The tariffs enacted and proposed by the Trump administration have created a cause for concern among industries worldwide, and the construction sector is no exception. Imported goods are often essential to a construction project, and tariffs can have a dramatic effect on project costs and completion.
Understanding the impact of these tariffs—and proactively managing risks through properly drafted construction contracts—can help parties on all sides of a construction project avoid financial difficulties and potential project delays.
How Tariffs Affect the Construction Industry
The construction industry relies heavily on a global supply chain, sourcing materials like steel, aluminum, lumber, and various other raw products from around the world. When tariffs are imposed, the cost of these imported goods rises. Inevitably, such cost increases may cause budget overruns, delays, and ultimately, more expensive final products.
Additionally, the volatility introduced by tariffs can lead to price uncertainty, making it difficult for contractors to predict costs accurately. The difficulty associated with making such predictions grows when more subcontractors and suppliers are involved in the project. It is essential for contracting parties to consider contract terms and to incorporate provisions into new and existing contracts to appropriately allocate risks and protect project interests.
The Need for Properly Drafted Contracts
To mitigate the risks associated with tariff-induced price increases and project delays, all sides of a construction project—owners, contractors, subcontractors, and suppliers alike—must ensure that their contracts are well-drafted and flexible enough to accommodate potential changes in material costs. Depending on the type of construction contract at issue, there are a few key contract provisions to consider:
- Material Price Escalation Clauses: These clauses allow for adjustments in contract prices based on fluctuations in material costs, including those resulting from tariffs. By defining how price increases will be handled—whether through renegotiation or cost-sharing or imposition of restrictions or other limitations on price adjustments—these clauses can protect all parties from cost unpredictability.
- Force Majeure Clauses: Tariffs may not fall under traditional force majeure events (like natural disasters), but expanding the language in a force majeure provision to account for trade policy changes or identify governmental proclamations, orders, or laws as covered events can help parties avoid penalties for delays or increased costs caused by tariff impositions.
- Contingency Clauses: A contingency is a specific amount of money within the project budget the parties agree to set aside to cover unforeseen costs or to address unexpected expenses that may arise during construction. If a project contingency permits material price fluctuations due to tariffs as part of the intended use, it may allow the project to continue without major disruptions if such events occur. These provisions are a risk management tool for the owner and contractor alike in contracts where the project price is not fixed.
- Clear Delivery and Supply Terms: Contracts should clearly define the sourcing and delivery terms of materials, as well as the timeline. This can help to manage expectations and minimize disruptions when the global market shifts unexpectedly. Contractors considering proactive procurement of materials to mitigate the impact of price escalations and shortages should include contract terms to address storage logistics and job-site preparations.
- No Damage for Delay Clauses: Owners can guard against financial liabilities associated with project delays due to tariff-related disruptions. A “no damage for delay” provision limits compensation to contractors to time extensions rather than monetary damages and reduces the likelihood of disputes over delay-related costs. Contracting parties should consider whether tariff-related cost increases are “excusable delays” entitling a contractor to a time extension or a “compensable delay” warranting financial compensation for the added costs related to the delay.
Conclusion
Tariffs can have a substantial impact on construction project budgets, timelines, and overall feasibility. By understanding the potential risks and incorporating the right contractual protections, parties to a construction contract can minimize the risks of tariffs, ensure predictability for the project price and schedule, and avoid costly delays and disputes. The key to success lies in anticipating challenges, clearly outlining responsibilities, and staying flexible to adapt to changing market conditions. Properly drafted contracts not only safeguard against tariff-related risks but also foster better relationships between contractors, suppliers, and clients in an ever-evolving global economy.
