Colocation contracts: what to check before you sign

You are buying electrical capacity, not floor space. The headline rate is a small part of the total, and the clauses that determine cost over five years are the ones nobody reads at signature.

A colocation agreement is a commercial property lease wearing a technology jacket. It runs for years, it is difficult to exit, and the headline rate is a small part of what determines the total cost. Most of the money is in the mechanics underneath.

Buyers who negotiate this well treat it like a lease. Buyers who treat it like a hosting subscription tend to sign something they regret in year three.

You are buying power, not space

The rack is largely incidental. What you are actually contracting for is electrical capacity, and how that capacity is charged is the single most important commercial term in the agreement.

The typical structure is a commitment to a level of power per rack or per cabinet, billed whether or not you draw it. Buyers routinely commit to a figure based on the theoretical maximum draw of the equipment they intend to install, rather than measured operating draw. The gap between nameplate rating and real consumption is substantial, and the provider has no reason to point that out.

Establish clearly whether power is billed on commitment, on metered actual usage, or a hybrid with a floor. Establish what happens when you exceed the commitment, since overage rates are often punitive. And establish how power cost escalation is handled, because energy price pass-through clauses are where an apparently fixed contract becomes variable.

The connectivity charges are the second bill

Cross connects are the physical links between your equipment and carriers, cloud on-ramps or other tenants. Each is billed, usually monthly, usually on a per-connection basis, and the volume grows quietly as the deployment matures.

Two things to establish before signing. First, whether cross connect pricing is fixed for the term or subject to annual increase, since these charges have historically risen faster than the underlying rack cost. Second, whether the facility is genuinely carrier neutral or whether limited carrier presence means you have less choice of connectivity provider than you assumed. A facility with few carriers is a facility where your bandwidth costs are structurally higher.

Term, escalation and the exit

Three clauses determine whether this contract ages well.

Annual escalation

Most agreements contain an automatic annual uplift. Whether that is a fixed percentage, indexed to inflation, or uncapped materially changes the total cost over a five year term. An uncapped index-linked escalator in a volatile inflation environment is a significant open exposure. Cap it.

Auto-renewal and notice

Colocation agreements frequently renew automatically unless notice is served within a defined window, sometimes twelve months before expiry. Miss the window and you are committed to another full term at whatever the escalated rate has become. Put the notice date in a calendar the day you sign, owned by a named person.

Exit and migration

Establish before signature what leaving actually involves: notice period, any early termination liability, de-installation obligations, whether you must restore the space, and how long you have to remove equipment. Also establish whether you can reduce footprint mid-term or only exit entirely. The absence of a partial reduction right is what makes over-commitment expensive rather than merely inefficient.

What to check before signing

• 01Committed power against measured drawUse real utilisation data with sensible headroom, not the sum of equipment nameplate ratings.
• 02Billing basis and overage rateCommitment, metered or hybrid. Then what you pay for exceeding it, and whether there is a burst allowance.
• 03Energy cost pass-throughEstablish whether and how energy price changes flow to you. This determines whether your fixed contract is actually fixed.
• 04Cross connect pricing and escalationPer-connection cost, whether it is held for the term, and how many you realistically need at maturity rather than at go-live.
• 05Carrier densityHow many carriers are actually present and active. Few carriers means structurally higher bandwidth cost and weak negotiating position later.
• 06Escalation capFixed, indexed or uncapped. Model the total cost across the full term under each, then negotiate a cap.
• 07Notice window and auto-renewalFind the date, diarise it, assign an owner. This single administrative failure costs more than most negotiation wins.
• 08Reduction and exit rightsCan you shrink the footprint mid-term, or only leave entirely? Negotiate a partial reduction right before you sign.
• 09Expansion terms, priced nowSecure the right of first refusal on adjacent space and fix the rate for expansion. Growing into a facility with no agreed expansion price is a captive negotiation.
• 10Service levels and the remedyPower and cooling availability commitments matter less than what happens when they are missed. Check whether the remedy is meaningful or a token service credit.

Model the whole life, not the monthly rate

Comparing providers on rate per rack or per kilowatt will lead you to the wrong answer. Build the total cost across the full term including committed power, expected overage, cross connects at maturity, escalation compounding annually, remote hands, installation and any exit cost. The provider with the best headline rate is frequently not the cheapest over five years once escalation and connectivity are included.

That model takes a day to build properly and it is the difference between a defensible decision and an expensive one.