Elevating risk management
As Europe’s data centre sector matures, so must its approach to supply chain risk.
To protect their profit margins and delivery schedules, operators and their contractors are taking action to mitigate supply chain risks.
A third of operators (33%), and nearly as many contractors (31%), have adopted contractual measures to share supply chain risk with their counterparties, for example.
The most common of these protect against price hikes. Price escalation and inflation clauses, used by 45% of respondents with such measures in their contracts, specify exactly how price changes will be handled. Package contingency allowances (also 45%) include additional funds in the project budget to accommodate price changes (Figure 8).
Figure 8: Contractual measures to mitigate supply chain risks
Which of the following contractual measures does your organisation routinely use to share supply chain risk? (% of respondents that have adopted contractual measures to share supply chain risk)
But price changes are not the greatest risk to a data centre development project. These hurt the bottom line, but a missed delivery or overleveraged supplier can bring a project to a halt.
To guarantee access to critical materials and equipment, some operators are taking matters into their own hands – only 41% purchase materials directly, instead of leaving it up to their contractor. Owner furnished/contractor installed (OFCI) arrangements reduce delivery risk, reduce costs and improve cashflow management.
The survey reveals a missed opportunity – only 19% of respondents have implemented vendor-managed inventory agreements, in which a supplier takes responsibility for ensuring a customer’s inventory is always stocked as needed. This helps to de-risk the supply of long-lead electrical equipment.
Measures such as this, which exchange a long-term commitment for guaranteed supply, require a degree of standardisation in data centre design. However, standardisation must be balanced against the need to be responsive to customer needs, says Pohjanpalo at Hyperco.
“Having a standardised concept design locks in your delivery times,” he says. “But it also reduces your flexibility to give the customers what they want. You can be too rigid.”
In some cases, this quandary can be eased with flexible equipment, such as modular cooling and power equipment, which can be easily upgraded; adaptive rack layouts that handle multiple types of workload; and grid-agnostic power systems, which work with both offsite and onsite energy sources.
Supply chain visibility
Operators and contractors also mitigate risk by taking a closer look at their supply chains.
Only nearly three in 10 (29%) have implemented detailed supplier reviews for deeper visibility into the supply chain. Such reviews ensure that a prospective supplier ticks the boxes in terms of health and safety, ESG and financial stability. We also help clients assess the workload and pipeline of suppliers to ensure they are not overcommitted.
Pohjanpalo warns against being too inflexible when qualifying suppliers. “If you are too rigid in terms of financial standing and track record, you could miss out on a whole spectrum of local contractors and vendors who might do a better job. You need to be mindful that you’re not filtering out very capable, up-and-coming companies.”
The most widely adopted risk mitigation measure is using technology to track supplies and/or suppliers, as used by 44% of respondents.
Every developer stands to benefit from data-driven production planning. Tracking equipment throughout the supply chain means delivery delays can be anticipated. And if one project in their portfolio suffers an unforeseen delay, assets can be redirected to alternative sites. Also, asset tracking beyond delivery into the operation phase can reveal the true lifecycle cost of equipment.
The level of digitisation in supply chain monitoring varies greatly across the industry, however. Hyperscalers themselves may have direct access to their suppliers’ inventory data. But for smaller developers, the next step might simply be to move supply chain data from Excel into dedicated applications.
Optimising the supply base
Relatively few respondents have mitigated supply chain risk by optimising the size of their supplier base. Only 21% have broadened their data centre construction supply chain; and the same proportion have narrowed it.
Given the industry’s heavy reliance on a small number of GCs and equipment providers, broadening the supply base will almost always mitigate risk. Some developers are even considering multiple GCs for their projects, says Lamb, despite the complexity this would create.
“We’ve got clients looking at a GC1 and GC2 model, where one company builds the building and another fits it out,” she says. “This can be problematic from an interface point of view, but they realise they need to share the risk.”
Both Lamb and Byrne report that some operators are appointing a “bench” of three to four strategic contractors, allowing them to build deeper relationships and provide a steady stream of work. “These relationships and mechanisms will ensure that contractors remain competitive to repeat opportunities while the client gets consistency in quality and delivery,” says Byrne.
In our experience, this approach is effective in mature data centre markets. However, operators expanding into growing markets in Europe may find their strategic contractors’ resources are constrained there.
A new approach to risk
The changing dynamics of the data centre construction supply chain are prompting some operators to radically rethink their approach to risk sharing. “They are trying to move away from an adversarial culture of assigning blame towards a more collaborative approach,” explains Lamb.
In some cases, they are drawing up non-binding charters that describe how the employer and contractor will work together. Others are discussing an alliance model, akin to the ‘knock-for-knock’ agreements in the oil and gas industry in which both parties agree to share responsibility for losses, regardless of fault, and also share the upside.
The need for more equitable risk sharing is increasingly urgent as the scale of projects grows, Lamb argues. “Data centres are becoming billion-pound, critical national infrastructure projects. We need an alliance structure where the risk is shared.”
Investors and insurers are used to projects with a clearly defined allocation of risk, Lamb adds, so they are likely to present one of the biggest barriers to alliances.
Even so, these conversations are a clear indication that as the data centre sector matures, its approach to supply chain risk management must also evolve.
Share this report:
