Colocation pricing guide: Understanding data center costs

Many organizations turn to colocation facilities to avoid the expense of owning and operating their own data centers, but they quickly learn that the true costs of colocation are often buried in the fine print. It's not until they've committed to their contracts that the real costs emerge, and they're faced with an assortment of unexpected expenses.

Before deciding on a facility, decision-makers should understand the various factors that can contribute to colocation fees and why they can vary so much between facilities. Here we look at 10 important considerations that decision-makers should take into account when trying to understand the issues that affect colocation hosting costs.

1. Location

Location plays a key role in colocation pricing. Higher real estate values translate to higher prices. A facility in the downtown corridor will cost more than one in the suburbs or in a rural area. In addition, facilities in urban areas, including the suburbs, might charge more for the convenience of being in a central location. For example, they typically offer closer proximity to airports, train stations and highways, and they're often nearer to the organizations that use them.

Because of the differences in prices, some organizations might opt for data centers in more remote locations, where real estate is a lot cheaper. However, remote colocation facilities typically offer fewer connectivity options, and bandwidth might come with a higher price tag. In addition, longer distances between the facility and end users can translate to higher latency and lower performance. Distance can also be an important factor if customers must be at the facility regularly, in which case, travel expenses should be considered.

2. Space

Colocation costs are also driven by the amount of space customers rent from a facility. The size is usually measured in rack units or square footage. Charges for this space reflect the physical area used, as well as a portion of the building operating expenses, such as ongoing maintenance and data center security. Some facilities might also have minimal space requirements. In some cases, a facility might not base rental fees on the amount of space used, but rather on the amount of allocated power. Even in this situation, however, floor space can still play a role.

To reduce the amount of required space, an organization might deploy blade systems or high-density servers, but these systems can have power requirements that offset the savings. In fact, any special space requirements or customizations that affect power, cooling or ventilation could translate to higher monthly fees. In addition, some organizations might require a private cage or suite that provides a lockable enclosed area for their equipment. Although these configurations offer customers more control over their hardware's immediate environment, they also increase rental fees.

3. Hardware

Organizations that use colocation services typically bring their own hardware to the facilities. They might own the equipment outright or they might lease it, taking advantage of hardware as a service or other pricing models. Those that are leasing the equipment might get it from the facility itself or from a third-party vendor. Regardless of the approach, the expenses associated with acquiring the basic server, storage and networking components fall outside the costs of renting space in the colocation facility.

However, organizations might also need to lease or purchase other equipment, such as cages, cabinets or racks, adding to the overall costs. In addition, a facility might require specialty equipment, such as racks that exchange heat or reduce noise. An organization might also need to lease or purchase multiple power distribution units (PDUs). A PDU is a type of power strip that provides outlets for the servers and other systems. Each facility is different, and organizations must carefully vet them to determine exactly what additional hardware might be required.

4. Power

Power represents a significant portion of colocation costs, and multiple variables can affect those costs. For example, the price of electricity can vary from one region to the next, as well as among facilities in the same region. Some facilities use electricity more efficiently than others and can pass those savings onto their customers. Local electrical codes can also affect overall power costs by placing restrictions on power usage. In addition, the expenses that go with cooling a customer's hardware and running other HVAC components contribute to a customer's power costs.

Power fees also reflect a facility's need to ensure the continuous availability of power and cooling. Not only does this include maintaining the power infrastructure, but also ensuring adequate redundancy, such as maintaining extra backup generators or uninterruptible power supplies (UPSes). However, the exact formula used to calculate power costs varies from one facility to the next. For example, a facility might charge a flat rate, charge by the kilowatt or charge a committed amount, with fees added on for overage.

5. Connectivity

An organization's equipment at a colocation facility must be able to connect to other parts of the data center or to outside networks. Enabling that connectivity can incur a one-time installation fee or ongoing monthly charges. For example, organizations might need additional or dedicated IP addresses or want to establish connections with multiple cloud platforms, either of which can add to overall expenses. Even if charges originate with a cloud provider, they should still be factored into colocation costs.

A common connectivity-related expense is cross-connect fees. Cross-connects make it possible to interface with outside telecommunication providers. A facility might charge a one-time fee for a cross-connect, charge a monthly rate or do a combination of both. The total amount that an organization pays depends on the number of cross-connects, the type of cross-connects and the supported transfer rates. For example, an organization might require multiple fiber optic cross-connects to support a multi-cloud environment that requires high performance and low latency, resulting in steeper costs.

6. Bandwidth

In addition to connectivity, organizations must also pay for the bandwidth they use at colocation facilities. Bandwidth refers to the amount of data that can be transmitted over a network during a specific interval of time, such as 25 Mbps. Bandwidth requirements will depend on the deployed applications and their supported workloads. Not surprisingly, the greater the bandwidth, the higher the costs. Customers typically purchase bandwidth directly from the provider, rather than it being included in their monthly facility fees, although this isn't always the case.

