In short
Subcontractors on AI data center jobs face risks that are bigger and faster than anything in standard commercial construction. In AI data center construction, single trade MEP subcontracts can reach $500 million or more. Alliant/AGC SDI presentation, Jan. 2026 Schedules are compressed to 12 to 14 months, and a one month delay can cost roughly $14 million on a 60 MW project. Gallagher, Apr. 2026, IRMI, Feb. 2026
Payment risk is acute. On federal projects the Miller Act gives first tier subcontractors a payment bond remedy but requires second tier subcontractors to give strict 90 day written notice or lose the right entirely. 40 U.S.C. § 3133(b) Many subcontracts also include pay-if-paid clauses that shift the risk of owner nonpayment to the subcontractor, though several states have limited or voided these clauses and federal courts almost never enforce them against Miller Act bond rights. Subcontractor Default Insurance, a first party product bought by the general contractor, adds a new layer because the GC controls the default declaration and the cost of completing the work, leaving the subcontractor with no independent right to the coverage. Workforce shortages, supply chain delays, lithium battery fire hazards, and expanding liquidated damages tied to operational performance metrics all compound the risk. The following sections walk through each layer.
Why AI data center construction is different for subcontractors
The numbers illustrate the difference. The US AI data center construction market hit $25.2 billion in starts in January 2026 alone, a historic high. More than $100 billion is earmarked for new builds this year. Gallagher, Apr. 2026 The average project value grew to $633 million in 2025, a nearly 70 percent increase from the year before. Gallagher, Apr. 2026 Construction costs now exceed $1,000 per square foot.
On the largest AI data center campuses, prime contracts approach $10 billion, and individual mechanical, electrical, and plumbing trade subcontracts reach $500 million or more. Alliant/AGC SDI presentation, Jan. 2026 These are not the standard commercial project numbers that most subcontractors have lived with. They mean that a single subcontractor default can trigger catastrophic consequences, which is why the insurance market has responded with per claim policy limits of $125 million to $200 million with aggregate program limits of $500 million or more, and Alliant recently assembled a project-specific SDI program with $200 million per claim and $600 million aggregate capacity using three carriers. Alliant/AGC SDI presentation, Jan. 2026
At the same time, the workforce is stretched. The construction industry was short roughly 439,000 workers as of late 2025. The average age of the AI data center workforce is 53, and 60 percent of providers report difficulty filling open roles. Bessemer Venture Partners, May 2026 Meanwhile, peak crew sizes have ballooned from around 750 workers during the cloud era to 4,000 or 5,000 on a modern AI data center project. Bessemer Venture Partners, May 2026 All of this stacks pressure on the trades that sit directly on the critical path, including electrical, mechanical, and pipefitting.
The payment environment also tightens the screw. Average payment delays to subcontractors hit 56 days, nearly double the expected 30 days. Parakeet Risk, Feb. 2026 And the clauses that govern whether a subcontractor gets paid at all are often drafted to push the risk of upstream nonpayment down.
What payment protection does the Miller Act give subcontractors on federal projects?
The Miller Act applies to federal construction contracts that exceed $150,000. It requires the prime contractor to furnish a payment bond that protects subcontractors and material suppliers who are not paid. 40 U.S.C. § 3131, 48 C.F.R. 28.102-1 Many AI data center projects involve federal land, federal funding, or federal lessees, so the Miller Act is a live tool for subcontractors who know the deadlines.
First tier subcontractors
A subcontractor who has a direct contract with the prime contractor may sue on the payment bond 90 days after the date it last furnished labor or material. The suit must be filed no later than one year after that last date. No prior notice to the prime contractor is required. 40 U.S.C. § 3133(b)(1)
Second tier and lower subcontractors
A sub subcontractor must give written notice to the prime contractor within 90 days of its last labor or material. The civil action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. 40 U.S.C. § 3133(b)(2) This is a strict condition. If the subcontractor misses the 90 day notice, its bond claim is extinguished. The Seventh Circuit enforced exactly that rule in a 2020 decision, holding that a sub-subcontractor who gave notice in August 2016 but left equipment on site through February 2017 still failed because the notice was not within 90 days of the last actual performance. A&C Construction v. Zurich American Insurance, 963 F.3d 705 (7th Cir. 2020)
Once notice is given, the second tier claimant must still sue within one year of its last labor or material. The Miller Act right cannot be waived in advance. United States ex rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir. 2002), 40 U.S.C. § 3133(c), United States ex rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir. 2002), United States ex rel. McKenney’s, Inc. v. Gov’t Tech. Servs., LLC, 531 F. Supp. 2d 1375 (N.D. Ga. 2008), United States ex rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir. 2002) That means a subcontract cannot require a sub-subcontractor to give up its bond remedy before it has even started work.
