AI and cloud computing technologies are driving a boom in the construction of data centres across the globe. In the UK, just under 100 gigawatts of data centre capacity is currently in the queue to connect to the electricity grid. To support this huge demand, physical infrastructure needs to be rolled out rapidly. However, there are a number of challenges that developers need to be aware of.
A significant amount of attention is paid to the impact of grid constraints and energy prices on the construction of data centres in the UK. While these risk factors are undeniably important, there are also other issues that require consideration before developers embark on construction.
This article examines some of the key legal and commercial challenges from a construction perspective and considers how they can be managed.
At the start of the build phase, how the works are to be procured should be carefully considered. The choice of procurement route will affect how responsibility for design, construction, and cost risk is allocated. Certain procurement routes are better suited to projects requiring rapid completion, while others can sometimes lend themselves better to achieving higher levels of quality.
The primary decision for developers is between full-wrap options, such as design and build or Engineering, Procurement and Construction (EPC), and unwrapped options, such as construction management or Engineering, Procurement and Construction Management (EPCM).
Traditionally, EPC contracts have been the most common form of contract used by the private sector for large-scale, complex infrastructure projects across various industries and are therefore a popular choice for data centres. These types of contracts offer the advantage of a single point of responsibility for design and construction, a fixed programme, a firm price, and guaranteed performance levels. The downside of EPC procurement is that it comes at a premium, as contractors must price for the additional risk they assume.
Construction management is a procurement method whereby the client appoints a construction manager, professional consultants, and trade contractors, with the construction manager responsible for managing the construction but not directly undertaking any of the works. This route is often cheaper than full-wrap procurement and can provide greater flexibility; however, it can also be more administratively complex for developers and does not provide a ‘single point of responsibility’ for defects via a main EPC contractor.
Standard forms of construction contracts published by institutions such as JCT, IChemE, and FIDIC provide useful starting points. However, it is vital that these are amended to address project-specific and general risks.
Whatever route is chosen, early contractor involvement and effective collaboration are essential to enable risks to be identified and appropriately priced. This can help mitigate common issues encountered in data centre projects by improving knowledge and enabling optimisation at an early stage.
When designing data centres, the speed of technological change within the sector means that future-proofing is a significant challenge. Developers must incorporate sufficient flexibility to accommodate innovations in computer infrastructure technology, such as the continued development of AI.
This can lead to scope-related issues during the build stage if the works need to be varied to reflect changing requirements, potentially causing delays, additional costs, and disputes. It is therefore vital that parties discuss the likelihood of such changes at an early stage and agree clear contractual mechanisms to manage them.
Interface issues are another common cause of delay in data centre projects. Multiple tiers of specialist subcontractors are often required to carry out the works, and these must coordinate with consultants such as civil, structural, and MEP engineers.
The allocation of this risk depends on the chosen procurement route. A key advantage of EPC contracting for developers is that interface risk is typically held by the main contractor. As noted above, this benefit comes at a premium.
Developers using EPCM or construction management procurement routes should ensure that interface obligations are clearly defined in their contracts to reduce the risk of gaps in accountability. For example, where responsibility is divided between the construction of the shell and core, the shell contractor must be given clear obligations regarding the works and on-site coordination required to enable later trades to commence their services and deliver them without undue delay or disruption. Deficiencies in the Employer’s Requirements at this stage may result in claims for extra time or money once subsequent contractors begin their work.
The rapid expansion of AI usage means that the supply of data centres is struggling to keep pace with demand. Weekly consumption of tokens - units used to measure LLM output - quadrupled between January and March. Increased token usage drives higher computing demand, thereby increasing the need for data centre capacity.
However, this growing demand is not currently matched by increased production of the specialised materials required for data centres or by the expansion of the specialist contractors needed to deliver them. In addition, much of the specialised equipment required for construction has long lead times, necessitating early procurement to avoid delays. This in turn can result in developers having to pay significant upfront sums to secure such lead times, which may well necessitate suitable bond or other security being put in place.
A particular concern at the moment is the availability of transformers, switchgear, and gas turbines. Developers are required to secure manufacturing slots well in advance and frequently experience delays. These constraints are unlikely to be resolved in the short term. Supply chains can take many years to expand, and equipment manufacturers are often investing more cautiously than the data centre developers they supply.
The imbalance between supply and demand has led to significant increases in hardware costs. This places hyperscalers at an advantage compared to smaller developers. Companies such as Meta and Google are able to leverage their balance sheets to secure the hardware they require, often at the expense of competitors. High costs and limited availability have led some developers to explore producing their own hardware to reduce reliance on suppliers and improve affordability. While this may reduce dependency, it may also increase the risk of bottlenecks arising from production challenges.
The construction of data centres in the UK involves a wide range of commercial and legal considerations. Careful selection of procurement strategy is essential from the outset, as it directly influences the allocation of risk, the management of interface issues, and the ability to respond to design changes and supply chain constraints. A well-structured approach, aligned with the specific challenges of data centre development, is critical to the successful delivery of these projects.
For further information, please contact Ashfords’ construction team.
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