. High-tier contractors are scarce, particularly in emerging geographical markets. As developers compete to secure top-tier talent, several contractual vulnerabilities can arise:

• Liquidated damages (LDs) are frequently inadequate and do not reflect the actual financial losses that developers would suffer due to late completion. As standard LDs do not match the real financial risk of missed target dates, developers absorb premium acceleration costs, paying for extra shifts, expedited procurement and overtime to keep completion dates intact.
• Contracts are often executed with ambiguities, as the allocation of certain risks has not been fully agreed between the Parties. Fast-track execution can lead to agreements being signed with lingering gaps that remain unresolved during negotiations.
• Many developers adopt bespoke contracts with heavily employer-biased terms. Many of these bespoke contracts originate from specific jurisdictions, and the supply chain in some geographies may not be familiar with those terms. For example, many U.S. hyperscalers adopt bespoke contracts designed for civil jurisdictions, whereas common law jurisdictions interpret principles such as "good faith" quite differently through their courts.
• The procurement methods chosen by some developers may be unfamiliar to local supply chains, creating challenges across the wider delivery process.

Off-the-shelf standard construction forms, such as FIDIC or NEC, were designed for more traditional civil infrastructure projects and can fall short when applied to modern data centre developments, when applied directly without modification:

Standard contracts often treat grid connection delays as employer risks or neutral events, exposing developers to severe downstream liabilities with end-tenants if power energisation lags behind physical building completion. Direct procurement of long-lead items (such as UPS systems, chillers, and transformers) can create gaps in liability between equipment manufacturers and the EPC contractors responsible for installing and integrating them. Additionally, traditional contracts tie completion to physical structure handovers, whereas data centres require rigorous Level 1 through Level 5 Integrated Systems Testing (IST), which can create disputes over when "Completion" legally occurs.

Beyond the contract itself, day-to-day project execution in the region introduces further risks. Developers’ development managers and construction managers in Asia typically prioritise delivery over contract administration. Often project delivery teams pressure contractors to overlook contractual requirements, such as the strict submission of formal notices, based on informal assurances that management will not enforce its contractual rights. This informal approach brings rise to three key issues:

• Potential waiver by estoppel risks, where strict contractual rights are inadvertently waived through a course of conduct. 
  
• A disconnect between contractors’ head office understanding of the situation and the reality on the ground.
• High staff turnover in the data centre market, meaning unofficial oral commitments made by individual personnel can easily be lost when staff depart.

Historically, developers have been able to rely on informal change orders and verbal agreements to maintain contractor goodwill for future data centre builds, rather than strictly adhering to contractual mechanisms. However, this dynamic will inevitably shift as new capacity comes online, power grid interconnections mature and contractor availability normalises.

As supply catches up with demand, developers may lose the capacity to absorb informal acceleration costs. Delays can have a direct impact on bottom lines, triggering strict enforcement of notice provisions and the pursuit of delay claims. Contractors facing smaller project pipelines may no longer prioritise client goodwill over unresolved financial claims. Defects, scope changes and cost overruns previously overlooked may increasingly lead to formal arbitration and litigation.

When this occurs, will standard contracts and practices be enough? Where does the market go next?

• Could collaborative contracting models align stakeholder incentives more effectively than adversarial, highly employer-biased bespoke frameworks?
• Could contracting methods and contract forms be adapted to local markets, ensuring that the regional supply chain thoroughly understands, can price, and can operate under the chosen terms?

Developers and contractors who take the time now to establish clear scope demarcation, balanced and transparent risk allocation, and robust, realistic schedules will be better positioned to navigate market normalisation than those relying on substandard contracts. When the rush subsides, well-drafted, unambiguous contracts will be essential to stand up to the scrutiny of a tighter economic reality.

Contributed by:

Trevor Lam - Director & Partner, TBH

Lorraine Gillespie - Associate Director, TBH