Legal development

Data Centres: An increasingly important asset class for the construction sector

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    A fast-growing asset class, data centres are dynamic and complex systems requiring careful design, management and optimisation to meet the unprecedented growth in demand fueled by new ways of working and modern technologies including artificial intelligence, machine learning requirements and 5G.

    In this Data Centre Insights series of articles, we will explore and examine the challenges and opportunities data centres present for the world in terms of technology, real estate, innovation, sustainability and investment.

    In the third article in our series, we will explore key considerations associated with the construction of data centres.

    The ever increasing digitalisation of the world economy is driving huge demand for data-orientated and cloud-based approaches to how organisations do business. With that comes a need for the data centres that house the IT equipment that makes this possible.

    In 2022, estimates put the size of the global data centre construction market at as much as $215 billion, with major further growth forecast for the period 2023-2030. In the context of a slower moving housing market and fewer largescale projects in the public sector, the data centre market is viewed as less susceptible to recessionary pressures and a major opportunity for investors.

    What does the current market look like?

    Data centres already represent a significant share of UK construction work, with London in particular accounting for over 75% of UK data centre installations in 2023, and it will continue to grow. In 2023 the UK government announced a £960 million "Connections Action Plan" relating to investments it will make to the national grid (which all data centres will require access to) in an attempt to release further capacity.

    While many industry commentators consider that more data centre developments are needed to meet demand than are currently in the pipeline, there are some sizeable and high value projects currently underway in the UK, which include:

    • the construction of a £790 million development in Hertfordshire for global tech giant Google's data centre;
    • the development of a second 30MW hyperscale data centre by Yondr Group at one of the UK's largest data centre hubs at Slough, Berkshire for an area of 41,300 square metres;
    • the construction of a 194,000 sq ft data centre for Vantage Data Centres at their second London Campus, near Heathrow Airport; and
    • Norwegian company Green Mountain's expansion of a build-to-suit data centre facility of over 59,200 sq ft in Romford (which is to be powered entirely by certified renewable energy).

    What considerations are needed from a construction perspective?

    Power Planning

    Unsurprisingly, power supply quality and reliability is of fundamental concern. Secure and reliable power sources, in addition to viable and powerful back-up generators, are essential. The type of power source can also be significant, given the growing appetite from customers for renewably sourced energy (as well as energy-efficient technologies within the functionality of the data centre).

    The geographic location (as well as the risk profile attached to the selected site) is also critical. Generally speaking, the greater the distance of the data centre relative to its intended consumers the longer it will take the data to be delivered. This is often referred to as "latency" or "network latency" and means the time the system spends waiting to receive the relevant data, before it can then deliver it to the end user. The lower latency levels can be reduced to, the better performing the data centre will be.

    The challenge of supplying and maintaining the power to support these IT systems is enormous, particularly considering demand often exceeds the grid providers’ ability to deliver energy when it is needed (especially for hyperscalers such as Meta, Google and Microsoft). In this regard the costs associated with sourcing the power can account for up to 80% of the total project budget.

    Sticking to Programme

    As with all construction projects a key consideration will be allocation of delay-related risks and incentives for keeping to programme. Under UK contracts (which are typically based on standard forms produced by industry bodies, notably the JCT and NEC, and then amended to meet the agreed risk profile on a particular project), there are usually detailed provisions for how risks related to issues such as geopolitical events, material shortages and ground conditions are dealt with. NEC contracts are particularly strong on commitment to programme and contain useful 'early warning' provisions for when problems are anticipated.

    To avoid supply chain issues, particularly for goods with long lead times such as generators and transformers, goods can be ordered in advance. For the developer, the risk associated with paying for materials in advance may be mitigated to some extent by securing an on-demand advance payment bond. Alternatively, we may see owners, with a clear pipeline of projects, increasingly buying critical equipment for use on future projects themselves to avoid the risks of making substantial upfront payments.

    Retrofit or rebuild?

    In light of ESG requirements, this is a question being asked across the sector. Retrofit avoids the need to locate a new site and navigate planning laws, as well as having sustainability benefits. However, because of the fast moving nature of this sector, a perennial concern is whether the original equipment, for example, the cooling systems, will function in conjunction with new equipment and vice versa. This can lead to difficulties in contract negotiation as developer and contractor argue over who takes the risk of ensuring that the original elements work with the new.

    Procurement Approach

    In the UK, on large scale projects, a 'D&B' approach is typical. This is where the developer engages a contractor who takes on full responsibility for the design and construction. If specialist sub-contractors are required because of the fit-out requirements then they are engaged by the main contractor rather than directly by the client. Developers will often also seek a lump sum fixed price from the contractor.

    While 'single point responsibility' and a fixed price can give the illusion of security, there are drawbacks. The financial covenant strength of the contractor will be an important concern. Contractors may apply an uplift where they are accepting full liability (particularly in a retrofit scenario) or they may require that the contract retain enough flexibility to enable them to claim additional money later on, for example, through fluctuation provisions, provisional sums, and compensation events.

    As the data centre sector continues to grow, we may see a shift towards different procurement models, for example, where the main contractor is engaged to provide management services rather than on a D&B basis. This allows the developer to retain greater control of the project and potentially engage specialist contractors directly. Commercially, it means no uplift for the contractor for taking on single point responsibility. This approach would better suit experienced players in the market, with established relationships within its supply chain, as opposed to new entrants.

    Skills Shortages

    While there are a number of established contractors in the UK market, such as ISG and John Sisk, with extensive data centre experience, like the rest of the construction sector, there are skills shortages in the workforce that pose challenges. These are most evident in terms of M&E experience, which, unsurprisingly – in light of the complex mechanical and electrical fit-out data centres entail – accounts for as much as 70% of the work.

    An obvious answer to workforce issues is greater investment in modular and prefabricated construction methods and AI solutions. There are already AI tools to facilitate tasks such as temperature and energy consumption adjustments, monitoring, and data collection and we can expect to see rapid developments in this area.

    Modular construction has been much hyped in the construction sector as a solution to workforce issues (as well as to other problems like delays and carbon footprint), but it has yet to gain traction. In this asset class, as opposed to other parts of the sector like commercial offices or retail, there is more scope for success because functionality rather than form or originality is the most important criteria.

    What can we expect in the future?

    The data centre space is experiencing many of the same challenges as other asset classes within the construction sector but it is clear that this is one asset class that will ride out the storm. Data centres are also better placed, at least in the short term, to harness the benefits of AI and modern methods of construction.

    In addition, data centres are 'one to watch' in terms of innovative solutions to sustainability challenges. They have a huge environmental impact, and face growing pressure to reduce their carbon footprint and become greener. There are a number of ways in which this is being done including innovative use of waste heat, efficient cooling systems, and, of course, minimising the embodied carbon in the building process itself. Again, there may be much that the construction sector as a whole can learn from in the next 5-10 years.


    Authors: Sadia McEvoy, Counsel and Head of Construction Solutions; Chris Whitehouse, Partner; Kevin Bassett, Solicitor

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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