How to get a copy of the payment bond. The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond. 40 U.S.C. § 3133(a) No FOIA request is needed. The Federal Acquisition Regulation also allows an oral request for bond information. FAR 28.106-6(d) This change makes it easier for subcontractors to learn the bond’s terms and limits early.
What the Miller Act does not do?
The Miller Act only governs federal construction contracts. It does not help a subcontractor on a private AI data center project unless the project itself is federal. On private work, state mechanics lien and bond statutes are the primary security, and they vary enormously. And the Miller Act does not override a private contract’s pay if paid clause. It simply gives an independent payment bond right. But courts have consistently refused to let a pay-if-paid clause extinguish that separate federal right.
How do pay-if-paid clauses work, and are they enforceable?
A pay-if-paid clause makes the owner’s payment to the general contractor a condition precedent to the GC’s obligation to pay the subcontractor. If the owner never pays, the subcontractor may get nothing for work it already performed. This is a fundamental risk shift. A pay when paid clause, by contrast, is only a timing mechanism. The GC may delay payment a reasonable time after owner payment, but remains obligated to pay even if the owner never pays. Courts interpret ambiguous language as pay-when-paid. Tax alert (background principle)
Enforceability depends on the state where the project is located, and also on whether the project is federal.
State law snapshot
Virginia bans pay-if-paid clauses in private construction contracts that were executed on or after January 1, 2023. The ban does not apply when the owner or higher-tier contractor is insolvent or a debtor in bankruptcy, but even then the subcontractor may still have lien and bond rights. A Virginia subcontractor should therefore see the pay-if-paid language stripped out by operation of law. Va. Code Ann. § 11-4.6(B)(2)
Texas treats pay-if-paid clauses as defined and enforceable, but with an important limit. If the GC’s own failure, such as uncompleted punch list items or missing closeout paperwork, caused the owner’s nonpayment, the clause cannot be used to deny payment to the subcontractor. Tex. Bus. & Com. Code § 56.051
In Maryland, even an otherwise valid pay-if-paid clause cannot destroy a subcontractor’s mechanics lien rights or its payment bond rights. MD Code, Real Prop. § 9-113(b)
Delaware voids pay-if-paid clauses in most private construction contracts as against public policy, though the statute exempts contracts for six or fewer residential units built simultaneously, the alteration or repair of a single residential unit, and purchases of materials by a person working on their own real property. Del. Code Ann. tit. 6, § 3507(e), (f), NASBP analysis
The District of Columbia takes a similar approach, voiding pay-if-paid clauses with respect to lien and bond rights on private projects. D.C. Code § 27A-104
The positions of Florida, Georgia, and Arizona on pay-if-paid enforcement were not independently confirmed for this article, and a subcontractor working in those states should obtain a current state specific legal review before relying on anything here.
Federal projects and pay-if-paid
On a federal project, a subcontractor’s Miller Act payment bond right is independent of the subcontract’s payment terms. The reported federal decisions have almost uniformly refused to allow a pay-if-paid clause to defeat that federal right. Tax alert Even if the clause is drafted as a pure condition precedent, the court will look to the bond. So a second tier subcontractor who gives the required 90 day notice can still claim against the bond even when the prime contractor never received payment from the government. This is a powerful safety net for subcontractors on federal AI data center projects.
