Data center construction projects are among the most complex and high-stakes undertakings in the commercial real estate and technology sectors.
With tight delivery schedules, global supply chain dependencies, substantial power needs, local community opposition and stringent environmental regulations, contractual risk management becomes a top priority for both owners and contractors. Failure to address these risks upfront can lead to costly disputes, operational delays and potentially losing out on a lucrative project.
This article explores 10 important questions about contractual risk and liability in data center construction – covering delay penalties, force majeure clauses and indemnity provisions – so stakeholders can better protect their interests and maintain project momentum.
1. Are Liquidated Damages Clauses Common in Data Center Construction Contracts?
Yes, liquidated damages clauses are common in most construction contracts, including those that are for data centers.
Data centers are mission-critical facilities, and delays can lead to significant financial and operational losses for clients. Late delivery can postpone IT migration, cloud services and client onboarding, creating cascading business impacts and financial losses. Owners may also face Service Level Agreement (SLA) penalties from their customers if the facility isn’t ready on time.
Liquidated damages clauses provide a predictable, pre-agreed remedy for these risks, reducing litigation and incentivizing contractors to prioritize timely completion. These clauses effectively allocate risk between parties and ensure accountability.
2. How Are Liquidated Damages Typically Calculated in Construction Contracts?
Liquidated damages are typically calculated by taking a daily rate provided for in the contract and multiplying that by the number of days for the delay.
The daily rate should be a reasonable forecast of actual losses (and not an arbitrary number) that the owner may incur if the project is delayed that is jointly calculated and documented prior to the execution of the contract and the commencement of the project. Liquidated damages must reflect a reasonable estimate of anticipated loss rather than serve as a punitive measure, or they risk being unenforceable under state contract law.
Owners often calculate these amounts using daily operational costs or projected revenue streams and maintain documentation to justify the figures. The calculation should start with an estimate of extended general conditions and consultant costs (architects, engineers, project managers) per day for the owner but should also include consideration for extended financing costs and ongoing administrative and personnel costs for the owner.
In some cases, including amounts for lost revenue, associated rental costs of substitute space and quantifiable lost opportunity costs may be appropriate. In large-scale projects like data centers, these rates can range from thousands to tens of thousands of dollars per day.
3. What Is the Difference Between Delay Penalties and Liquidated Damages?
Delay penalties are punitive and often invalid under contract law, while liquidated damages are compensatory estimates of potential losses and enforceable if reasonable.
Courts favor clauses that represent a genuine pre-estimation of loss rather than punishment. The language utilized in liquidated damage clauses will be scrutinized by the court if a dispute ensues, and therefore, the description of the liquidated damages and the process used to arrive at the daily rate should be specifically referenced, and backup information should be saved.
4. How Can Data Center Construction Contracts Limit Exposure to Liquidated Damages?
Contractors frequently attempt to negotiate protections to mitigate potential liquidated damages.
Common strategies include setting caps on total liability, often expressed as a percentage of the contract value, and allowing grace periods for minor delays as well as building in weather days. Data center construction contracts also often include exclusions for delays caused by force majeure events or other owner actions.
There are often heavy negotiations between owners and contractors over the language in force majeure clauses. Owners push for very narrow force majeure clauses, while contractors seek broader clauses to address a multitude of potential events that could lead to delays at the project.
5. Can Force Majeure Clauses in Data Center Construction Contracts Protect Against Supply Chain Disruptions?
Yes, especially if the language of the force majeure clause specifically mentions “supply chain disruptions.”
In the past, force majeure operated as a legal doctrine that was applied through common law equity. But now, it is viewed by the courts as completely contractual, and therefore, the specific instances where the parties wish to excuse delays in performance must be dictated by the language of the clause itself.
6. Are Supply Chain Disruptions Always Covered Under Force Majeure?
No, supply chain disruptions are not automatically covered under force majeure clauses. As discussed above, the specific language in the clause will dictate whether a supply chain disruption is covered.
If a force majeure clause does not specifically mention “supply chain disruptions,” it may be a challenge to argue they are covered under more general language relating to delays caused by unforeseeable events beyond the contractor’s control, such as natural disasters, pandemics or governmental actions. These clauses prevent penalties for circumstances no party could reasonably anticipate, but supply chain disruptions are arguably foreseeable in today’s market.
Vague language like “acts beyond control” may not suffice. Contractors may also need to prove that delays were unavoidable despite reasonable mitigation efforts, making precise drafting and documentation critical. Sometimes supply chain disruptions may not fully prevent a party from obtaining materials and/or products, but it will instead significantly raise the process for such materials and/or products, which might make it commercially impractical for a contractor to continue performing.
Generally, force majeure clauses are not intended to cover commercial impracticability. These circumstance may be better addressed by price escalation clauses that shift some of the financial burden for significant price increases between the parties.
7. Can Force Majeure Clauses Cover Geopolitical Events?
Yes. Geopolitical events, such as trade embargoes, sanctions or political instability, can severely impact material availability and project timelines. Including these risks explicitly in the force majeure clause ensures contractors have legal protection if such events occur.
Examples include export bans on critical components or sudden tariff changes. Contractors should also confirm whether political risk insurance covers these scenarios to align contractual and insurance protections.
8. What Are Indemnity Provisions, and Why Are They Important in Data Center Construction Contracts?
Indemnity provisions require one party – usually the contractor – to compensate the other party for losses and/or damages arising from third-party claims, such as personal injury, property damage or environmental breaches during construction.
Indemnity provisions may also address losses and/or damages caused by the parties’ themselves and are often intended to address liens placed on the project and/or claims of the infringement of intellectual property rights of third parties.
These clauses often include obligations to cover defense costs and settlement expenses in addition to the losses and/or damages incurred. Contractors should seek reciprocal indemnities for claims caused by the owner’s actions, ensuring balanced risk allocation and clauses that obligate one party to indemnify another party for that party’s negligence should be avoided.
9. How Do Indemnity Clauses Address Environmental Liability in Data Center Construction Disputes?
Indemnity clauses often require contractors to cover costs related to environmental contamination or regulatory violations caused by construction activities. This includes cleanup expenses, fines and litigation costs.
The recommended best practice is to tie indemnity obligations to insurance requirements and verify coverage limits to avoid gaps. Exclusions for gross negligence or willful misconduct usually remain uncapped, leaving contractors fully liable in those cases.
10. Are There Limits on Indemnity Obligations in Construction Contracts?
Typically, indemnity obligations are capped, often linked to insurance limits or a fixed dollar amount.
However, exceptions for fraud, gross negligence or intentional misconduct are common and rarely capped. Also, some states have statutory limits on the scope of indemnity provisions, including conspicuousness requirements and anti-indemnity statutes to protect against indemnity clauses that intend to indemnify one party against its own negligence or wrongdoing.
Clear definitions and scope in the contract are essential to prevent hidden exposures and ensure fair risk allocation. Local counsel in the state of the project should be involved in the review of indemnity provisions to ensure they comply with applicable law.
Conclusion
Data center construction contracts demand meticulous attention to risk allocation. Liquidated damages provisions safeguard owners against costly delays; force majeure clauses provide relief from global uncertainties and indemnity provisions protect against third-party and environmental liabilities.
For both owners and contractors, the key is proactive negotiation and precise drafting. Aligning these clauses with insurance coverage, documenting assumptions and anticipating geopolitical and supply chain risks can prevent disputes and keep projects on track.
