Standard forms of contract commonly used in Singapore such as the SIA Building Contract, the public sector form of PSSCOC or the REDAS form for design and build projects are drafted based on risk profile of a typical construction project. The principle objective of a standard form of contract is that the contract should be sufficiently versatile to be used widely in construction industry for a variety of projects with minimal or no modification required. This article examines whether standard forms of contract are suitable to be used for construction of data center given its inherent unique characteristics. Is the contractual risk profile of construction of data center adequately addressed by conventional standard forms?

To facilitate the review of this subject, one needs to appreciate the general characteristics of a data center in particular what makes it unique and different from conventional construction project. For conventional projects involving construction of residential buildings, retail malls, hotels, schools or office buildings etc, the completed building is meant to be used by people or to host occupants. On the other hand, data centers are facilities to host and operate IT infrastructures. Apart from security personnels as well as IT personnels coming to data centers to perform specific technical tasks from time to time, there are very few occupants located at the data center. Given this inherent functional difference between data centers relative to conventional buildings, one can argue that data centers are designed mainly to cater to the needs of IT infrastructure hardware rather than people. Examples of IT hardwares include servers, racks, structured cabling, back up power, management platform, network security systems etc. These infrastructures are meant to perform enterprise applications and demanding computing tasks. With increasing demand for cloud computing by individuals and businesses, the need for data centers is poised to increase. 

When one is designing a facility to cater to the needs for infrastructure as opposed to individuals, the ultimate aim is to ensure that those infrastructure is provided with an environment that allows it to perform to a very prescriptive and objective standards. By way of example, data centers can be designed to achieved certain classified tiered standards namely Tier 1, Tier 2, Tier 3 and Tier 4 which is a measure of resilience, reliability and availability of redundancy. These standards are objective by and large. On the other hand, conventional buildings can sometimes be subjective in its standards as it is meant to cater to needs of its intended occupants with a range of tolerances and preferences. Such subjectivity is evident from the fact that individuals may have different opinions on what is considered luxurious condominium or from the fact that there is an absence of a global standard of how to design a retail mall.

Given some of the notable unique characteristics of data center mentioned above, it challenges the conventional way we appreciate common contract provisions found in standard forms of contract such as practical completion, maintenance period, extensions of time etc. This will be expanded further in the subsequent sections of this article.

Construction of Data Centers vs Construction of Regular Building – What is Practical Completion?

How the construction of data center is regarded as being “completed” can be very specific and objectively defined whereas this may not be the case for conventional buildings. Under standard forms of contract for conventional project, practical completion or substantial completion is the point at which the certifier appointed under the contract issues a completion certificate. This happens when he is of the opinion that the construction works appear to be complete to his satisfaction apart from minor outstanding works. Whilst the contractor is expected to complete the minor outstanding works within an agreed time period post practical completion, such works carried out by the contractor shall not unreasonably cause disturbance to the Employer’s full enjoyment and occupation of the property. There are multiple elements of subjectivity in this regard. Firstly, the degree to which minor outstanding works are considered acceptable and still qualify for completion certificate can be subjective. Secondly, the extent to which on going construction works are permitted without causing disturbance is a matter for assessment and could vary according to circumstances. In fact, the process of certification of completion that involves judgment call by an individual certifier in and of itself is subjective. What is considered completed to one architect may be unacceptable to another architect. 

The above is in stark contrast to the completion of a data center. Data center cannot be said to be completed and able to function until and unless the IT infrastructures installed are performing its computing task as intended. By way of illustration, if a bank’s dedicated data center is unable to power its digital banking applications, it cannot be considered as operational and completed. Even if the data center appears to be physically completed from the view point of an architect or engineer which would traditionally qualify for a completion certificate, the facility is of no use to the Employer if the IT infrastructures is unable to perform its intended computing applications. IT infrastructures demand very specific environment for it to function and its margin of tolerance is relatively narrow. One common example is the amount of cooling required to keep the data center temperatures low due to an enormous amount of heat generated by the IT equipment. The temperature allowance is designed based on amongst others the classes of data center equipment, ranging from A1 to A4, with A1 being the strictest temperature and humidity requirement. A1 refers to enterprise servers and storage hardware. The layout of data center is therefore design and build to achieve this temperature requirement, such as with the adoption of hot aisle and cold aisle layout with clear compartmentalisation of hot air from cold air for high efficiency. Even if the compartmentalisation is 99% effective, to the extent that the remaining 1% ineffective portion affects the IT infrastructures thereby disrupting digital banking applications, this is unacceptable to the bank or the data center operator/ owner. The usual element of subjectivity and tolerance for minor outstanding works including defects appear not applicable to a data center with mission critical enterprise applications. 

