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DATA CENTER CONSTRUCTIONLocation matters for data center construction.   

By Steven Cooke

In today’s hot commercial construction market, the data center-building sector stands out as a particular bright spot. Driven in large part by the booming cloud services and IoT markets, data center construction in the United States is expected to grow by more than six percent a year through 2022. And as demand for data-related services continues to grow, more and more companies are entering this high-growth sector or expanding their current operations to take advantage of the seemingly limitless demand for more data.

History shows that with this kind of fast-growing market there comes not just opportunity, but risk as well. Data center development is constantly evolving; latency, security, power and fiber availability, and cost pose unique challenges:

• Geographic proximity and quality of Internet infrastructure are complex factors that contribute to latency;

• Despite the push for bigger and faster data centers, the heavy capital investment and high level of depreciation requires creative thinking to maximize ROI;

• Data centers require massive amounts of power, making green energy an important consideration;

• Data centers must be designed for top-notch physical and digital security; and

• Data centers and mission-critical projects are under extreme pressure to meet growing customer demand for data and expectations of near-100 percent uptime.

Unique obstacles to data center construction require expertise that many commercial and public works construction companies do not possess. That’s why it’s so important that businesses entering (or returning) to the data center construction market perform their due diligence on all cost-related decisions to maximize their investment. The construction finance management field makes use of a variety of tools, but one of the most useful for estimating costs is benchmarking. At its core, benchmarking is about comparing “apples to apples” to account for cost disparities between different projects, and it ultimately provides the insight that firms need to make informed decisions and avoid overpaying for data center construction.

Location, Location, Location

You may have heard about several major cloud providers’ recent decisions to build their new data centers in places like Oklahoma or Alabama. What you may not have heard is that the largest data center market in the world — the place known as “Data Center Alley” — is not Silicon Valley, but northern Virginia.

That’s not an accident. Firms are deciding to build outside of traditional regions like the Bay Area because location is one of the single biggest determinations of cost. A comparison of three similar RagingWire data center projects, for example, finds that one can expect to pay as much as 33 to 40 percent more per kilowatt in Silicon Valley and 22 to 30 percent more in Chicago, than they would in northern Virginia for a project of similar scope. Benchmarking these three projects helps explain that difference.

Benchmarking Three Data Center Projects

Location itself is a manifestation of other cost determiners such as tax breaks, cost of labor, price of materials, and the amount of red tape required to get a project off the ground. But the degree to which these factors can vary (even within the same country) often surprises people, especially considering that the options for locating a data center are limited by strict infrastructure requirements.

For a concrete example of how location impacts the costs of a data center project, consider this benchmarking of the three previously-mentioned RagingWire data centers. All three are of similar scope, analyzed around the same time, and yet all three vary widely in terms of cost per kilowatt to construct. Here are some major location-based factors that were found to have contributed to that cost disparity, even after taking into account aspects such as density (watts per square foot) of the data center:

• Labor – Everyone knows that labor costs in Chicago and Silicon Valley are bound to be more expensive. After all, the cost of living is higher and the amount of construction forces compensation higher. Nonetheless, many are surprised to find that this factor alone can add up to tens of millions of dollars in additional costs over the course of a multi-year data center construction project. In this regard, Virginia clearly has the edge, with far lower labor costs than America’s dense urban regions.

• Price of materials – In regions with hundreds of major construction projects going on simultaneously, construction materials are often harder to come by, meaning that the price per unit for the very same material may be double or triple what it can be gotten for in another region of the country. Moreover, certain states require the use of certain (more expensive) materials and design patterns, which can drive costs up.

• Weather and natural disasters – Various geographical and geological features can increase the cost of a data center construction project in that data centers must be built to withstand a region’s extreme weather patterns and be prepared for natural disasters. This is true for most construction projects, but uptime requirements and the necessity of data availability in case of the events tend to amplify these costs.

• Cost of land – It’s a basic tenet of capitalism: not all land is equally desirable, leading to higher demand and higher costs in some areas, and lower costs in others. Thankfully, data centers don’t require a lake or ocean view or proximity to the coolest bars and restaurants, so locating in places where land is cheaper (usually rural or suburban) can make a difference of tens of millions of dollars.

Location Isn’t Everything

Location is an important determiner for the cost of a data center construction project, but expenses associated with building must always be understood in the context of the overall business strategy. If a company is headquartered in San Francisco, it may make more financial sense to locate a data center on the West Coast even if it costs more. Another factor that firms often take into consideration is latency: Data centers are often located where they are in order to serve a certain market with optimal speed. In such a case, suggesting that they build instead in the South Central region of the United States (where construction costs tend to be cheaper) is a non-starter.

If companies have the data, either from their own past projects or from other sources, they should always benchmark costs. It’s an extremely useful exercise that often yields firms the data they need to weigh financial concerns with other strategic variables and make the right decision for their specific goals. 

Steven Cooke is managing director for the USA West Region at Linesight, a global construction consultancy that provides independent cost management and general consultancy services to the U.S. construction industry. A native of Edinburgh but based in San Francisco, Cooke is a chartered surveyor and has more than 20 years’ professional experience in construction cost management.

 

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