Supply Chain And Technology Agreements In Data Center Construction: Navigating Component Shortages And Alternative Sourcing

Data centers are the backbone of today's digital economy and are even more important to its future, powering everything from cloud services to ever increasing AI-driven applications. To address this demand, the development and construction of data centers is proceeding at an extremely fast pace, with numerous investors and parties searching for suitable land, acquiring that land, and then trying to commence construction as quickly as possible.

However, building these facilities is no small feat – especially when global supply chain disruptions, caused in part be the increased demand for these facilities, threaten the availability of critical components like electronic components, servers, batteries, cooling systems and networking gear.

To mitigate these risks, data center operators are increasingly relying on robust supply chain and technology agreements that include component shortage remedies, price adjustment clauses, alternative sourcing clauses as well as revamped force majeure and liquidated damage clauses. These contractual tools help ensure project continuity, provide confidence to lenders, control costs and provide operational resilience. Because these contracts often limit consequential damage, it is imperative to consider these issues.

In this Q&A, we explore the most pressing questions surrounding these agreements and how they safeguard data center construction projects.

1. Why Are Data Center Supply Chain Agreements Critical?

Data center supply chain agreements form the foundation for timely procurement and delivery of essential hardware and technology components for data center construction so that delays and increased costs can be avoided. Because data center projects are in such high demand and often have aggressive lending facilities, the development of these centers are on tight schedules, and delays can lead to serious challenges that threaten to scuttle projects – such as increased costs, missed service-level commitments and market irrelevance, and the triggering of unwanted debt remedies.

While these agreements are not a magic bullet that eliminates these risks, they can minimize delays and disruptions and control expectations by defining delivery timelines, setting forth quality standards and contingency measures, provide alternatives and remedies when supply chain disruptions are unavoidable, and ensure that all parties understand their obligations and remedies in case of disruptions.

2. What Causes Component Shortages in Data Center Projects?

Component shortages in data center projects can be caused by many issues, including but not limited to:

• increased global demand for specific components needed for AI infrastructures
• deficiencies in supply sometimes associated with newer and/or higher-performing technologies that are not as easy to produce
• increased tariffs on certain countries or products, global semiconductor constraints
• geopolitical trade disruptions, political instability in certain regions
• war, pandemics, extreme weather events and disasters and transportation bottlenecks that delay critical deliveries

While these shortages can sometimes be foreseeable and of limited length, they can sometimes be unpredictable and indefinite.

3. How Can Technology Supply Agreements Address Component Shortages in Data Center Construction Projects?

Data center technology supply agreements typically include shortage remedy provisions that:

• prioritize allocation for critical projects, provide for cost allocation or sharing if there are substantial increases in costs
• allow for the modification of normal supply and procurement procedures
• set forth alternate products and sources
• mandate expedited shipping procedures
• require suppliers to maintain buffer inventories (and audit procedures to confirm such inventories)

These agreements can also provide streamlined termination procedures at low cost upon the triggering of certain metrics which may allow a contractor or operator to quickly obtain a new supplier or vendor. These clauses may also include escalation protocols, ensuring that shortages are addressed at senior management levels quickly.

By embedding these remedies into contracts, data center operators can reduce uncertainty and maintain construction momentum even during global supply chain turbulence.

4. What Is an Alternative Sourcing Clause?

An alternative sourcing clause provides an option for operators or contractors to procure alternate components from secondary suppliers if the primary vendor fails to meet agreed delivery timelines. These are often triggered by certain metrics that are tied to reputable market indexes and/or more specific shortfalls that can be easily verified.

This flexibility is crucial in avoiding project delays. However, these clauses must clearly define what constitutes "equivalent" in terms of technical specifications, performance standards, and compliance requirements to prevent integration issues later.

5. How Do Alternative Sourcing Clauses Protect Data Center Project Timelines?

Alternative sourcing clauses act as a safety net, allowing procurement teams to pivot quickly at reasonable costs without breaching contractual obligations. They also provide clarity to all parties involved so there are not any surprises that can create or foster legal disputes and delays.

Alternative sourcing clauses place competitive pressure on primary suppliers to adhere to timelines, knowing that buyers have clearly outlined contractual and legal alternatives and remedies. The combined effect of risk mitigation, performance incentives and clarifying alternatives and remedies with your supplier – makes these clauses imperative for owners, developers and contractors involved in data center construction projects.

