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14 November 2023

Data Centres: Can the supply-chain keep up with a booming market?

In this article, Linesight’s Declan Morley, Associate Director – Cost Management, and Peadar Beirne, Associate – Cost Management, share insights on solutions for expanding capacity, while minimising risks associated with delivery or programme. 

Strong relationships have been one of the defining characteristics of successful data centre developments, due to the complexity and speed of these projects. In this demanding sector, cost is important – but speed to market and quality assume a level of importance as seen in a few other sectors. In order to deliver for clients, the whole supply chain must be able to respond to issues both within and outside their control in a collaborative, decision-based manner. Consultants and general contractors who have proven they can do this are rewarded with repeat work over many years, and because many clients adopt an open-book, Guaranteed Maximum Price contracting model, margins are generally sustainable. 

The trust-based model has served both clients and general contractors well, but there are capacity constraints in such a booming market, particularly with subcontractors. As outlined in Linesight’s latest commodity reports, the Australian data centre market has a substantial pipeline and projects are exploding in both size and number, with approximately US$11bn worth of projects currently in progress. Approximately, 60% of these projects, in terms of value, are in the planning or design stage. At the same time, there is no reduction in delivery timeframes, and general contractors are using the same limited pool of sub-contractors which could be a risk to schedule. There have been numerous examples within the sector outside of Australia, where ongoing capacity issues have led to extremely steep cost escalation, rendering projects financially unsustainable and ultimately driving end users to locate elsewhere. 

Why a booming market requires a different approach  

Currently, some of the most sought-after general contractors, and just as importantly their supply chains, have a full order book for the next 12-18 months. In Australia for instance, there are several well-established contractors, but they are often reluctant to scale beyond a comfortable level of organic growth and explore new subcontractors to work with for fear of jeopardising their record on delivery. Larger organisations have been able to lock in the required teams, but emerging / smaller organisations may struggle, with their tenders suffering from a lack of competition as a result. This is a particular issue among the specialist trades: the pool of M&E subcontractors for example, is largely the same size as it was five years ago, so even where there are several general contractors tendering, they may be fielding the same supply chain.   

In addition, the situation is exacerbated by a wider skills shortage in Australia, a hangover from COVID-19 border restrictions and the lengthy process that key trades, such as electricians, must go through to have their overseas qualifications recognised. Data centres are also competing with major infrastructure programmes, which have a massive capital spend and a guaranteed pipeline of work lasting years. For a subcontractor, this is often a more attractive proposition than a fast-paced data centre project where the trade element could be as short as three to six months. 

Solutions for increasing supply chain capacity    


As growth in the data centre market shows no signs of slowing, the dearth of new entrants for subcontractor work is a cause for concern. There are, however, several avenues that clients, main contractors, and the industry as a whole could explore to broaden the pool of subcontractors and to benefit from greater competition and market resilience.

One approach would be to look to those trades with transferrable skills, working in similarly critical sectors such as life sciences and healthcare. Like data centres, these facilities are also highly technical and delivered to strict programmes. As such, if a subcontractor has successfully completed a project within these other mission-critical spaces, they would also understand what is required to deliver a data centre. We have seen a similar approach work well for consulting firms that provide strategic support across multiple sectors – i.e., they are able to leverage local, regional, and global experience, bled alongside existing core teams to navigate the complex processes and requirements of large-scale project construction and delivery.    

A good first step would be to re-engage with the market for the fit-out phases after the main build, where the capital spend is lower and the work less complex and more repeatable. This presents less of a risk from a client’s perspective, and it allows newcomers the opportunity to prove themselves. We have seen several firms successfully enter the market by undertaking data hall fit-outs, before moving on to larger projects. 

There is not always time for pre-tender due diligence within a fast-paced build programme, so taking subcontractor selection off the critical path may help. For example, the introduction of a generic prequalification process to establish panels of subcontractors / specialists, and to agree project constants such as staffing rates and levels of resourcing, margins and contingency provisions upfront. As firms have already been rigorously vetted before a project arises, this enables a shorter tender programme and quicker engagement. 

In addition, the Australian Construction Industry Forum (ACIF) [1] highlighted in their recent 2023-2024 Policy Priorities that state and federal governments can alleviate skills shortage through a variety of initiatives, such as:  

  • Promoting onshore production of critical construction materials 
  • Ensuring that an automatic mutual recognition of licences system is working effectively to encourage interstate and intrastate migration in Australia 
  • Property funded, integrated and resourced vocational education and training (VET) system, as well as targeted funding for construction-related university courses. 

A strong pipeline of open-book projects  

From a contracting point of view, data centres are an attractive, less risky proposition, especially in a wider construction market that has seen insolvencies climb to a record high. Firms are often caught in the trap of fixed prices for multiyear projects (particularly in the commercial and residential sectors) with rising costs (labour and materials). In contrast, as mentioned previously, Data Centre clients are often willing to work on an open-book basis and they occupy large campuses offering a steady stream of projects over many years to come.  

With such robust growth now and for the foreseeable future, there is room for many more players in the data centre sector. The key to keeping up with a booming market, however, will be for subcontractors to be open to expand their existing team as well as for clients to introduce new entrants, to broaden the supply chain without risking programmes or delivery – or diminishing the trust-based culture that has underpinned its success to date and made it such a rewarding sector in which to work. Expanding the supply chain, particularly sub-contractors and specialists will be crucial to the sector’s ongoing success, and to avoiding the cost escalation seen elsewhere. This is a two-way street: it will require willingness to engage on the part of the supply chain, and a willingness on the part of developers to place trust in new entrants.   

Linesight has established strong relationships with clients and contractors and has been providing strategic consultancy services across a range of projects in the Data Centre sector. If you have any questions or would like to share your insights about this article, our Cost Management team would be happy to speak with you.  


 

References: 

[1] https://www.acif.com.au/policies/policies/acif-policy-priorities-2023-2024  

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