Data centres: Risk Management during the Construction Stage

As the data centre industry races to meet the ever-growing demand for data centres, driven predominantly by the adoption of Artificial Intelligence ("AI") in everyday life, we look at what employers, developers and contractors can do during the construction phase of a data centre project to mitigate risk and avoid disputes. 

Data centres are the engines of modern life and the foundations of our digitalised world. The data centre industry is rapidly growing, a trend which has only been accelerated by advancements in AI. Yet in this fast-moving industry, the risks and potential disputes linked to the unique challenges of data centre construction are also increasing.  

We explored the potential risks facing stakeholders at the contractual stage of a data centre project. Now, in this second article in our Data Centre Risk Management series, we set out some key strategies that stakeholders can employ during the construction phase of a data centre project to mitigate risk and avoid disputes.  

Construction of a Data Centre 

Construction of data centres is technically complex, with tight timelines and high specifications for power, cooling, and security. To ensure successful delivery and long-term operational efficiency of a project, developers and contractors need to be alive to risks that cause delays, supply chain issues, cost overruns, delays in planning or technical failures during construction and operation. Failure to mitigate these risks can increase costs, delay revenue generation and threaten project completion.  

In an industry where the capital being deployed to meet the demand is exponentially growing, the stakes for employers, developers and contractors in delivery increase on a regular basis. So, what can each party involved with the construction of a data centre do to achieve a smooth and successful outcome for the project? 

Implement strong and widespread communication  

Effective communication is the cornerstone of all successful projects. Addressing any potential disputes early through communication will drastically decrease the chances of escalation. Most construction contracts detail how notice must be given of any matter which is likely to lead to an increase in cost or time, such as the early warning procedure under the New Engineering Contract ("NEC").  

This mandatory and reciprocal procedure requires both the Contractor and the Project Manager (representing the Employer) to notify each other about potential risks in the project. It covers issues that may increase prices, cause delays, or affect key dates, prompting fast cooperation to resolve problems and prevent disputes from escalating on site. Each party should ensure they are fully aware of their own contractual obligations as well as those of the other party involved.  

Utilise project managers 

A Project Manager ("PM") is a fundamental tool to avoid conflict, as they can manage risk and avoid disputes. PMs are key in facilitating collaboration, cultivating team spirit and driving the contractual philosophy forward. If a Contractor feels the PM is too close to the Employer, it will affect the efficacy with which the contract is operated and undermine the spirit of mutual trust and cooperation which a PM can bring to a contractual relationship. Employers should ensure that PMs have the freedom to act independently and impartially. 

From a disputes perspective, PMs should be viewed as people who facilitate the contract rather than as individuals who are solely protecting the Employer's interests. PMs who can act independently are essential in preventing conflicts by resolving issues before they escalate.  

Carry out regular progress meetings and site reports  

Regular in-person meetings are key to identifying and addressing risks early. Keeping all stakeholders informed of the progress of construction and upcoming hurdles is central to avoiding conflict. A large proportion of the delay claims we see involve one or both parties complaining that they received informal instructions or were not given information in a timely manner.  

Maintaining contemporaneous documents such as meeting minutes or observation reports illuminates the work that contractors were doing before an issue arose and how the parties responded. These documents are likely to be highly influential in resolving a dispute.

Ensure good record keeping 

Consistent and thorough record keeping throughout the project is critical to mitigating liabilities. Ensure that Project Files (files that monitor progress and risk) are kept up to date, establish and regularly update a Risk Register, hold regular risk review meetings and record in writing any steps taken to avoid risk.  

Having clear, consistent contemporaneous documents like Project Files or Risk Registers is instrumental in fending off allegations that may be made during construction. Involving all parties in the production of these documents deters the very making of these claims, reducing the risk of disputes over unrecorded actions and maintaining an atmosphere of cohesion and trust.  

Avoid informal communication 

A common issue in construction projects is that one or both parties assert that they were acting pursuant to an informal arrangement on site. Often, inadequate records make resolving these disputes much harder. Although sending 'as discussed' emails may seem like it impedes friendly relationships, parties involved in disputes often say they regret not communicating formally. This does not mean avoiding all verbal communication, however following up with emails to ensure critical information is properly documented is crucial.   

Avoid using WhatsApp or other similar informal lines of communication when making agreements. One piece of critical communication may be shrouded by mountains of informal correspondence which a party might not want to be seen by a Tribunal or Court, leading to uncomfortable and more complex disputes. Clear, formal communication helps protect all parties and keeps the project on track.  

Seek external advice early 

Whilst it is common for clients to be reluctant to incur fees for legal or expert consultation when a dispute arises, seeking external advice throughout the project offers significant benefits. Although the decision will be fact-specific, involving disputes lawyers or experts early can help prevent disputes before they arise.  

Early assessment of liability can be instrumental in avoiding disputes from escalating and can provide a fresh pair of eyes to contentious issues which have stagnated. Direction provided by lawyers and experts ensures the most efficient use of time and resources and can prevent further risks to the construction process. Additionally, legal and expert involvement can add weight to a party's position in future negotiations or proceedings. 

Understand your insurance policies 

During the construction phase of the data centre, multiple insurance policies will likely apply, each  imposing specific obligations upon an insured party. These often include obligations in relation to the notification of Claims or Circumstances which insured parties reasonably believe may give rise to a claim under the policy. There may also be conditions around not admitting liability in respect of a claim and/or exclusions in respect of certain risks.   

To effectively manage risk, parties should be aware of their obligations under the relevant policies and engage with Insurers throughout the project. Failure to notify Insurers of issues on site in accordance with the terms of a relevant policy may prejudice a claim later made to the Insurer, potentially leaving a party picking up a liability that would have been covered. It is essential to understand the terms and requirements detailed in relevant insurance policies and communicate these promptly if any issues arise.  

How We Can Help 

The data centre industry is evolving rapidly, presenting unique legal challenges in construction, risk management, and compliance. Simmons & Simmons has extensive experience advising on data centre projects, from pre-contract risk assessments to dispute resolution. Our dedicated team is here to help you navigate the complexities of this dynamic sector.