Why tech needs smarter contracts for data centers

Data centers are reshaping our landscape at breakneck speed. Every AI query, online purchase, and streaming video now runs through these massive facilities.

The United States Department of Energy is leading the way in developing public private partnerships (PPPs) essential to facilitating AI’s expansion. Meta, Google, Microsoft, and OpenAI are racing to lock in long-term agreements, while state and local governments scramble to rezone farmlands and wetlands, and to offer tax breaks in exchange for the promise of jobs.

While there’s a desire to quickly build out the much-needed infrastructure of the future, the approach being used isn’t working. The news is littered with reports of litigation around data centers, ranging from states pushing back on the build-out of data centers, to the NAACP suing xAI for pollution issues. What was once dismissed as scattered NIMBY pushback is maturing into a multi-level political challenge to the AI-era infrastructure buildout. And it’s accelerating. Opposition to data centers rose 125% in Q2 of 2025 alone.

What does this mean for CIOs?  The data center crisis is no longer a niche real estate or environmental issue, but a supply chain risk.

How contracts contribute to the crisis

Professors Carolyn Heinrich and Deanna Malatesta, co-authors of Contracting for Public Value, warn that the way both public and private organizations approach their data center contracts is a key cause of recent data center lawsuits.

“In the rush to build, both tech companies and governments are using transactional contracts,” says Heinrich, a professor of public policy, education, and economics at Vanderbilt University. “While transactional contracts are easier to negotiate and administer, they’re inadequate to govern the layered, interdependent relationships that data center partnerships require.”

Malatesta, a professor of public affairs at O’Neill School of Public and Environmental Affairs at Indiana University, adds insight. “Transactional deals are static,” she says. “Instead of promoting the partnership-like relationships needed to cope with uncertainty, conventional contracts undermine them.”

The results are costly change orders, escalating disagreements, and eroding public trust. Or worse, litigation. So their advice? Formal relational contracts.

The pivot to formal relational contracts

Formal relational contracts are defined as legally enforceable contracts that establish a commercial partnership within a flexible framework based on social norms and jointly defined objectives, and with continuous alignment of interests before commercial transactions.

“Unlike traditional contracts focusing on legal obligations and penalties, relational contracts emphasize collaboration, communication, and problem-solving by specifying mutual goals and establishing governance structures to keep the parties’ expectations and interests aligned over the long term,” says Heinrich. “And because they embrace that it’s impossible to predict every what-if scenario, they’re a sound option for data center contracts.”

The University of Tennessee’s field-based research shows how the theory of formal relational contracting can be put into practice through what UT researchers call a Vested business model, an approach used by companies such as Intel, bp, EY, IBM, and the Canadian government that provides a proven framework to create mutually beneficial agreements that drive innovation and adaptability — just what data center contracts need.

What a relational data center contract looks like

The UT’s research into highly collaborative, win-win relational contracts suggests contracting partners follow certain rules to structure complex contracts. Here, we highlight how a Vested formal relational contract would work for data centers.

Define clear outcomes, not transactions. Making the shift means contracting for mutually defined and measurable business outcomes rather than transactions or activities. For example, rather than specifying exact servers or cooling systems at signing, formal relational contracts focus on mutually defined desired outcomes such as uptime, ambitious energy efficiency, and local job creation. A Vested formal relational contract also changes the lens of metrics from transactional and activity level metrics to tracking what matters, like energy cost per compute unit, carbon intensity, and local hiring rates. These KPIs enable transparent, real-time performance management without micromanagement.

Focus on the what, not the how. A relational contract adopts a flexible scoping approach that embraces the many uncertainties that leave room for parties to collaborate on when new tech and processes emerge. “Unlike conventional contracts, relational contracts promote a broad perspective, where all parties involved have clear roles and responsibilities through an end-to-end taxonomy and workload allocation, rather than a conventional statement of work, which typically only includes scope and work for the supplier,” says Malatesta.

Plan a pricing model with incentives to optimize outcomes. Traditional contracts often create inherent perverse incentives. For example, public partners and citizens pay power bills while private partners build facilities that may be less likely to prioritize energy efficiency. Formal relational contracts align interests with a win-win outcome-based economic model, so parties win and lose together. If energy efficiency improves beyond targets, both partners share savings. If new revenue emerges, both reap the benefits.

Find clarity on insight vs. oversight governance. Traditional contracts emphasize oversight through audits and inspections, often resulting in penalties that signal distrust and invite adversarial behavior. Formal relational contracts embed a robust, insight-based governance structure that includes transparent data sharing, joint decision-making, structured adaptation through ongoing strategy reviews, and agreed conflict resolution processes.

What forward-looking CIOs should do now

The data center backlash isn’t a PR problem for tech companies that CIOs can watch from a comfortable distance. CIOs who get ahead of it will be the ones who stop treating infrastructure as a utility and start treating it as a strategic asset requiring the same scrutiny applied to any critical supplier relationship. Some things you can do to mitigate risk include:

• Treating compute capacity like a supply chain risk. The same discipline applied to post-Covid supply-chain risk management needs to be applied to compute infrastructure. Stress test your AI and cloud roadmap against scenarios to understand the impact of a planned provider’s facility being delayed from one to two years.
• Auditing your provider’s exposure. Directly ask your cloud and colocation providers which of their planned or in-construction facilities face litigation or community opposition? What percentage of your committed capacity sits in contested markets?
• Building regulatory awareness into infrastructure planning. Jurisdictions that have streamlined approvals and close coordination with utilities can convert projects into construction more quickly. Geographic diversification alongside awareness of local regulatory conditions may help decision-makers balance cloud availability and risk. 
• Getting ahead of the ESG story. Several companies, including Microsoft, OpenAI, Google, Oracle, and Amazon, signed a Ratepayer Protection Pledge, committing to provide or pay for all power generation needed for AI projects. CIOs should demand similar accountability from providers, and be able to articulate their own organization’s data center footprint and environmental impact to boards and stakeholders. 

Why this matters now

The question isn’t whether the litigation and community opposition will affect your organization’s technology strategy. It’s whether you’ll find out before or after your AI roadmap hits a wall.

Governments and tech can continue using 20th-century contracts, guaranteeing conflict and missed opportunities, or they can embrace formal relational contracting by building data centers designed for collaboration, innovation, and shared success. For the sake of our digital future, we can’t afford to get this wrong.