Subcontractor Default Insurance and what it means for the trade
Subcontractor Default Insurance (SDI) is a first party insurance product. The general contractor or construction manager buys the policy. When a subcontractor defaults, the insurer reimburses the GC for the costs to complete the work and certain indirect costs such as extended overhead, liquidated damages, and acceleration. The GC controls the key decisions. It decides whether to declare a default, selects the replacement subcontractor, and manages the claim. The subcontractor has no direct right to the insurance proceeds and no standing to challenge the GC’s decisions under the policy. Alliant/AGC SDI presentation, Jan. 2026
The scale of the market
SDI premium costs typically range from 0.4 to 0.85 percent of total subcontract values. The market is about $500 million to $600 million in fixed premium, with $1.8 billion when deductible premium is included. Alliant Seven carriers operate in the space, but only two can write more than $50 million per claim in capacity. The largest program, assembled by Alliant, provides $200 million per claim and $600 million aggregate capacity across three markets. Alliant/AGC SDI presentation, Jan. 2026
How SDI reshapes the subcontractor’s risk
Because the GC controls default, a subcontractor that is struggling on a large AI data center project may be terminated earlier and with less process than under a traditional performance bond regime where a surety would investigate. The SDI carrier does not step in to finish the subcontractor’s work. It simply pays the GC. The subcontractor can still be sued by the GC for the cost of completion, and that claim is often uninsured from the subcontractor’s perspective unless the subcontractor has its own errors and omissions or excess liability coverage that responds. Meanwhile, the GC’s SDI policy probably requires prior carrier approval for any subcontract award above $60 million. Alliant/AGC SDI presentation, Jan. 2026 That means a subcontractor that lands a $200 million electrical package may find the prime contract is conditioned on the SDI carrier’s affirmative consent, adding an extra layer of uncertainty to the deal.
Practical note. SDI is not a replacement for performance bonds, and it does not give the subcontractor a direct safety net. When negotiating a subcontract on an AI data center project, ask early whether the GC carries SDI, what the per claim and aggregate limits are, and whether the carrier has approved your award. If the GC has SDI, the subcontract is likely to include broad termination for default rights that align with the policy’s triggers, so review those termination provisions closely.
The current loss data
So far, the SDI market reports zero known default losses in the AI data center segment since carriers began writing these policies roughly two years ago. Alliant/AGC SDI presentation, Jan. 2026 Carriers consider the financial strength of the hyperscale owners a favorable risk factor because those owners have a strong incentive to bring projects online fast. That underwriting view could change quickly if a large subcontractor teeters. The stress is already visible elsewhere, as roughly 70 percent of construction risk managers reported increased subcontractor distress in late 2023, and electrical trade defaults jumped 15 to 18 percent in a single year. Parakeet Risk, Feb. 2026
Why schedule and workforce stress multiply subcontractor risk
Hyperscale clients often expect facilities spanning 100,000 square feet to be completed in as little as 12 to 14 months. Gallagher, Apr. 2026 A one month delay on a typical 60 MW project can add roughly $14 million in extra costs. IRMI, Feb. 2026 When a subcontractor falls behind, the liquidated damages and acceleration costs hit fast.
The labor crunch
439,000 workers were missing from the construction industry as a whole in late 2025. Bessemer Venture Partners, May 2026 On AI data center sites the shortage is concentrated in the skilled trades that form the critical path. Among construction firms that plan to hire, more than 80 percent report difficulty finding qualified workers. AGC, 2026 A subcontractor that signs a fixed price or guaranteed maximum price contract while the labor market is this tight is making a bet on its own ability to man the job. If the workforce does not materialize, the subcontractor bears the overrun. Even when costs are passed through on a cost plus arrangement, a delay caused by labor scarcity can still trigger liquidated damages that a subcontractor must pay.
The supply chain
Lead times for critical components have stretched beyond one year. Lead times for some materials, including transformers and switchgear, now approach two to three years. Construction Executive, Apr. 2026 A single delayed transformer can halt commissioning and push a project past its liquidated damages date. Subcontractors who are responsible for procuring long lead equipment need to build procurement risk into their price and schedule, and they should push for a contractual provision that excuses delay caused by forces outside their control where the owner or GC controlled the lead time or the specification.
Contractual risks that hit harder on AI data center jobs
Performance liquidated damages
Standard commercial contracts tie LD provisions to substantial completion and physical milestones. AI data center contracts routinely go further. They tie liquidated damages to operational performance metrics such as continuous data processing capacity, internet connection speeds, power consumption, cooling efficiency, and even ambient temperature and humidity levels. AGC Insurance Issues paper, 2026 A subcontractor responsible for the mechanical or electrical systems that govern those metrics can face liquidated damages even after the building is physically complete. Understanding exactly which metrics the subcontractor’s scope touches, and whether the subcontract caps its share of liquidated damages at a fixed dollar amount, is critical.
Powered shell construction
Hyperscale owners often want tenants operating servers in one part of the building while construction continues in another. This creates dust, vibration, and temperature swings that can damage sensitive equipment that is already online. AGC Insurance Issues paper, 2026 General contractors will often flow that liability down to the subcontractors performing the adjacent work. Standard CGL (Commercial General Liability) policies may exclude or limit coverage for property damage to the project itself or to the owner’s personal property, and a subcontractor that causes contamination in a live data hall could face an uninsured claim. Subcontractors should review whether their CGL and umbrella policies cover damage arising from ongoing operations in a powered shell, and should negotiate clear protocols for dust control, vibration monitoring, and co occupancy isolation in the subcontract.
