Mitigating the Impact of Tariffs on Construction Projects
Category | Briefing Papers
By Hugh D. Brown
Hugh is a shareholder of the firm’s Construction Law Department. He can be reached at 612.359.7663 or hbrown@fwhtlaw.com.
Although the details continually change, one thing is clear – the Trump Administration’s tariffs are already having and will continue to have a significant impact on contractors by affecting the pricing of materials, both through direct charges on construction materials and through indirect market forces which restrict supply. As contractors know, tariffs can upend the assumptions underlying contractor bids and make it difficult or impossible for subcontractors or suppliers to perform as agreed. This Briefing Paper addresses strategies to deal with tariff risk in contracts, both those already signed as well as those in the pipeline.
Background
Several new tariffs have been announced since the beginning of the year. First, in February and March of 2025, tariffs were announced under the authority of the International Emergency Economic Powers Act (IEEPA), directly impacting goods imported from Mexico, Canada, and China. This implementation resulted in a 25% additional tariff on imports from Canada and Mexico, with the exception of energy resources from Canada, which have a 10% tariff, and a 20% additional tariff on imports from China. IEEPA tariffs are not applicable to US-Mexico-Canada Agreement (USMCA) qualifying goods, which are goods that are wholly grown, produced, or manufactured in the US, Mexico, or Canada.
Second, using Section 232 of the Trade Expansion Act of 1962, in February 2025, the Trump administration announced a 25% tariff on steel and aluminum. Items subject to Section 232 tariffs are exempt from the recently announced reciprocal tariffs. However, these items are still subject to the IEEPA tariffs and Section 301 tariffs.
Third, in early April, the administration announced reciprocal tariffs against all countries. Amounts varied based on the country, but all countries were to be subject to a minimum 10% tariff. Asian nations were set to face the worst of the brunt, with Cambodia facing a tax rate at 49% and Vietnam at 46%. On April 9, 2025, however, the Trump administration delayed the implementation of the reciprocal tariffs for 90 days, except that the universal 10% tariff remains in place for all countries, except China, which has been hit with a tariff of (as of writing) 145%.
While U.S. tariff application to various countries remains volatile, prices for many materials are beginning to see the effects. As expected, these tariffs have had an effect on prices of construction materials, which rose 0.5% on a monthly basis in March, with yearly prices up 0.8%, according to the U.S. Bureau of Labor Statistics’ April 11 Price Producer Index. “Lumber and metals prices shot up in March, while contractors’ inboxes are bulging with ‘Dear Valued Customer’ letters announcing further increases for many products,” said Ken Simonson, chief economist at Associated General Contractors of America.[1] “Rapid-fire changes in tariffs threaten to drive prices higher for many essential construction goods.”
Further cost increases related to tariffs are “not a matter of if, but when.”[2] The 90-day “pause” does not entirely mitigate the issue. For one thing, the high tariff rate on goods from China will pose challenges. “For more generic items, like steel, contractors may be able to shift purchases to other countries or the U.S.,” Simonson said. “But for items that incorporate a lot of parts and/or labor, setting up replacement supply chains will be time-consuming.” In some cases, even that may not be possible. “For lithium, solar panels and other materials for which China has developed the most processing capacity, substitution may not be possible,” added Simonson.[3] In that case, contractors may have few commercial options available to mitigate tariff-related cost increases.
Discussion
The ongoing volatility surrounding tariffs pose serious concerns for contractors operating under fixed price contracts. As a general rule, where a construction contract does not include a clause expressly permitting a contractor to recover the additional cost of materials during a period of price escalation, the contractor bears the risk of price escalation.[4] Contractor options differ significantly depending on whether they are operating under an existing contract or a future contract.
Future contracts
Although, as noted below, standard boilerplate clauses can address tariff risk to a degree, this is much harder to rely on where price escalation is foreseeable before contract execution. Therefore, where possible, it’s best if escalation is specifically addressed by express contract language. The most obvious way to do this is an escalation clause, which come in different forms. For example:
- Any-Increase Escalation Clause: Any increase in the price of certain defined materials warrants an equitable adjustment of the contract sum.
- Threshold Escalation Clause: Any increase of more than a fixed percentage shall warrant an equitable adjustment of the contract sum.
- Delay Escalation Clause: If the project is delayed through no fault of the contractor, the contract sum and time will be equitably adjusted to account for price escalations incurred as a result.
