Construction / 1 min read
The construction industry is grappling with the impact of tariffs introduced during the Trump administration, which will, if not already, significantly affect material (i.e., steel, aluminum and other materials) costs and contract negotiation dynamics. The ripple effect of these tariffs can be significant and present a host of challenges for contractors and project owners alike. Not only will these tariffs increase material costs, putting pressure on contractors and project owners to absorb additional expenses or renegotiate budgets but it will cause supply chain disruptions, leading to delays affecting project timelines and shortages in critical construction materials due to restrictions on imports.
In contemplating your next construction contract, consider the following implications:
- Cost Escalation
- Allow price adjustments to cover unexpected cost increases due to tariffs.
- Identify who bears the risk of price hikes—contractors, project owners, or shared responsibility.
- Define the threshold (e.g., percentage increase) that triggers the escalation clause.
- Require substantiating evidence for cost changes.
- Limitations on adjustments to the actual increases caused directly by tariffs.
- Force Majeure
- Include tariffs as a qualifying event to address delays stemming from material shortages or supply chain disruptions.
- Alternates/Substitutions
- Permit the use of alternative materials or suppliers if tariffs make the originally specified materials prohibitively expensive.
- Advance Procurement
- Allow for early material purchases to lock in prices before tariffs take effect, where applicable.
- Include provisions for advance payments or storage costs, if necessary
- Insurance or Bonds
- Explore specialized insurance or performance bonds to cover risks associated with tariffs, where available.
- Change in Law
- Account for the impact of new tariffs or trade regulations imposed after the contract's execution by specifying mechanisms for adjusting costs or deadlines when changes in law directly affect the project.
Practice Tips to Mitigate Risks
- Proactive Communication: Engage in early discussions with project stakeholders about the potential impacts of tariffs. Aligning expectations upfront can minimize surprises later.
- Due Diligence: Vet suppliers and confirm lead times to mitigate supply chain disruptions.
- Flexible Contract Terms: Incorporate provisions like those above to allow for renegotiation or adjustments if tariffs significantly alter project costs.
The evolving landscape of U.S. tariffs and escalating trade tensions emphasizes the importance of strategic planning and well-drafted contracts. By anticipating challenges and adjusting terms accordingly, you can navigate this uncertainty while keeping projects on track.