Insurance coverage gaps
Traditional Builder’s Risk, CGL, Subcontractor Default, and Professional Liability policies were not designed for AI data center construction. The insurance market has not yet developed products that fully match the risk profile. AGC Insurance Issues paper, 2026 Subcontractors can find themselves in a gap where the Builder’s Risk policy covers the project but excludes the subcontractor’s own work product, and the CGL policy excludes property damage to the project itself. The subcontractor’s own installation floater or contractor’s equipment coverage may help, but the limits are often too low for an AI data center loss. Each AI data centre site relies on numerous specialised subcontractors, and subcontractor default insurance and surety bonds are becoming increasingly important on projects where construction costs for a single location can exceed USD 20 billion. Swiss Re, sigma insights 07/2026
Lithium battery hazards on the jobsite
Lithium ion battery backup units (BBUs) are increasingly being placed directly in server racks inside data processing equipment rooms. This creates an ignition source that FM Global says did not previously exist in these rooms. Swiss Re, sigma insights 07/2026 The fire risk is real. The Gateway Energy Storage facility burned for seven days in May 2024, and the Moss Landing fire in California forced 1,200 residents to evacuate in January 2025. eTraining, Feb. 2026 On an AI data center construction site, subcontractors can encounter these hazards during installation, testing, and commissioning long before the building is occupied.
OSHA obligations
No specific OSHA standard governs lithium ion battery hazards. The agency relies on the General Duty Clause, which requires every employer to provide a workplace free from recognized hazards that are causing or are likely to cause death or serious physical harm. OSHA Lithium-Ion Battery Safety Fact Sheet, 29 U.S.C. § 654 OSHA has published guidance, including Fact Sheet 4480 from January 2025, that explains safe handling, storage, and charging practices. OSHA Fact Sheet 4480 Employers must also follow DOT hazardous material shipping rules for lithium-ion batteries. 49 CFR 173.185
In February 2026, OSHA clarified that injuries from lithium batteries, even personal devices brought onto the jobsite, must be recorded on the OSHA 300, 301, and 300-A logs when they meet the general recording criteria under 29 CFR 1904.7. OSHA Letter of Interpretation, Jan. 2026, OSHA Trade Release, Feb. 9, 2026 That means a burn or thermal runaway event on an AI data center site can become a recordable injury even if no specific battery standard was violated.
Subcontractors handling BBUs should adopt written safety protocols, train workers on thermal runaway recognition, provide adequate fire extinguishers rated for lithium fires, and coordinate with the GC on emergency response. An uncontrolled battery fire can destroy a building and halt a project for months. The subcontractor that caused the ignition will face liability claims from the owner, the GC, and possibly insurers exercising subrogation rights.
Disputes are getting larger and more common
The average value of North American construction disputes rose 43 percent since 2021. Arcadis 2024 Construction Disputes Report, cited in Global Arbitration Review, Jul. 2025 On AI data center projects the dollar figures are enormous. In May 2020, a general contractor sued Microsoft for more than $34 million in unpaid work and extended overheads on a $1 billion AI data center project in Texas, alleging that Microsoft’s failure to supply equipment and manage vendors caused cascading disruptions. Rogers-O’Brien Construction, LLC v. Microsoft Corporation
These disputes tend to follow a pattern. A compressed schedule meets an equipment lead time delay or a labor shortage. The subcontractor falls behind. The GC issues a notice of default. The SDI carrier weighs in. Meanwhile the owner withholds payment from the GC, who then tries to enforce a pay-if-paid clause against the subcontractor. The subcontractor files a mechanic’s lien or a Miller Act bond claim. Litigation follows. Subcontractors who have maintained contemporaneous records, preserved their notice deadlines, and reviewed the risk shifting provisions in their contracts stand on much stronger ground when that moment arrives.
Key takeaways
- Check whether the project is federal. If it is, the Miller Act payment bond is your safety net. First tier subcontractors automatically get the right to sue after 90 days, within one year. Second tier subcontractors must give written notice to the prime within 90 days or lose the right completely.
- Do not trust a pay-if-paid clause to protect you. Learn the rule in the project’s state. In Virginia the clause is likely void on private work. In Texas it can be defeated if the GC caused the nonpayment. On a federal project the bond right survives.
