Seven Key Issues to Consider When Negotiating Long-Term O&M Agreements for Data Center Projects

At a Glance

• Where an O&M agreement is being negotiated for a newly constructed data center, the agreement should incorporate a responsibility matrix that encompasses the operator’s, owner’s, and construction contractor’s responsibilities.
• Provisions for adjustments to pricing and schedules due to tariffs, duties, or supply-chain disruptions are prudent.
• Given the increasing prevalence of cybersecurity threats and data breaches, it is important to address insurance requirements and data-handling protocols up front.

As the demand for robust data infrastructure continues to accelerate, long-term operations and maintenance (O&M) agreements have become increasingly critical for data center owners (Owners) and O&M service providers (Operators), particularly when Operators are contracted separately from the contractors who construct the data center or data hall (Construction Contractors).

Whether you are negotiating as an Owner or Operator, understanding the nuances of these agreements is essential to safeguarding your interests and optimizing long-term performance.

1. Defining Scope of Services

   A clear and comprehensive definition of the scope of services is fundamental to any O&M agreement. Parties should specify which maintenance tasks and operational responsibilities fall under the Operator’s purview, distinguishing them from those retained by the Owner or assigned to third parties. A clear delineation of responsibilities is especially important when it comes to the maintenance of HVAC, controls, security, and IT systems. Decisions regarding equipment repair versus replacement over the asset lifecycle must be addressed, with transparent processes for approvals to avoid disputes. At a minimum, responsibility for routine and preventative maintenance, repair work, and capital improvements and equipment upgrades should be specified. Drafters should avoid vaguely stating obligations for maintenance or repair “as needed” or “as required.”

2. Avoiding Gaps & Overlaps with a Construction Contractor’s Work

   For new construction, the O&M agreement must fully coordinate with the construction agreement(s) between the Owner and its Construction Contractor(s) to avoid situations where (i) work is not clearly assigned to either the Construction Contractor or Operator, and (ii) the Construction Contractor and Operator have overlapping responsibilities. The scopes of service for the construction agreement and O&M agreement should not be drafted in separate silos, and instead should be considered together and reconciled as part of a whole. To prevent confusion and potential disputes over which vendor “owns” responsibility, where an O&M agreement is being negotiated for a newly constructed data center, the agreement should incorporate a responsibility matrix that encompasses the Operator’s, Owner’s, and Construction Contractor’s responsibilities.

3. Key Performance Indicators (KPIs), Deductions & Remedies

   Performance measurement and enforcement mechanisms are central to effective O&M agreements. The O&M agreement should define KPIs relevant to data center reliability, including uptime, power usage effectiveness (PUE), cooling capacity, and response times, as applicable. Caps on deductions for nonperformance and carve-outs for excused events such as scheduled maintenance or force majeure should be clearly stated. While performance-based incentives and payment deductions are standard in the industry, it is important that caps and exclusions to these incentives and payment deductions are reasonable and provide appropriate protection for both Owner and Operator.

4. Term & Termination Rights

   The duration of the O&M agreement and the rights of each party to terminate are crucial considerations. Longer-term contracts may necessitate provisions for breakage fees, clear end-of-term extension requirements, and equipment purchase options. If the agreement is terminated, it is important to define how unreimbursed lifecycle expenses and demobilization costs will be recovered by the Operator. Owners often seek broad termination rights, but Operators should negotiate fair compensation for early termination to protect their investments in personnel and equipment dedicated to the project.

5. Site Access & Third-Party Interference

   Service delivery locations and site access protocols must be carefully addressed. Data center projects inherently carry elevated security and access protocol concerns. In addition to carefully addressing these issues, Operators’ liability should be limited to the specific areas where they perform services, and Owners should provide advance notice of any third-party access to ensure proper oversight and coordination. Data centers frequently host multiple vendors, so clear site protocols are essential to minimize risks and clarify responsibilities within a multiparty environment.

6. Payment Structure & Financial Arrangements

   The payment structure should be clearly defined. If the data center is not fully constructed, the parties should clarify when the Operator will onboard and train staff, and how those costs will be reimbursed if there is a delay to the commencement of operations. For long-term agreements, it is also crucial to include an escalation provision, potentially tied to an inflation index to capture labor and material cost increases. As data center projects grow in complexity and scale, Owners may request flexible payment terms or financing arrangements, necessitating that both parties understand and agree to the financial mechanisms in the agreement. Provisions for adjustments to pricing and schedules due to tariffs, duties, or supply-chain disruptions are prudent.

7. Risk Allocation: Indemnity, Limitation of Liability & Insurance

   Risk allocation provisions, including indemnity obligations, limitations of liability, and insurance requirements, should be negotiated with care. Reciprocal indemnity obligations help ensure fairness, while aggregate liability limits protect both parties from excessive exposure. Waivers of consequential damages, including loss of revenue and data, are common to avoid open-ended risk. Given the increasing prevalence of cybersecurity threats and data breaches, it is important to address insurance requirements and data-handling protocols up front.

Broader Industry Considerations

Beyond these core issues, parties should consider regulatory compliance obligations, limiting them to laws in effect at contract signing with carve-outs for future changes. Force majeure clauses should be broadly defined to cover modern risks such as cyberattacks, data breaches, and utility outages. Lifecycle planning should also be aligned with intended accounting treatments and capital investment recovery, ensuring that both parties’ financial and operational interests are protected throughout the term of the agreement.

In Closing

By proactively addressing these key issues, stakeholders can minimize disputes, manage risk, and promote operational excellence throughout the term of the O&M agreement.