Colocation Contract Terms to Negotiate

Before drafting a wish list, be honest about your position. Uptime Institute's research describes retail colocation contracts as standardized, with customers having limited negotiating power because of their small scale. Wholesale terms are customized, and the customer generally holds more of an advantage. A team taking a few racks may be able to move only a handful of points, and should spend its effort on the ones that cost the most to get wrong.

A word on who does what. TAG advises occupiers on real estate, and we do not negotiate data center contracts. Your engineers should set the technical requirements, and a specialist attorney or colocation advisor should handle the contract. The list below is meant to help a founder or operations lead brief those people and understand what they come back with.

Morgan Lewis notes that providers often seek multi-year terms, sometimes up to a decade, and suggests that parties assess their rights to renegotiate or exit at different stages. Encor Advisors, a colocation advisory firm, says monthly charges can depend on term length, and that a longer commitment may help reduce one-time charges.

• ✓What do we get in exchange for a longer term, in writing?
• ✓Can we have a break right at a set point, and at what fee?
• ✓Can capacity ramp up in stages, so that we do not pay for all of it from day one?
• ✓When does billing start, and what happens if the space or power is delivered late?
• ✓Does the term run from signing or from when the capacity is ready for service?

Delivery delay is worth specific attention. Morgan Lewis treats remedies for a late ready-for-service date as part of the same negotiation as liability caps and SLA credits.

Power is commonly the largest item, and the structure can matter as much as the rate. Uptime describes three broad approaches.

• A fixed fee based on maximum power capacity, common in retail, which bundles IT power and cooling. It is predictable, though you may pay for capacity you do not use. Some providers also meter usage and charge more above capacity.
• A granular structure, seen in wholesale, with a rack fee, metered IT power and an additional fee based on the design PUE (power usage effectiveness).
• A blended model with a fixed baseline and a variable charge for use above it.

Metered power can scale with your use, but Uptime points out that customers bear the full cost of price fluctuations. Morgan Lewis adds questions of reserved capacity versus actual usage, overage charges, derating and limits on increasing density.

• ✓Are we paying for what we reserve or for what we use?
• ✓What is the overage rate, and what happens at the breaker limit?
• ✓If power costs are passed through, can we see the underlying bill?
• ✓Can the provider raise a fixed fee mid-term? Uptime says some contracts allow it as an emergency measure, so read when that applies.
• ✓Can we increase density later, and does that change the price?

Most service credits are small compared with the cost of a real outage, so their main value is as an incentive. Pillsbury advises including meaningful credit amounts, along with obligations for uptime, response times and repair timelines. Morgan Lewis says remedies are typically tiered, and calls the interplay of liability caps and SLA credits among the most heavily negotiated provisions.

• ✓What is measured, where, and by whose instruments?
• ✓Are credits automatic, or do we have to claim them within a deadline?
• ✓Is the credit calculated on our whole bill, or only on the affected service?
• ✓What is excluded, such as planned maintenance or events the provider describes as outside its control?
• ✓After repeated failures, or one long failure, can we leave without paying a termination fee?
• ✓Are credits our only remedy, and how do they sit with the liability cap?

This last question links to your own risk planning. Morgan Lewis says providers typically cap damages and exclude consequential losses. Knowing that limit helps you decide how much redundancy to build yourself and what to insure. Pillsbury suggests checking the limits of the provider's insurance and whether you need additional coverage.

A colocation customer is often at its weakest at renewal, because moving live equipment is painful and the provider knows it. Morgan Lewis warns of automatic renewals with strict notice requirements and pricing that may reset at renewal. Uptime says retail customers are more likely to face cost increases at renewal. Encor recommends negotiating price caps or fixed annual increases on long-term contracts.

• Ask for a stated cap on renewal pricing, or a fixed schedule of increases, rather than the then-current rate.
• Check that the renewal keeps the same capacity, and clarify what happens to any unused reserved power.
• Ask for a renewal that needs your active consent, or at least a notice date that you can actually meet.
• Check how the price cap treats the items outside the base fee, such as cross-connects and remote support.

Morgan Lewis warns that recurring interconnect fees can become significant, and advises addressing their availability and pricing, along with meet-me room access and carrier restrictions. Encor also lists cross-connect fees as negotiable. ArentFox Schiff suggests seeking the ability to establish circuits and cross-connects without added cost, though not every provider will agree.

Ask for the rate card to be attached to the contract, and for how those charges can change. Do the same for remote hands and other on-site services, which can be small per use and large across a year.

Founders often negotiate the entry and leave the exit for later, which is expensive. Morgan Lewis says a poorly defined exit can cause operational disruption and unexpected cost, and lists early termination rights and fees, equipment removal timelines, data destruction and holdover consequences among the items to cover.

Pillsbury recommends rights to extend for predetermined periods, for example in three-month blocks, at predetermined cost, because moves are often lengthy. It also advises securing a clean exit, including rights to remove your equipment and keep service continuous elsewhere.

1. Estimate with your engineers how long a real migration would take, and add a margin.
2. Make sure the contract's removal period and extension rights cover at least that long.
3. Fix the holdover rate, or at least know how it is calculated, before you need it.
4. Clarify who can access equipment during a dispute, and ask your attorney about lien waivers, a protection Morgan Lewis raises in the context of financial distress.
5. Settle how data destruction will be done and evidenced.
6. Check whether cross-connects and carrier services can stay live during the move.

These contracts rarely stand alone. Where a company also has an office or flex lease coming up, TAG can line up that lease's timing and exit terms with your infrastructure plans, so one commitment does not trap the other.