What Is a Colocation Contract?
A colocation contract is a formal, legally binding agreement between your business and a colocation data center provider that outlines the foundational expectations of both parties – that you are taking the space on a contractual basis for the purpose of hosting your hardware and software, and that the colocator is obliged by law to make those resources available to you if it is being paid for . When you are leveraging data center services, it is imperative that you have a colocation contract drafted and ready to sign before you take the plunge. The basic agreement should set the stage for the more specific, legally binding documentation that will ultimately determine how that relationship runs on a day-to-day basis. Written documentation such as a master service agreement is an integral part of that relationship – a colocation contract is the first step.
Key Clauses of a Colocation Contract
In addition to pricing structures, colocation contracts may vary in terms of additional clauses contained within. Many of the most essential contractual elements, such as warranties, service levels, and limitations of liability, also happen to be the most difficult to negotiate. In advance of entering negotiations, clients and providers should familiarize themselves with these key issues.
Presence and Control. A client’s right of presence within a colocation facility is critical to the client’s use of the facility. Due to the critical nature of data and systems housed in colocation facilities, a client’s ability to access the facilities must be established and preserved. A provision establishing a client’s presence, and the rights of that client to access the facility, typically requires that clients notify their colocation service provider at least 72 hours in advance of a site visit. The billable hours often vary depending on whether the site visit is during the business day or off-hours.
Security and Site Access. Another key aspect of colocation contracts is establishing the degree of security in place at the client’s designated colocation facility. Security measures may include, but are not limited to, biometric access (e.g., retina scan, fingerprint, etc.), key card entry, guard posts, and high definition video surveillance. In addition, colocation contracts should establish security protocols and emergency procedures in the event of a power outage, data storage disruption, or other system error. Many such provisions specify timeframes for addressing such issues. If a certain system is down for more than 30 minutes, a credit is applied to the client’s account.
Service Levels. For colocation customers, uptime guarantees set out in SLAs are critical to ensure a level of service. In the absence of such guarantees, colocation providers can do little to incentivize their own performance. A number of different components are typically included in an SLA, including response times to ensure certain availability, the frequency of system backups, notification periods in the event of system outages, the accuracy of online reports, and guarantee of service credits.
Limitations of Liability. Due to the fact that clients house their entire network infrastructures in their colocation facilities, a client’s SLA provision is even more essential to the health and viability of its business. Clients have certain expectations, and a service level contract serves as a baseline for service. In general, colocation contracts expire after 1, 3, or 5 years, with a 90 day notice requirement prior to termination. Most contracts include limitation of liability clauses. Many of these remissions serve to indemnify the service provider from claims due to breach, special damages, lost revenues, and consequential injury to the client’s tangible and intangible assets.
A client’s rights and obligations in the event of a service interruption or outage is critical. Understanding the limits of that liability are essential to a client’s ability to assess risk, and determine what system to integrate into its infrastructure.
Tips for Negotiating a Colocation Contract
The negotiation process is arguably the most important part of any colocation deal. Approach this as you would a marriage; if both parties do not walk away satisfied, in the long run neither will be happy. With that in mind, you can begin the hard work of negotiating a successful contract.
States and jurisdictions have their own laws and regulations governing colocation contracts and the interpretation of each section. But there are a number of guidelines that will help you get the best deal and avoid common pitfalls.
Space and Power. Space and power are always the biggest selling point for both sides. By definition, a colocation facility must have significant space and power. You want to negotiate hard for both. As a colocation customer, you want to make sure that you get as much space as possible at the best price. Work to get expandable space. In other words, arrange with your provider to be able to build out additional space if you need to at the same contract rate you are currently paying (or at least below market level). You should also be able to restrict your provider’s ability to charge escalating rates over the term of the contract. As a provider, you want to negotiate the highest space rate possible, along with the right to dramatically increase rates after the initial term and get an annual increase.
Upgrades. As both parties (provider and customer) make upgrades and improvements to the facility, they should both be entitled to a cost credit. Providers generally oppose this process because of the administrative headache it causes; however, the customer needs to protect itself. If not, you may find yourself paying for a new data feed or electrical upgrade for which you must immediately pay for half. If the deal is structured properly, the owner of the hardware should pay for the upgrade because they will be the ones benefiting from it.
Labor. When negotiating a colocation contract, labor becomes an issue. Who will be providing the labor to maintain communication circuits, building alarms and cooling and HVAC? Some providers expect customers to maintain these services and log any failures. Others charge for these services. Customer lawyers should be very sensitive to labor issues in a colocation contract because the burden of cost and responsibility can quickly fall on the customer if the language of the contract is not explicit.
