In the realm of project management, the adage "time is money" holds an unequivocal truth, especially when it comes to large-scale undertakings such as data center developments.

Understanding the financial costs associated with delays is crucial for project managers, developers, and stakeholders alike.

At any given point, a project organization might have 10 to 100 different activities happening simultaneously.

By tracking progress on these activities daily, we can see significant effects on productivity, workflow, and cost. This article delves into the multifaceted financial impacts of project delays, underscoring the necessity of adhering to schedules and mitigating time overruns.

Time as lost revenue

The most direct impact of project delays is the loss of potential revenue. For instance, if a data center does not open on time, the developer cannot start earning revenue as anticipated.

This delay translates into lost business opportunities and deferred income. Data center facilities typically cost millions of dollars. A delay of just a few weeks can mean significant revenue losses, exacerbating financial stress on developers.

In 2018, Apple experienced significant delays in the construction of its data center in Waukee, Iowa.

The project, initially scheduled for completion in early 2019, has faced multiple delays, pushing the completion date further and we can safely assume causing extra costs and potential revenue losses due to the unavailability of the new facility.

Time as standing army costs

Another critical aspect is the standing army costs, which include the expenses incurred to maintain the project management team and, depending on the contractual arrangements, the contractor’s team.

These costs can escalate rapidly. For example, if a construction project is delayed, the salaries of project managers, engineers, and laborers still need to be paid, even though the project is not progressing as planned.

The longer the delay, the higher these standing costs. The construction of Tesla's Gigafactory in Berlin faced numerous delays due to regulatory and environmental challenges. Each delay not only pushed back the timeline for production but also, we anticipate, added millions of dollars in costs associated with standing army expenses and equipment idling.

The costs of idle equipment also play a significant role in standing army costs. Construction machinery, for instance, represents a substantial investment.

When projects are delayed, this equipment remains idle, leading to depreciation without productive use. This inefficiency translates into wasted capital and increased overall project costs.

During the construction of the SoFi Stadium in Los Angeles, there were substantial delays, which we believe led to unforeseen costs associated with idle equipment. The machinery had to be kept on-site, maintained, and secured, adding to the project's total cost due to the prolonged timeline.

Time as liquidated damages or SLA fines

In data center construction, Service Level Agreements (SLAs) often come with stringent deadlines. Hyperscalers, who are typically the end customers for co-location data center builders, have historically been somewhat accommodating regarding delays. However, this business-friendly approach is waning.

Nowadays, even minor delays can result in substantial SLA fines. Real-world instances show that delays in the completion of a 10MW data center have incurred fines upwards of a million dollars. Such penalties can severely impact the profitability of a project.

Time as cost of capital

Project delays also mean extended periods of debt servicing. Loans taken to finance large-scale projects need to be serviced, and the interest accumulates over time. In an inflationary environment, the cost of debt can increase, making delays even more expensive.

The longer the project remains unfinished, the higher the financial burden due to accumulated interest.

In the UK, for instance, as of May 2024, the base interest rate has reached 5.25 percent, a level not seen since the global financial crisis of 2008.

The incremental increases in interest rates are significantly impacting the construction sector, making debt-financed projects less profitable and, in extreme cases, financially unviable.

Time as inflation

Living in an inflationary economy exacerbates the cost implications of delays. The prices of materials and labor can increase over time, inflating the overall project costs.

This scenario is particularly concerning in long-term projects where initial budget estimates may no longer hold true as time progresses.

The renovation of LaGuardia Airport in New York experienced significant cost overruns partly due to inflation. Delays in the project extended the timeline, during which material and labor costs rose, adding millions to the original budget.

Time as opportunity cost

The data center industry is experiencing unprecedented growth, driven by increasing demand for digital infrastructure.

According to research from the University of Oxford, building on data from the Royal Bank of Canada and DigitalBridge, the market for data center construction has grown 7-10 times since 2020, with over 4.5GW of data centers currently under construction in the US.

However, delays in ongoing projects mean developers cannot promptly start new projects in their pipeline. These delays result in significant opportunity costs, as developers miss out on the benefits of scaling and growth, ultimately impacting the overall enterprise value.

This hidden yet substantial loss underscores the importance of timely project completion in maintaining competitive advantage and maximizing growth potential in the rapidly expanding data center market.

A relevant example involves Cyxtera Technologies, a data center developer that recently filed for Chapter 11 bankruptcy. The company faced significant financial distress, partly due to delays and financial mismanagement.

These delays impacted Cyxtera's ability to meet customer demands and capitalize on market growth opportunities. The ongoing financial restructuring and the sale of assets to Brookfield aim to stabilize the company and position it for future growth.

Every day counts

Every day counts on a project, and the financial repercussions of delays are profound.

From lost revenue and standing army costs to SLA fines, interest rates, inflation, and idle equipment costs, the multifaceted impact of time on project costs cannot be overstated.

Effective project management strategies and a proactive approach to mitigating delays are essential to safeguard against these significant financial losses.

Understanding and addressing these time-related costs can help organizations better manage their projects and maintain financial stability.