The data center risk test

For AEC firms, data center projects may represent game-changing opportunities, but are you prepared for the risks?

Despite significant public opposition in some areas of the country, data center projects continue to be a driving force behind the growth of the commercial construction sector given the need for a quantum leap in computing power to support the expansion of AI. These tend to be large and complex projects with construction costs for the largest campuses reaching several  billion dollars. 

For many A/E firms, the invitation to design a data center may represent a game-changing opportunity. Yet, as with any next generation  type of project there may be significant risk involved – in this case, the potential exposure may be magnified if the specific project already has been subject to local controversy and media scrutiny.

Here are six key questions for A/E firms to consider in evaluating whether to pursue a data center design project:

1. Do you have the time and the staff to dedicate to a complex project that may have a highly compressed schedule? Furthermore, these projects may be subjected to a series of stops and starts for reasons completely beyond your control. For instance, given their size and scope data center projects can involve challenges such as labor availability, specialized equipment procurement issues, multiple prime contractors, technological advances that occur during design and construction, power and water constraints, environmental issues, and political issues. Because of the emphasis on schedule and low tolerance for any type of delay you should be certain there is a clear allocation of responsibility, realistic timelines, and you should be focused on documenting any delay along the way.
2. Does your firm have the necessary expertise? These projects are relatively new and new project types can be challenging. The standard of care will be the same for these projects, but the application may be different given the novelty of them. The criteria should be documented, dates coordinated, and a third-party validation process should be considered. There are considerations you may have never encountered in other projects you’ve been involved in including regulatory and jurisdictional issues, and limitations on water, power, and noise levels, as well as concerns about potential environmental impacts. 
3. Are the consultants you will need available, and do they have the appropriate experience? Mechanical, electrical and plumbing systems, controls and security systems can be far more complex for data center projects. Often, several different specialties will have to interface during the design process, all of which your firm may be required to coordinate. 
4. Do you have the resources and resolve to negotiate sound contract hygiene? Given the nature and sophistication of the developers of these projects, it’s likely they will be aggressive in their contract requirements. Your team needs to make sure the contract language aligns with your stated obligations. Understanding and delineating the roles and responsibilities of the various project participants is key. Clear boundaries should be drawn with respect to scope and additional services. Potential disputes arise from unclear scope and responsibility allocation. The size and complexity of these projects means there is a wider range of potential risks that come with higher price tags. For instance, the consequential damage exposure alone could be huge. Pay especially close attention to your contracts and avoid provisions that could lead to coverage concerns, including warranty and “time is of the essence” language, or increased exposure from  consequential damages waivers, and even language related to coordination. Thus, contracts for these types of projects  absolutely should be negotiated with the assistance of your counsel.
5. Can you satisfy the significant insurance requirements? Data center projects typically have substantial insurance requirements for design firms and other participants. Obtaining adequate capacity or project-specific programs may be challenging, so A/E firms need to plan ahead. Notably, these projects frequently include delegated design, which has its own risk exposure. Make certain the various elements are aligned, and the contractors and design professionals involved in the delegated design have the appropriate insurance.
6. Can you assess the potential community impact and sentiment? One potentially serious undetermined risk might be whom you might ultimately be found to owe a duty to in relation to your firm’s design of data centers. Even with sound third-party beneficiary exclusion language in your contracts, or in states that follow the economic loss doctrine, it’s possible that you may encounter a scenario involving class action lawsuits brought by communities impacted by data center construction. The imagination is the only limit as to what these claims might entail: the potential for negative outcomes to local populations such as increased power costs and water shortages, as well as possible allegations related to climate change, including water, drought, heat and other environmental issues. With widespread protests currently surrounding the construction of data centers, some local and state governments are blocking, restricting, or delaying their development. Design firms have licensing obligations to protect the health, safety, and welfare of the public; thus, arguments that their involvement in data center projects requires special attention to the community may not be far-fetched.

Mega projects typically involve elevated levels of risk. So, it’s critical to evaluate carefully both the internal and external risks when getting involved in a data center project. Given the large costs and substantial exposures associated with them, data center projects have the potential to reshape professional liability exposure. They are technically complex and rely on continuous operation.

What are the possible implications for the design firm should operations be interrupted by a fire, hurricane, earthquake, power outage or equipment failure? Can sufficient warning about the potential risks be communicated widely and in a timely manner? 

Design firms are now in an era where change is accelerating more quickly than ever. If your firm plans to become involved in a data center project, the more you can get your arms around the risk, the better prepared you will be.

Lauren Martin is vice president and a risk manager and claims specialist at Ames & Gough. She can be reached at lmartin@amesgough.com.