Some colocation facilities offer blended bandwidth services -- sometimes referred to as blended IP. Rather than customers contracting with individual carriers, the facility provides broadband services that span two or more carriers. If one service fails, the other service automatically kicks in, minimizing workflow disruptions. With blended bandwidth, the facility manages the entire operation and related components, such as routers, switches and cross-connects. In exchange, customers pay an additional fee to the facility, which is usually higher than basic bandwidth.

7. Setup and change fees

Colocation facilities often charge setup and change fees for specific operations. These charges can cover an assortment of services and can quickly add up. For example, it was noted earlier that facilities charge fees for setting up cross-connects. These types of fees would fall into this category. A facility might also charge for such services as hooking up new servers, discontinuing equipment or adding monitoring or reporting. It doesn't matter whether these operations are carried out when the hardware is first deployed or later when changes need to be made. In either case, the charges will still show up on the customer's bill.

The approach that facilities take to charging setup and change fees can vary widely, and the providers aren't always diligent in explaining their fees. In addition, they might group multiple services together as a single charge, making it more difficult to understand them. Even if the charges are carefully itemized, they can still catch customers off guard if they aren't expected. Setup and change fees can add significantly to the base rate, so an organization should fully understand what to expect when assessing a facility.

8. Disaster recovery

When shopping for colocation space, organizations should consider the amount of uptime that each data center guarantees. Update assurances refer to a facility's ability to continuously deliver the services necessary to keep a customer's equipment running with minimal disruptions. For example, customers should always be able to expect adequate power and cooling services. Colocation data centers are often rated on a four-tier system, with tier 1 facilities guaranteeing 99.671% availability and tier 4 facilities guaranteeing 99.995%. As a result, a tier 1 facility might experience up to 28.8 hours of annual downtime, while a tier 4 facility would top out at 26.3 minutes.

A facility ensures uptime by implementing redundant systems that provide fault tolerance. For example, the data center might implement redundant utility feeds, diesel generators, automatic transfer switches and UPS battery backup systems. Some facilities might also deploy redundant cooling equipment or network switching gear or take other steps to protect against disaster. However, all these protections come at a price, which is passed onto the customer. When evaluating facilities, organizations should determine the level of disaster recovery and fault tolerance that their workloads and data require and choose a facility that meets or exceeds their needs.

9. Security and compliance

Organizations are increasingly looking for colocation facilities that can address their security and compliance concerns. Most facilities take extensive steps to protect their physical environments, deploying security mechanisms such as video surveillance, key card access, biometric security or perimeter fences. They might also take other security measures, such as implementing a multilayered access control system with escalating access points. Like other operating costs, security expenses are passed onto the customers. Many facilities also provide protections for individual cages or cabinets, adding to the overall costs.

Some organizations are looking for colocation facilities that meet specific compliance regulations. For example, an organization that handles medical data in the U.S. would likely seek out a facility that meets HIPAA requirements. Although the organization is responsible for how the data is handled on its own systems -- whether on premises or in a colocation facility -- the facility still plays a role in meeting HIPAA's requirements for protecting the physical environment. Nonetheless, complying with these types of regulations can raise data center's operating expenses, which means the customer pays more.

10. Support services

Unless customers opt for fully managed services, their IT teams are expected to deploy and maintain the hardware themselves. However, this isn't always practical, in which case, customers can pay for the services of remote hands or on-site technicians to carry out specific actions. Remote hands can perform a variety of tasks that range from setting up equipment to installing software to replacing cables. Some facilities charge a minimum monthly fee for a specific block of remote-hands time, with additional fees for overage. Other facilities charge on an as-needed basis when the services are rendered.

When evaluating colocation facilities, organizations should determine when remote-hands staff is on premises and how long it takes to get an issue resolved. For example, if a server freezes up at 3 a.m., it might need a physical reboot, but if the facility doesn't maintain on-premises staff at all times, response times could be exceedingly long while waiting for a technician to be called out and arrive on site. An organization might be tempted to save on costs by using a facility that doesn't offer 24/7 services, but the costs of extended downtimes can be much pricier than the initial savings.

Asking the right questions

The 10 factors described here can provide decision-makers with a good starting point for asking questions about a colocation facility. For example, they might ask about special hardware requirements, how power charges are calculated, the level of guaranteed uptime or if the facility meets specific compliance regulations. They should also get answers to such issues as to whether the location is prone to disaster, which telecommunication providers are used and what bandwidths they deliver.

Decision-makers should learn as much about a facility as possible, including such details as maximum usage capacity and equipment maintenance plans. The goal is to understand the quality of the services being offered, whether those services will meet their business requirements and exactly what those services will cost. The price quote from one facility might be a lot cheaper than from another facility, but when taking into account the differences in disaster protection, support services, connectivity, security and compliance, those savings might not add up as the customer had hoped.