In addition to the clauses above, another way to address materials known or expected to be subject to tariff cost increases is to negotiate with the owner for time and materials pricing for the materials and equipment in question. Alternatively, owners may be willing to include an allowance for certain particularly volatile materials.
Existing contracts
For contracts that are already negotiated and being performed when tariffs come into effect, or where owners are unable or unwilling to negotiate escalation language, contractor options are more limited. However, existing boilerplate provisions may give a contractor the right to an increase in the contract sum.
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- Boilerplate:
Without an escalation clause, Change in Law provisions can give a contractor the right to an increase in the contract sum to cover price increases. Note, though, that these probably won’t apply to the indirect cost increases that tariffs can generate (i.e., when other domestic materials increase in price due to increased demand or other market responses to tariffs).
An example of a Change in Law provision comes from the EJCDC C-700 Standard General Conditions, which includes the following language at Section 7.10(C):
Owner or Contractor may give notice to the other party of any changes after the submission of Contractor’s Bid (or after the date when Contractor became bound under a negotiated contract) in Laws or Regulations having an effect on the cost or time of performance of the Work, including but not limited to changes in Laws or Regulations having an effect on procuring permits and on sales, use, value-added, consumption, and other similar taxes. If Owner and Contractor are unable to agree on entitlement to or on the amount or extent, if any, of any adjustment in Contract Price or Contract Times resulting from such changes, then within 30 days of such notice Contractor may submit a Change Proposal, or Owner may initiate a Claim.
“Laws or Regulations” are defined as “[a]ny and all applicable laws, statutes, rules, regulations, ordinances, codes, and orders of any and all governmental bodies, agencies, authorities, and courts having jurisdiction.” This language gives contractors an argument for passing on tariff-related cost increases to their customers.
Force Majeure clauses may also be an option, albeit a less reliable one. Depending on the language of the Force Majeure provision at issue, it may cover government actions such as the imposition of tariffs. Unfortunately, it is unusual that Force Majeure clauses provide for extra compensation, and generally speaking, contractors will be limited to extra time. However, this is not always the case, and it may be worth checking your contract.
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- Delay Damages:
When excusable and compensable delays force contractors to purchase materials later than planned, the cost increase may be a component of delay damages. Several cases hold that, when an owner causes delay that results in material being purchased at a later date, the increase in material and related costs are recoverable as delay damages. See, e.g., Levering & Garrigues Co. v. U.S., 73 Ct. Cl. 566, 577 (Ct. Cl. 1932) (holding that contractor was entitled to recover increase in cost of brick where increased cost was the result of owner’s four month delay in approving brick sample); Luria Bros. & Co. v. U. S., 369 F.2d 701, 709 (Ct. Cl. 1966)(holding that contractor was entitled to recover increased material costs that resulted from owner-caused delay); Tech. Const., Inc. v. City of Kingman, 278 P.3d 906, 911 (Ariz. App. 1st Div. 2012) (affirming trial court award of increased material costs as delay damages where increased material costs were incurred due to the owner delaying commencement of a phase of the project, which then pushed the purchase of materials out to a time when they were significantly more expensive due to the effects of Hurricane Katrina, which occurred during the period of delay); Michael T. Callahan et al., Proving and Pricing Construction Claims § 2.18 (4th Ed.) (“If the contractor’s work, or a part of its work, is delayed by the owner, the increased direct costs of material and labor resulting from the delay are a compensable element of the contractor’s delay claim”).
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- Mitigation:
With enough notice, mitigation may be possible. It may be feasible to purchase and warehouse impacted material. Alternatively, it may be possible to delay the purchase of certain materials if prices are expected to fall.
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- Collaboration:
Early discussion with upstream parties is essential, even where there is no contractual right to relief. Owners may be willing to consider material substitutions. Also, if a subcontractor or supplier cannot or will not perform in the face of large price increases, upstream parties may find it in their best interests to renegotiate contracts in a way that works for all parties. Ask and (sometimes) ye shall receive.
