Data centers are the backbone of modern technology. By processing and storing ever-growing volumes of data, they form the core of today's digital infrastructure – from online banking to cloud computing. With the rise of AI, the demand for high-performance, secure and scalable data infrastructure continues to accelerate. The result: a global boom in data center construction.
This trend is clearly visible in Switzerland. According to a study commissioned by EnergieSchweiz, a program of the Swiss Federal Office of Energy, there were 80 data centers in 2020. While no official updates have been published since, more recent industry platforms like Cloudscene or DataCenterMap estimate that around 120 data centers are now operating across the country.
Notably, Microsoft has recently announced a USD 400 million investment to expand its four existing data centers near Geneva and Zurich, in order to meet rising demand for AI and cloud services (Reuters).
It comes as no surprise that Switzerland remains a top choice for data center development: its political and legal stability, business-friendly regulatory framework, robust data protection laws, central location in Europe, renewable energy availability, and sustained demand from the financial and technology sectors make Switzerland a highly attractive location.
Yet, data center projects are inherently complex. They require careful planning and well-structured contracts to manage risks and ensure long-term operational success.
In this edition of Construction Insights, we explore key considerations for stakeholders involved in data center development, including site selection, contractual frameworks and dispute resolution mechanisms.
1. Types of Data Centers: Colocation vs. Hyperscale
An important consideration at the outset of any data center project is the type of facility to be developed. This choice typically depends on the developer's business model: whether the developer aims to lease space within the facility to multiple tenants (colocation data center) or to a single major customer under a long-term agreement (hyperscale data center).
In a colocation data center, the developer builds and operates the facility, providing tenants with access to secured space, power, cooling, and connectivity. Customers lease parts of the facility and install their own IT equipment, while the operator remains responsible for the shared infrastructure. This model allows for flexibility and diversification of tenant risk but requires intensive operational management and close coordination of service levels.
By contrast, a hyperscale data center is typically leased in full to a single large customer, usually a global cloud service provider. The developer constructs the "shell and core" of the building, including critical infrastructure such as backup power, cooling, and physical security. The hyperscale customer then fits out the interior with its own servers and operates the facility independently. Instead of being based on square meters, rental fees are typically tied to the reserved power capacity. Given the long-term nature and technical complexity of these arrangements, developers often secure the customer before design begins, allowing the facility to be tailored to the tenant's specific operational and technical needs.
Both models have their place in the market. However, the hyperscale model is often favored by developers, as it offers greater scalability and typically involves long-term leases with financially strong counterparties. This creates more predictable revenue streams and reduces the operational complexity associated with managing multiple tenants in a colocation environment.
2. Site Selection: Regulatory and Technical Considerations
From a legal perspective, the most significant considerations when selecting a site for a data center are land acquisition, zoning compliance, and permitting. Developers must ensure that the site complies with local zoning plans, and, if not, apply for the necessary adjustments or exceptions. Permitting typically involves both technical and legal due diligence and may require an Environmental Impact Assessment (EIA) if the project is expected to have a significant environmental impact, such as noise emissions. Additional biodiversity protection measures may also be required. Obtaining planning and permitting approvals can take from several months to over a year.
In parallel, developers must assess the site's technical feasibility. Key considerations include access to fiber connectivity, reliable energy supply, and operational accessibility. Hyperscale projects may require geo-redundant configurations and significant power capacity, necessitating early coordination with grid operators and energy providers, as upgrades of the power grid may involve long lead times.
3. Contractual Set-up and Key Considerations
Once the site is secured, the developer will typically appoint a single main contractor under an EPC (Engineering, Procurement, and Construction) contract to deliver the project. The EPC contractor assumes responsibility for the overall design and construction process and serves as the developer's sole point of contact. Specialized works such as civil engineering, electrical installations and HVAC (Heating, Ventilation, and Air Conditioning) systems, are usually subcontracted. These multiple contractual layers give rise to distinct legal considerations.
3. 1 Developer – Main Contractor Relationship
The main (EPC) contract is generally structured as a contract for works, often based on standard forms such as the FIDIC suite or the Swiss SIA 118 Norm. It sets out the project scope, responsibilities, and delivery schedule, but above all, it governs risk allocation between the parties.
Key issues to address include:
- Performance guarantees: Ensuring completion of the project.
- Site risk: Usually allocated to the EPC contractor, covering e.g. ground conditions and health and safety.
- Force majeure clauses: May excuse delays or non-performance due to unforeseeable external events.
- Delay mechanisms: For example, agreed liquidated damages to compensate the developer for late completion.
- Limitation of liability: Often a central negotiation point, particularly regarding the extent to which liability is capped and whether by amount or by type of damage (e.g. excluding consequential loss or loss of profit). Defining key legal terms such as "consequential damage" within the contract can help avoid ambiguity and disputes.
In the context of data centers, these issues are particularly critical, as potential losses can be significant. Equipment failures or structural defects may threaten assets worth hundreds of millions and cause serious service interruptions. Such interruptions can be highly damaging because data centers provide continuous IT services to businesses and cloud providers; even brief downtime can result in reputational harm, contractual penalties, and significant financial loss. To mitigate these risks, data centers typically employ redundant systems, including backup power supplies (first layer being batteries, second layer being diesel generators), multiple network connections, and duplicated cooling systems, to ensure operational continuity even in the event of component failures.
3.2 Main Contractor – Subcontractor Relationships
EPC contractors typically rely on subcontractors to carry out large portions of the work. In particular the hyperscale business is dominated by international players (developers, specialized construction companies and customers). Hence, there is strong preference for international standards such as FIDIC. The international construction companies often do not have substantial capacities locally on ground and subcontract a large portion of the work to local contractors. The local contractors often have a strong preference for local standard contracts (in Switzerland the SIA standards). This tiered structure of different standard contracts introduces an additional layer of contractual relationships that must be carefully aligned. Any discrepancies in liability regimes, or performance standards can create coverage gaps, leaving the EPC contractor exposed. Effective contract management and interface coordination are therefore critical to ensure subcontractor agreements are aligned with the main contract. This requires that the terms of subcontractor agreements closely mirror the obligations owed by the EPC contractor to the developer in the main contract.
4. Dispute Resolution
Despite careful planning, disputes can and do arise, particularly in large-scale, high-value projects such as data centers. These disputes may relate to delays, cost overruns, defects, unmet performance targets, or differing interpretations of contractual terms. Given the financial and operational stakes involved, it is essential to have a clear and effective dispute resolution mechanism in place from the outset.
Contracts should specify not only the governing law and jurisdiction but also the forum for resolving disputes, such as court proceedings or arbitration. In international projects, arbitration is often preferred due to its neutrality, enforceability of awards, and confidentiality. Where arbitration is chosen, careful consideration must be given to the choice of institution (e.g. ICC, the Swiss Arbitration Centre) and the seat of arbitration. Multi-tiered dispute resolution clauses, starting with negotiation or mediation before escalation, can help preserve commercial relationships and avoid formal proceedings where possible.
In construction projects like data center developments, contracts are often based on FIDIC forms, which provide industry-specific dispute resolution mechanisms. Under FIDIC contracts, disputes may be referred to a Dispute Adjudication Board (DAB) or Dispute Avoidance/Adjudication Board (DAAB), i.e. panels of independent experts that issue binding decisions during the project. These boards are designed to resolve issues promptly, keep projects moving, and minimize the need for lengthy litigation or arbitration.
Early legal review and precise drafting are key to ensure that the dispute mechanism is enforceable, fit-for-purpose, and aligned with the overall risk profile of the project. A well-structured clause can make the difference between a swift resolution and a protracted legal battle.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
