With AI-driven demand accelerating the shift to modular builds, Michael Kurzer, Alexa Chally and Sean Dao of Vinson & Elkins warn that fuzzy specs, flimsy warranties and inflexible exit terms can explode budgets and uptime alike.
Digital infrastructure demand paced by a rapid increase in AI computing and expectations for more in the coming years have spurred interest in modular data centres. Designing and constructing a traditional data centre can take years, require substantial engagement with local trades (plumbers and electricians), and require expensive retrofitting as newer AI chips demand greater power and cooling capacity.
Modular data centres offer advantages in deployment speed, scalability, and operational flexibility. However, they still require a significant capital investment and are not yet ‘set it and forget it’.
That’s why it’s important that buyers scrutinise some key contract provisions when it comes to negotiating a modular data centre agreement.
These include:
- Performance specifications need specific, measurable metrics.
- Comprehensive warranty and support provisions help maintain operational continuity.
- Thoughtful compliance frameworks reduce disputes.
- Build in flexibility with structure of payments, options for growth and exit strategies.
Technical performance and acceptance
Technical specifications and acceptance criteria establish the foundation for performance expectations. Buyers should insist on defined, measurable performance metrics including specific PUE ratings, cooling capacity parameters, and reliability standards. Vague references to ‘industry standard’ performance are too ambiguous and can result in receiving less than what you bargained for with no real remedy to fix it.
Acceptance testing provisions should include objective success criteria, testing timeframes, and specific remedies if testing results reveal any performance deficiencies. If testing results reveal any deficiency, common remedies can include repair obligations, component replacement requirements, and financial compensation.
Carefully review any change order provisions, as this is often the process to make any necessary adjustments during the implementation phase. Change order terms should establish a clear approval process, specifications and documentation requirements, and pricing methodologies for an adjustment in the scope of services or repairs.
Warranty, support, and maintenance
Warranty provisions directly impact long term operational success. Comprehensive coverage should extend to all modular data centre components including hardware systems, embedded software, physical structure, and connectivity elements. Service Level Agreements should establish minimum response times and timeframes for resolving problems in accordance with severity level, as well as potential service credits for delays or outages.
Preventive maintenance provisions should clarify each party’s responsibilities, establish maintenance frequency requirements, and address how maintenance activities impact uptime guarantees.
Lifecycle support commitments typically address forward looking considerations including spare parts availability, software update policies, and technical support duration.
Since modular data centres can operate for extended periods, these provisions ensure continuity of operations throughout the expected deployment lifecycle.
Compliance
Modular data centre providers should comply with applicable regulations including building codes, environmental and permitting requirements, and electrical standards during installation. Vendor responsibility is especially crucial in areas experiencing rapid regulatory change, such as energy efficiency standards and data privacy obligations.
Lastly, we recommend addressing the compliance responsibilities for future changes in the modular data centre’s operational jurisdiction, such as the management of data sovereignty requirements, cross-border data transfer restrictions, and cybersecurity obligations.
Modular data centres may also incorporate DCIM, so closely review your usage rights for all embedded software, permitted users, authorised modifications, and transferability rights. Organisations need to determine whether additional software licenses are required for operators or if these rights are included in the purchase price.
Documentation requirements should also be specified, including user manuals, technical specifications, and troubleshooting guides.
Seeking indemnification and a limitation of liability can provide essential protection against infringement claims. Comprehensive indemnities include defence obligations, compensation for expenses, and specific remedies if infringement is established.
Financial terms and exit strategies
Payments can be tied to appropriate milestones for each stage of delivery and implementation, and it is helpful to hold back a substantial final payment until a successful deployment is achieved. As many organisations anticipate future growth, it is also important to consider negotiating favourable pricing and delivery times for additional modules.
Buyers should address scenarios that allow for early termination, such as vendor default, business requirement changes, or operational transitions. Comprehensive provisions define a ‘default’, cure periods, and consequences for unresolved defaults. Contracts should also address force majeure events, specifying which circumstances excuse performance delays and any resulting changes in a party’s obligations.
Lastly, transition assistance facilitates switching vendors when necessary and covers knowledge transfer requirements, documentation obligations, and operational support during migration periods. These considerations are crucial for critical installations where operational continuity is essential. Provisions should also address asset ownership of installed equipment, including removal rights and restoration obligations, if the relationship terminates prematurely.
Conclusion
Modular data centres offer compelling advantages in deployment speed and flexibility. When reviewing contracts to purchase modular data centres, buyers are advised to seek counsel and prioritise technical specifications, warranties, service obligations, and flexibility on expansion and exit as these areas can have a big impact on operational success and costs.