Who Union Affiliated? Not that it matters to either party on the surface, but it can have a profound effect on the cost. A union contractor will always cost more than a non-union. That is a given. Try and negotiate a statement that the project be awarded to a non-union contractor.
Resale Value. In the end, the ultimate question is how well the facility can be re-sold. Does the customer feel comfortable that the product will be saleable if need be? The key here is to negotiate a fair profit margin for your client. If the facility requires no maintenance, then margins will be higher than if the customer is the only one doing the work. A healthy installer will give steady business to the facility, thus increasing or maintaining the value. On the other hand, if the customer takes on the responsibility of doing the maintenance themselves, they will increase the value of their service and, thereby, their bottom line as well.
Legal Issues in a Colocation Contract
Colocation contracts should be considered a legally binding agreement between the provider and the customers. As such, it is important to include adequate legal protection for all parties involved. While some collocation service providers may not feel the need to discuss the legal portions of the contract with their customers, it is always best to do so, then have an agreement that covers the major legal areas that could cause problems down the line.
There are generally four main areas of legal consideration when creating a colocation contract: liability, termination rights and conditions, grace periods for late or timely payment of fees, and limitation of liability. You are trying to protect your business from any liability and passing off some of that liability to the client is just a step to protecting your business. However, it is important that you do not pass on any liability that is unreasonable or could hurt your business in the long run. It is equally important that you have some legal protection from a client that might have been less than reputable.
Termination rights and conditions should be clearly defined in a colocation contract , as they are an important factor to consider in many legal situations. A termination clause should include specifics about how a termination request must be issued, renewal and notification requirements, the timeframe for processing the termination, and rights concerning the status of equipment and services provision after termination. The scope of technological and hosting services rendered should also be included.
If appropriate, grace periods should be included in the colocation contracts, as most white space colocation service providers offer at least 30 days of grace for late payments. Grace periods may be negotiated upfront, but are not necessarily appropriate in all situations.
Limitation of liability clauses may include "liability caps," with a maximum dollar amount of liability that either party can issue during the term of the contract. While courts may not enforce some liability caps, no harm can come from including it as part of your colocation contract, especially if you have insurance that covers liability.
Tailoring a Colocation Contract to Your Company
Customization of a colocation contract often makes the agreement much more valuable to the client and provider. The customizing process includes the identification of the cloud or colocation service elements that are essential to the service being supplied in relation to the client’s specific needs. For instance, clients may have a specific need for a Tier Four classified data centre. Or, the client may have an application that runs best on Mac OS and therefore all parties will need to ensure that the provider has the capacity to run it. Clients may also have monitoring requirements that are critical to their business success. Like the above scenario, it is essential that those monitoring requirements are incorporated into the contract to minimize misunderstandings and potential lawsuits.
After identifying the requirements of the client, it is important that the client ensure that the key items are included in the contract itself. Many cloud service contracts lack specific terms addressing comments made during the sales process. If the terms applied by the sales rep, or other representations made during the sales process, are not added to the contract, the client may find themselves at a huge disadvantage. While many contracts have disparate sections dedicated to the SLA, Service Credit, Limits of Liability and other specific issues relevant to the services being supplied, they are not always clearly written, easy to read or located in the right sections of the contract. As is the case with contracts in general, it bears repeating that regardless of how well a contract is written, its efficacy is only as good as a business’ ability to enforce its provisions if the need arises.
How to Manage Colocation Contract
Ongoing management of colocation contracts is essential to ensuring that the terms and conditions reflect any changes in the technology, your organization’s needs and the colocation provider’s capabilities. To properly manage a contract after it has been signed, you must have a comprehensive understanding of the supplier’s requirements and performance. You should have an ongoing review process to analyze the contract as it is performed and on an annual basis. The most important aspects of supplier audits are: Third-party audit firms can be an invaluable resource and should be used at least annually to ensure compliance. When colocation service metrics or SLAs are not being met, determine whether the deficiency is the result of the supplier failing to meet expectations or if your company has requested more than what the contract specifies. A detailed gap analysis will show where any discrepancies exist. Senior management should get involved if issues arise that were expected but were missed in the initial review , or for issues that appear to be the fault of the supplier. For example, your company may want to require that the supplier install a specific piece of hardware or software, which is not covered under the agreement, in order to get the desired results. Colocation providers are very concerned about their reputations, and for that reason can be highly responsive to concerns. The colocation provider should be a partner, but now that there are many competing providers fighting for your business, you have the leverage to negotiate the best terms for your organization. Always make sure that the internal stakeholders are involved in the contract negotiation process to avoid discrepancies later on.