L EG AL ISSUE S SPO T L IGHT


Understanding Contractual Risk Allocation is Key in Volatile Data Center Market


BY LAURENCE PHILLIPS, PROCOPIO, CORY, HARGREAVES & SAVITCH LLP D


ata center construction in California is uniquely exposed to supply chain disruption.


Unlike conventional commercial proj-


ects, most value in a hyperscale or colo- cation facility lies in long-lead, specialty equipment: transformers, switchgear, generators, uninterruptable power supply systems, chillers, computer room air han- dling units, and integrated control systems. Delivery delays or price shocks involving a single component can derail commis- sioning schedules and trigger liquidated damages measured in millions of dollars. Prime contractors, major mechanical,


electrical and plumbing (MEP) subcon- tractors, and equipment suppliers must ensure the contract allocates risk.


Long-Lead Equipment: The Structural Risk Profile Lead times for medium-voltage switch- gear and utility transformers can exceed 12–24 months. Manufacturers frequently reserve broad rights to adjust delivery windows based on material shortag- es, labor conditions, or global logistics constraints. Equipment pricing may be tied to volatile costs for materials such as copper, steel, and fuel. Prime contracts often contain:


• Fixed substantial completion dates. • Strict liquidated damages provisions.


• Narrow force majeure clauses. • No express cost-escalation


22


CALIFORNIA CONSTRUCTOR MAY/JUNE 2026


mechanisms. • Tis mismatch can lead to disputes.


Force Majeure: Narrow Relief Under California Law California courts enforce force majeure clauses as written. If the event is not expressly covered in the contract, relief may be unavailable. Traditional force majeure clauses


reference “acts of God,” war, labor strikes, and government orders. Post-pandemic, many contracts now include language addressing “epidemics,” “pandemics,” and “supply chain disruptions.” But contrac- tors should not assume broad protection. Tree recurring issues include: 1. Foreseeability – If supply chain vol- atility is deemed foreseeable at the time of contracting, owners may argue it is not a force majeure event. 2. Causation Proof –Contractors must typically demonstrate that the delay was directly caused by the qualifying event and could not be mitigated through reasonable efforts. 3. Time vs. Money –Many force majeure clauses provide only schedule relief, not compensation. For equipment escalation, time alone does not solve the problem. For MEP trades and equipment


suppliers, the prime contractor will flow down strict schedule obligations. Without aligned upstream relief, sub- contractors can be exposed to delay damages they did not create.


Cost Escalation: Fixed Price vs. Reality California law generally enforces fixed- price contracts absent specific escalation language, and the doctrine of commercial impracticability is rarely successful in construction disputes. In data center projects, specialty equipment may be procured months before fabrication. Between bid and re- lease, manufacturers may issue revised quotes reflecting material volatility. If the contract lacks a price-adjustment mech- anism, the party holding the fixed-price commitment absorbs the delta. Common contractual approaches to


mitigate price adjustment include: • Material escalation clauses tied to published indices (e.g., Engineering News Record (ENR) building cost index, U.S. Bureau of Labor Statistics Producer Price Index).


• Allowance structures for long-lead equipment.


• Shared-savings/shared-risk formulas.


• Early procurement authorizations with separate guaranteed maximum price amendments.


• Price validity windows requiring rapid release after award. Prime contractors should resist broad


fixed-price commitments for equipment not yet procured, especially when up- stream owner contracts contain no esca- lation relief. MEP subcontractors should


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32