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- Impossibility/Impracticability:
In extreme cases, the doctrine of impracticability may provide relief. Courts have recognized that when the cost of performance increases, due to unforeseen events, such that it can be performed only at an excessive and unreasonable cost, performance under such circumstances constitutes a constructive change entitling a contractor to an equitable adjustment in the contract price. Raytheon Co. v. White, 305 F.3d 1354, 1367 (Fed. Cir. 2002) (“In government contracting, impracticability has also been treated as a type of constructive change to the contract; because a commercially impracticable contract imposes substantial unforeseen costs on the contractor, the contractor is entitled to an equitable adjustment.”); Ace Constructors, Inc. v. U.S., 499 F.3d 1357, 1364 (Fed. Cir. 2007) (stating same rule).
The bar, however, is high. Courts have generally rejected impracticability arguments if the price increase does not come within the area of a 100% increase. For example, in Raytheon Co. v. White,[5] the Court held that a 57% cost overrun was not sufficient to establish commercial impracticability. In In Re Spindler Const. Corp.,[6] a 23% increase in cost of steel did not render a structural steel supply contract “commercially impracticable.” Even more surprisingly, in App. of Gulf and W. Industries, Inc.,[7] a 70% cost overrun was held insufficient to establish impracticability. See also Publicker Industries Inc. v. Union Carbide Corp., 1975 WL 22890 (E.D. Pa. Jan. 17, 1975) (“[w]e are not aware of any cases where something less than a 100% cost increase has been held to make a seller’s performance ‘impracticable’”); Fla. Power and Light Co. v. Westinghouse Elec. Corp., 597 F. Supp. 1456, 1477 (E.D. Va. 1984) (holding that $70 million cost increase did not render contract commercially impracticable where the $70 million loss was less than 50% of contractors total revenue under related contracts), aff’d in part, rev’d in part, 826 F.2d 239 (4th Cir. 1987). Indeed, those courts that have found commercial impracticability due to price increases have done so only in cases of extreme cost increases.[8]
Conclusion
Contractors that have been affected by price increases are not without options, but as the discussion above shows, an ounce of prevention on this issue beats a pound of cure every day of the week. For contracts still in the pipeline, contractors should do all they can to proactively address tariffs in a way that will not leave them holding the bag if and when they experience price increases that they can do nothing to prevent.
[1] Alisa Zevin, Showing Tariff Impacts, Material Prices Rise in March, Engineering News-Record (April 11, 2025).
[2] 2025 Top 500 Design Firms: Design Market Shifts Overnight, Engineering News Record (April 23, 2025).
[3] Alisa Zevin, Pause on Tariffs Unlikely to Ease Project Worries, Engineering News-Record (April 10, 2025).
[4] 2A Bruner & O’Connor Construction Law § 7:292 (providing that without a price escalation clause “the contractor, under a fixed unit price contract, bears the risk” of price escalation”); William Schwartzkopf, Calculating Construction Damages § 12.09 (4th Ed.) (providing with respect to price escalation clauses “[w]hen there is no such provision, the contractor bears the risk of a price escalation”); App. of S. Dredging Co., Inc., ENGBCA No. 5843, 92-2 B.C.A. (CCH) ¶ 24886 (Eng. B.C.A. Feb. 21, 1992) (“Under a well-established principle of contract law, a contractor assumes the risk of unexpected increases in the cost of the materials and supplies necessary for performance absent an express contract provision shifting the risk to the government”); Agility Def. & Govt. Services, Inc. v. U.S., 115 Fed. Cl. 247, 252 (Fed. Cl. 2014) (providing that contractor that enters into a fixed-price contract assumes the risk of increased cost or scarcity of goods needed to perform the work).
[5] 305 F.3d 1354, 1368 (Fed. Cir. 2002).
[6] ASBCA No. 55007, 06-2 B.C.A. (CCH) ¶ 33376 (A.S.B.C.A. July 31, 2006).
[7] ASBCA No. 21090, 87-2 B.C.A. (CCH) ¶ 19881 (A.S.B.C.A. May 13, 1987).
[8] See, e.g., Aluminum Co. of Am. v. Essex Group, Inc., 499 F. Supp. 53, 88 (W.D. Pa. 1980) (holding that $75 million loss would render contract commercially impracticable); Mineral Park Land Co. v. Howard, 156 P. 458, 459 (Cal. 1916) (10 to 12 time cost increase would render contract commercially impracticable); 5 Bruner & O’Connor Construction Law § 15:28 n.8 (“Unexpected significant price increases, unless truly exorbitant, typically are treated as “hardship” rather than impracticability cases).
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