Data Centre Construction Projects Under Threat From Covid-19

Ed Cooke, the founder of Conexus Law.jpg

The pipeline of new data centres is under threat as the supply of labour and parts is halted by the international response to the Covid-19 pandemic.

Globally, the construction of new centres had been growing at a compound annual growth rate (CAGR) of 8.61% since 2017, and was predicted to reach values of US$73.87bn by 2021. However, that trajectory is now unlikely to continue.

“We are seeing quite a lot of sites shutting down. Quite a lot in central Europe where people are on lock down and there is no labour that can get to site,” said Ed Cooke, the founder of Conexus Law.

“In the UK we are starting to see that happen too, and it will continue. The big question is how long does it go on for?”

In Europe, Asia and now the US, the complex web of specialist suppliers and subcontractors – who themselves are reliant on labour and parts – are now checking their contracts for force majeure clauses. However, Cooke said these are unlikely to cover the disruption.

“We have to look at two things: Firstly, the very fact Covid-19 occurred, is it a force majeure event? The other question is whether or not the global response from governments has been a force majeure event in itself,” he said.

Sharing practical advice for those who may be assessing contracts currently, Cooke set out four steps for operators, owners, developers and contractors to consider:

Review all contracts to understand your right and the actions that can be taken. Prioritise the most important contracts and/or the most critical supplies;

Review customer contracts for your own obligations as the situation continues to unfold. It is also advisable to look for clauses that may release you from obligations;

Consider the risk of insolvency in your supply chain and its potential impact. If a supplier goes out of business the project has a problem, whether it’s due to force majeure or otherwise.

Conduct a risk assessment: What is happening? Who is responsible for what? Where do the risks lie and how can we address them?

“I think it’s then a question of having some sensible conversations,” Cooke advised.

Extraordinary times call for extraordinary measures and the tech industry – like the rest of the business world – will be required to go above and beyond what is considered good business practice over the coming months. 

“Whatever the contracts says, people are going to have to be practical about this and come up with the best solutions for everybody,” Cooke said.

“This is a moment when relationships are really going to be tested, particularly the commitment from suppliers. If you are able to stand up to the plate and do what is required of you, and do your very best even in these very adverse circumstances, you can build relationships for a very long time, I think. If you are seen to be shirking your responsibilities or sitting back, I think that’s where you will destroy your relationships very quickly. People have to look to the long term.”

“Are the sanctions and government measures a force majeure event or does it fall under another provision in the contract? That’s important because if a force majeure event happens, as a contracted party you are given relief from having to comply with your obligations. Basically, you are given time,” Cooke added.

If left unmanaged, the domino effect is likely to continue down the line, with Cooke warning that any loss of tier one and tier two suppliers could create a void in the supply chain when construction resumes.

Those who may be planning to rely on business interruption insurance are also likely to face issue. Interruption insurance is most often purchased as an add-on to building insurance, meaning it is unlikely to cover interruption events that are not triggered by damage to, or the destruction of, property.

“What I would say is that it’s time for the government to step up. I know they are trying to tackle an ever shifting situation and we can’t expect them to have answers to every question from day one. But at some point they will have to step in and protect these businesses, because otherwise we are going to have a decimated economy for a very long time,” Cooke warned.