6. Are There Downsides to Alternative Sourcing Clauses?

While alternative sourcing offers flexibility, it introduces risks such as compatibility challenges, warranty limitations, and integration delays. For instance, a substitute cooling system may meet technical specs but require additional engineering work to fit existing designs.

To mitigate these risks, data center construction agreements should mandate supplier cooperation during transitions and include provisions for technical validation before deployment. Though pushing for alternative sourcing clauses can also lead to a more adversarial negotiation process with your suppliers – which can cause delays in the execution of contracts – it is better to tolerate a painful negotiation on the front end of a project than have to deal with supply chain issues or legal actions during the project.

7. How Should Shortage Remedies Be Structured in Data Center Construction Agreements?

Effective shortage remedies go beyond vague commitments and ambiguous language in your contract. They should be triggered by clear and specific metrics that are easily verifiable, with procedures and processes to implement those remedies. Effective shortage remedies should include:

• priority allocation for critical projects during shortages
• escalation procedures that trigger prompt senior-level intervention
• liquidated damages or credits for missed delivery milestones
• access to inventory data and audits for transparency and proactive planning
• price allocation mechanisms to address unavoidable increases in products and materials
• reasonable termination procedures and the relaxation of exclusivity requirements that are triggered by verifiable metrics or trusted indexes

These measures ensure accountability and provide buyers with actionable levers during crises.

8. Are There Financial Implications for Invoking Alternative Sourcing Clauses?

Yes. Alternative sourcing often involves higher procurement costs, expedited shipping fees and potential integration expenses. They can also lead to legal costs if the clause is determined to be vague or ambiguous, further necessitating very specific and concrete language (sometimes including examples) so all parties know where they stand upon certain events.

Data center construction contracts should clearly outline cost-sharing mechanisms – such as whether the supplier bears additional costs if delays trigger alternative sourcing. They can also include cost sharing mechanisms when costs increase beyond a trusted pricing index or other verifiable metric, and ceilings and caps for those cost sharing mechanisms. This clarity prevents disputes and ensures fair allocation of financial responsibility.

9. How Do Global Supply Chain Trends Influence Data Center Construction Contracts?

Emerging trends like nearshoring, supplier diversification, inventory auditing, price allocation mechanisms and AI-driven demand forecasting are reshaping supply chain strategies in data center construction. It should be noted however, that when employing AI-driven demand forecasting tools, or other AI-driven tools, they should be accompanied by human verification and compliance procedures.

Data center operators are increasingly embedding flexibility for owners, developers and contractors into contracts to adapt to these trends. For example, clauses now often include provisions for regional sourcing or dynamic allocation based on predictive analytics, making agreements more resilient to global events that may create disruptions.

10. What Best Practices Should Companies Follow When Drafting Data Center Supply Chain and Technology Sourcing Agreements?

The following best practices can help create data center construction agreements that are both robust and adaptable:

• define clear technical equivalence standards to avoid ambiguity
• provide clear contractual language, mechanisms, remedies and processes to deal with issues that have specific language and examples, so parties are on the same page
• include collaboration obligations for smooth integration of alternative components
• set transparent escalation and approval workflows for invoking remedies
• align clauses with broader risk management strategies, ensuring consistency across procurement and legal frameworks
• focus on reviewing and negotiating the most critical contractual provisions, such as indemnity clauses, damage limitations, termination or suspension rights, force majeure clauses, liquidated damages and warranties

Conclusion

In a time where data centers fuel AI innovation and digital infrastructure, supply chain vulnerabilities and disruptions can derail even the best planned projects. By embedding precise shortage remedies, alternative sourcing clauses and verifiable metrics into technology agreements, owners, developers and contractors can minimize delays, control costs and maintain lender confidence. These tools not only address current challenges like semiconductor shortages, tariffs and geopolitical tensions but also adapt to emerging trends such as nearshoring and AI-driven forecasting.

Stakeholders should prioritize clear language, technical equivalence standards, remedies, cost-sharing allocations and collaborative obligations during negotiations to transform potential risks into competitive advantages and limit disputes because of vague or ambiguous provisions. Forward-thinking contracts that are specific and clear ensure data center projects launch on time, scale efficiently and thrive amid uncertain economic and political events.

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.