Construction

Addressing all stakeholders’ protection requirements

Data centers are high value projects, and their successful delivery requires collaboration from a large number of sophisticated stakeholders during the planning and construction processes. The management of the process will often need to meet the expectations of private equity investors, lenders, public sector stakeholders, and of course customers, who are usually involved from the outset. A top-notch risk management process with insurance protection against events that could derail timelines will impress stakeholders, pave the way for a smooth program delivery and achieve the desired ‘Ready for Service Date’ (RFS).

The construction plan and process needs to be well organized so that the data center is built to the high standard expected by sophisticated customers who may also have specific requirements. Data center occupiers often operate in several regions and expect similar service quality levels across the world.

Protecting the project

Insurers are generally attracted towards the data center industry and consider these to be target projects because they are large in value, well organized and require a consistent and high quality approach to risk and insurance worldwide.

In addition to standard insurance for the construction activity, data center developers need to factor in long lead times for equipment such as chillers, ventilation, air conditioners, and standby power generation. It is well known that this equipment is in high demand and replacements can take a considerable amount of time in the event of loss or damage during their procurement, transit, installation, and commissioning.

Because of the current market situation, data center developers are regularly considering purchasing this long lead equipment directly and sometimes in anticipation of its future usage on global projects. The risk of damage to this equipment whilst in transit can be adequately insured by the manufacturer or supplier, but it is important that the project principal or sponsor considers the potential impact on the project program if this equipment is not delivered to site as planned due to an insured event. Developers should consider the procurement of Delay in start-up (DSU) insurance that specifically responds to a loss whilst the equipment is in transit.

‘Loan Facility Agreements’ will be prescriptive with regard to debt repayment from planned RFS dates and data center operators need to deliver against them to avoid significant additional debt service costs as well as reputational damage. DSU insurance aims to indemnify the developer against delays to the commencement of revenue payments. Developers, particularly for co-location schemes or where there is no customer agreement, often restrict the scope of their DSU coverage only to protect against the ongoing cost of debt repayment service while the project is brought back on track following an insured event. This is a particularly important feature of the policy — it helps reassure both lenders and customers that the project is well protected, that risks are being addressed appropriately, and that the project sponsors and stakeholders will be protected in the event that the planned RFS date is not met.

Recommendations

The following considerations are key to securing a comprehensive and competitively priced insurance program:

Reputation and track record of general contractor and key supply chain members
Details of risk management of the supply chain including lead times for replacing critical items
Details of the risk management process during construction with particular focus on water management and fire
Global territories susceptible to natural perils such as named windstorm or earthquake require details of how these risks are managed during the construction process