In this regard, the question that arises is whether the conventional provisions of practical completion under standard forms of contract are suitable for construction of data center? A data center can be described in the most basic term as being a reinforced concrete shell within which there are operationally sensitive IT infrastructures. Apart from offering protection and security to the IT infrastructure, the concrete shell also maintains a conducive environment for these infrastructure to function. This is analogous to the relationship between cranium and brain. The data center cannot be said to be practically complete if the associated IT infrastructure are not subject to testing and commissioning as well as demonstrably proven to be operationally ready. Rightly or wrongly, the design, procurement, installation of IT infrastructure are so specialised and unique that it cannot be traditionally considered as ‘construction works’. Therefore, it is tricky to determine whether it make sense to subsume IT works as part of the construction works for it to be administered under a standard form of construction contract. However, if the IT works are administered outside the purview of construction contract, it give rise to the above mentioned conundrum associated with practical completion. The delicate balance between IT works and construction works in reality implicates many other provisions of standard forms of contract, which will be illustrated further in the subsequent sections of this article.

Construction of Data Centers vs Construction of Regular Building – What is Maintenance Period/ Defects Liability Period?

Under standard forms of contract, defects liability period or maintenance period refers to a defined duration, usually any period between 12 months to 18 months after practical completion of a construction project. During this period the contractor is mainly responsible for completing any minor outstanding works and also to rectify any defects that the contractor is responsible for. Whilst the Employer had contractually taken over the completed building, the contractor maintains a relatively small crew on site to manage its residual responsibilities. Whilst this provision works reasonably well for conventional construction project, is it relevant for data center?

As alluded to earlier, the standard form of construction contract is drafted pursuant to the nature and characteristics of construction works rather than IT works. After all main contractors do not ordinarily have specialty and in depth technical expertise in the installation and operations of IT infrastructures. Therefore it is safe to assume that practical completion under standard forms of contract only refers to completion of construction works as opposed to IT works. It follows that IT works are managed and implemented by a separate IT team after the construction team achieves practical completion. In other words, the installation, implementation and testing of IT infrastructure occur during the maintenance period for construction works. 

One of the critical activities during the IT works involve testing and commissioning of the IT infrastructures upon installation. These tests are carried out in multiple levels beyond the initial factory acceptance test. The ultimate objective is to ensure that all equipments and individual hardwares are tested and could function as an integrated system based on the design requirements. Given the need for a holistic assessment of an integrated system, the testing invariably include some of the completed works constructed by the data center contractor such as the electrical power supply, including back up power supply as well as ventilation and cooling systems.  It is entirely possible for such test to fail due to reasons attributable to the contractor’s works. Therefore, it raises the question of whether the contractor’s works had reasonably achieved practical completion if it had not been tested in conjunction with the IT infrastructures. Should the contractor’s responsibility be confined to defects rectification and minor outstanding works pursuant to maintenance period. There is a need to clearly distinguish the differences between non completion as compared to minor defects post completion. Also, the traditional certification process carried out by the architect or engineer may not be suitable as a means of defining completion when in fact there is a more objective method involving testing and commissioning. Therefore it appears that the data center activities that occur during maintenance period is not congruent to the spirit and substance of the standard forms of contract. 

Upon achievement of practical completion, the contractor is expected to demobilise much of its workers, plant, machineries and equipment off site. Therefore if the testing and commission reveals that the construction works are not completed per specification, there could be debate on who should shoulder the cost of remobilising those resources. Whilst some may argue that the mere certification of practical completion does not prove that the works are fit and proper, there are practical realities that could have been addressed had the provisions in standard form of contract been synchronised with the realities occurring on site. By way of further example, upon achievement of practical completion, the contractor is entitled to its release of the first half of the retention monies and the liquidated damages is no longer in force. If the constructions works are found to be non compliant and required significant follow up works, the Employer loses its contractual leverage to a large extent. 

Construction of Data Centers vs Construction of Regular Building – What is Liquidated Damages? 

As pointed out in the preceding sections of this article, the concept of practical completion as provided for under standard forms of contract appear incompatible with the requirements of data center. This triggers a ripple effect to other related provisions including the application of liquidated damages. Under construction of a regular building, liquidated damages is a fairly straightforward provision. It is generally a pre-agreed sum of money that the contractor is liable for in case the construction works remain incomplete beyond the stipulated practical completion date. It is the financial consequences for breaching a contractual date. This sum of money is usually expressed as an amount per day which represents a genuine pre-estimate of losses that the Employer will incur as a result of the delay. This estimate is derived based on amongst others, revenue that the Employer is denied as a result of late completion of the building. 

