With the return of Donald Trump to the White House, the question on construction professionals’ minds is will material tariffs return. President-elect Trump made it clear during his campaign that if elected, he intends to bring back tariffs on Mexican, Chinese and Canadian goods.
If material tariffs return, what impact will these tariffs have on the construction industry? More importantly, if tariffs return, are you prepared for any cost and time impacts associated with material tariffs?
During the initial Trump Presidency, many contractors handled tariffs through the force majeure provisions of the contract documents, with mixed success. A force majeure argument was also easier because of the COVID-19 Pandemic. Because the tariff impacts largely coincided with the pandemic, it was easier to blend tariff cost increases into a force majeure claim. However, now that the COVID-19 era has ended, material tariffs must be viewed as a stand-alone issue. How can a contractor prepare itself for the return of tariffs?
Best practices dictate that tariffs should be addressed separately than force majeure in any contract documents. If a general contractor anticipates the return of tariffs, they should negotiate for material cost increases associated with tariffs ahead of time; before the contract is signed.
It will be much more difficult for a general contractor to obtain a change order for material tariffs if the contract does not contain specific language applicable to tariffs. While a standard force majeure contract provision may aid the contractor, there is no guarantee that this will yield success. Likewise, force majeure excuses performance, it does necessarily translate into additional money. Include tariffs, specifically, in cost proposals (handled as a change order), or exclude tariff costs all together, from your lump-sum bid price, if possible.
On low-bid public works projects, where the contract documents are not negotiable, general contractors will have to either rely on the standard force majeure clause or ensure that they have included enough margin in the bid price to cover the costs of potential tariffs. Look at the scope of work and compare it with potentially tariffed construction materials. If the project is heavy on items that might be tariffed, factor that into your budget.
In addition to contract language for the costs of any applicable tariffs, general contractors should ensure that language also includes the time impacts associated with tariffs. On a construction project, time is money. If the Trump administration unilaterally imposes tariffs on certain foreign-made construction materials, the imposition of those tariffs will no doubt cause a delay in the manufacturing, fabrication and delivery of those materials abroad to the project site. Those delays could cause critical impacts to the project schedule and potentially lead to liquidated damages.
On a public works project, if the construction schedule is short, ask a bidder’s question about time impacts associated with tariffed items before you submit the bid. Get clarity from the owner ahead of time on how it will handle schedule impacts associated with tariff delays. Bidder’s questions become part of the contract documents and could be used later to help support a change order request.
Anticipating and covering both the costs and time impacts of the tariffs ensures that the general contractor is protected on both fronts should tariffs be imposed.
What about subcontractors? Likewise, subcontractors should ensure that their subcontract agreements cover tariffs. As with the general contractor, subcontractors want to ensure that they will not get stuck having to cover the costs and time impacts associated with tariffed materials. Negotiate those costs ahead of time in the subcontract agreement. As many subcontractors directly contract with material suppliers, ensuring flow-down responsibility for tariffs with any material supplier must also be considered.
For subcontractors relying heavily on tariffed materials, talk to your material suppliers immediately and ensure there is clarity on how those costs and time impacts will be allocated among the parties through the purchase order or invoicing process before contracts are signed.
The time to address potential tariffs in the construction industry is now. With the inauguration a month away, contractors should get ahead of this important issue.
Pursu Agency