- Ask the GC whether it carries SDI. If it does, the threshold for your default may be lower and the GC holds all control. Understand what triggers a default under your subcontract and whether the SDI carrier has approved your award if it is above $60 million.
- Build labor and supply chain risk into your price. Contractual schedules assume a workforce that is hard to find. Long lead items that you agree to furnish can cost you a project if they arrive late. Push for force majeure and excusable delay provisions that capture owner and GC caused delays.
- Review liquidated damages provisions closely. If they tie to operational performance metrics, know what metrics your work touches. Cap your liability at a fixed dollar amount if possible.
- Manage the lithium battery hazard on site. Write a safety plan, train workers, and verify your CGL and umbrella coverage for fire and property damage arising from battery incidents. Record all injuries as OSHA requires.
- Close your insurance gaps. Traditional policies leave holes on data center projects. Work with your broker to build a program that covers your work product, your equipment, and third party property damage in a powered shell environment.
- Keep records. The subcontractor who can prove the dates of last work, the date of notice, and the cause of delay will win the dispute more often.
Frequently asked questions
Q:What is the most important deadline for a second tier subcontractor on a federal AI data center project?
A:The 90 day notice deadline. You must give written notice to the prime contractor within 90 days of your last labor or material. If you miss it, you lose the right to make a Miller Act bond claim. 40 U.S.C. § 3133(b)(2)
Q:Can a pay-if-paid clause stop a Miller Act bond claim?
A:No. Federal courts have almost uniformly held that a pay-if-paid clause cannot defeat a subcontractor’s independent right to recover from the Miller Act payment bond. The bond right is created by statute and cannot be waived before the work is done. 40 U.S.C. § 3133(c)
Q:Does Subcontractor Default Insurance protect the subcontractor?
A:No. SDI is a first party policy that reimburses the GC for the costs of completing a defaulting subcontractor’s work. The subcontractor gets no direct benefit. In fact, the presence of SDI can make it easier for the GC to declare a default and replace the subcontractor.
Q:What should a subcontractor do if a long lead item it promised is delayed?
A:Notify the GC immediately in writing. Check your subcontract for a force majeure clause and an excusable delay clause. Provide updated delivery timelines and propose a recovery plan. If the item is custom and controlled by the owner’s specification, argue that the delay is not your fault and should not trigger liquidated damages.
Q:Are there special insurance products for AI data center subcontractors?
A:Not yet. The market is still developing products that fit data center construction. Many subcontractors are building custom coverage stacks by layering Builder’s Risk, installation floaters, contractors professional, and high limit umbrella policies. Brokers experienced in large scale power and technology construction are essential.
Q:What makes lithium battery fires on construction sites different?
A:Lithium fires burn at extreme temperatures, reignite spontaneously, and release toxic fumes. Standard fire extinguishers may not be effective. The hazard is new to the construction environment and OSHA has no specific standard, so enforcement relies on the General Duty Clause. Employers must still protect workers from recognized hazards.
Q:How can a subcontractor limit its liquidated damages exposure on an AI data center project?
A:Negotiate a liability cap expressed as a fixed dollar amount or a percentage of the subcontract price. Exclude consequential damages if possible. Define the metrics that trigger liquidated damages narrowly, and only for the systems you control. Whenever possible, push for a mutual waiver of consequential damages between you and the GC.
Q:What happens if the project owner stops paying the GC and the subcontract contains a pay-if-paid clause?
A:It depends on the state. In Delaware and Virginia (for most private work), the clause is void or unenforceable, so the GC must still pay you within a reasonable time. In DC, the clause is void with respect to lien and bond rights on private projects. In Texas, the clause may be enforceable unless the GC caused the nonpayment. In other states, you need a current legal opinion. On a federal project, your Miller Act bond claim survives regardless.
Q:Is a subcontractor’s CGL policy enough for an AI data center project?
A:Probably not. Standard CGL policies typically exclude damage to your own work and may exclude property damage caused by ongoing operations in an occupied building. A powered shell construction model multiplies those exclusions. Work with your broker to confirm coverage for property damage to the project, the owner’s installed equipment, and pollution liability arising from a battery fire.
Subscribe to The Compute Law Brief
The Compute Law Brief is a free weekday newsletter on the law of AI infrastructure across tax, real estate, construction, power, and deals. The big US build markets and federal law. Three minutes a morning. No paywall, and no email gate to read the blog. Subscribe if you want it in your inbox.
Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.