With the advent of software as a service (SaaS) and platform as a service (PaaS), there is a significant financial incentive for data center operators and owners to provide those cloud application services for a fee. In other words, data center owner views their data center as a revenue generating asset much like how a hotel owner would view its property. In this regard, a delay to completion of data center should attract liability to liquidated damages in a manner no different from a regular commercial building. However, the way a standard form of contract defines completion for a typical construction project may not be appropriate to the nature of data center. If the definition of completion of a data center is subject to debate, then it follows that the Employer’s entitlement to liquidated damages is adversely affected. This is because liquidated damages flow from non completion by a contractual date and ceases to be applicable upon actual completion. Therefore the clarity to what constitutes completion is important in the application of liquidated damages. 

Certain high tiered data centers host mission critical computing applications. It is not uncommon to find in service level agreements with their customers some form of financial penalty in case there is any disruption to their provision of services. This is because those customers in turn may face hefty fines from regulators if those mission critical applications are disrupted. Therefore data center owners become particularly reliant on a clear and effective liquidated damages provision as a means of risk hedging. 

Once the contractor achieves practical completion, it is also relieved from any exposure to liquidated damages. Therefore if and when the construction works are found to be non compliant with the contractual specification after testing and commissioning is performed to the data center, the data center owner loses its ability to recover liquidated damages. The situation could be exacerbated if the data center owner is simultaneously exposed to certain financial penalty under its service level agreement with its clients. Therefore there appears to be room for standard form of contract to address this issue to prevent the Employer from being stuck between a rock and a hard place.

Whether to Include IT Works As Part of Construction Works of Data Center?

The issues raised in the earlier sections of this article share a common underlying cause namely the repercussions of excluding IT works from the construction works from a contractual stand point. This in turn causes the certification of completion of construction works to precede the completion of IT works. It appears that therefore the solution is to include the IT works as part of the constructions works and be managed under the same construction contract. If this is adopted, the main contractor may be required to undertake the procurement, installation and overall coordination of IT infrastructure related works. In this regard, the main contractor is likely to subcontract or outsource a significant portion of such IT works to a third party IT firm with the relevant expertise. It is fair to say that most general contractors do not ordinarily possess the relevant in-house IT infrastructure expertise required for the purposes of data center. Whilst some may argue that contractors that carry out fit out works for financial institution or technology company may have been involved in the building of ‘computer room’ or ‘server room’, the level of intricacies are quite different with respect to a full fledged data center capable of hosting enterprise applications. 

The real question is if the IT works and construction works are managed under a single entity administered through a unified construction contract, does it give rise to a satisfactory solution to the above mentioned issues? Purely from a commercial view point, this unified arrangement is unlikely to be resisted by the main contractor since IT infrastructure works will set to increase the overall construction contract sum. After all, IT infrastructure works include many expensive and delicate hardwares. Correspondingly, the main contractor may be motivated by the prospect of a higher profit level. Admittedly, this is to compensate the contractor for a bigger risk it may be shouldering particularly for a specialised scope of work that it does not have a natural expertise in. From the Employer’s standpoint, its cost may be increased due to higher profit, attendance and overhead payable to the main contractor in return for mitigation of contractual risks. Therefore, whether this arrangement works is dependent on cost and benefit analysis of a balance between contractual concerns and commercial interest.

There is a famous saying that there are no solutions, only trade-offs by the famous economist Thomas Sowell. The contractor that has completed its construction works may not be issued with completion certificate until and unless the overall IT infrastructure works are tested and commissioned successfully. It follows that the site continues to be under the contractor’s responsibility for an extended period of time. The contractor may not be allowed to demobilise much of its labourers, plant, machinery and equipment upon completion of its construction works in case these resources may be needed for any rectification works or follow up works in due course. These resources are effectively left idling or be on stand by which may not be the most efficient use of precious resources, not to mention the corresponding cost that will be incurred. The contractor and the Employer should come to an agreement on what are the types of resources that could be reasonably demobilised off site without compromising any follow up works that may be necessary. This can be discussed and agreed on a case by case basis and there should be a corresponding provision under the contract to reflect this arrangement.

Conclusion

From the issues raised above, there is a strong case to be made that the present standard forms of contract for construction works may not adequately addressed the risks associated with construction of data center. This presents an opportunity for the relevant parties in the industry to examine whether a specialised form of contract for data center may be in order.




Koon Tak Hong Consulting Private Limited