As the Trump Administration’s tariffs are now in effect, owners, developers, and contractors managing pending construction projects face questions about who is ultimately responsible for impacts (both time and cost) resulting from those tariffs. Those negotiating contracts for upcoming projects face the predicament of allocating this future risk of material price increases and delays flowing from the new tariff regime.
Despite recent legal challenges to the tariff regime,[1] the enforceability of tariffs has not been subject to any final judicial determination, giving rise to a great deal of uncertainty and volatility. Developers and contractors alike faced a similar unknown five years ago when the COVID-19 pandemic hit. Many commonly used contract documents in the industry (i.e. the AIA A102 and A201) do not clearly allocate material escalation risk to any party and do not explicitly include tariffs as force majeure events. This leaves all stakeholders in a dilemma that could have serious financial impacts.
For parties currently negotiating contracts, clauses can be carefully crafted to ensure that the risk of tariff impacts is properly assigned to a specific party. The picture is murkier for those committed to existing contracts, although there may be some avenues for relief depending on how certain clauses are written. Some of the key contract terms to look for when navigating the new tariff regime are detailed below.
Price Escalation Clauses
For those who do not yet have a signed contract, a straightforward price escalation clause can allocate the risk of tariff-related price increases. This situation is more easily handled in a cost-plus contract, as the risk of tariffs is baked into the cost of the work, but parties negotiating guaranteed maximum price (“GMP”) contracts may need to draft careful language to provide for whether tariff costs will or will not count toward the GMP.
The simplest way to allocate risk is to draft a clause that expressly assigns the cost of tariffs to one of the parties to the contract. If, for example, the contract calls for the direct cost of new tariffs to be borne by the project owner, and a 25% tariff on steel is enacted after contract execution, the contractor would be entitled to an equitable adjustment of the contract for that 25% tariff. The inverse is also true, and the contract could just as easily assign the cost of potential tariff impacts to a contractor, requiring the contractor to bear any increase in costs incurred as a result of the tariffs. While the initial contract price will likely be higher as a result of allocating the risk to the contractor, the parties will at least have a clearer picture of the costs of the work at the outset. If the parties agree to allocate tariff risk to a particular party, they should consider whether the price increase will include only the direct costs of the tariff (i.e., the 25% increase in the above scenario) or the direct and indirect costs of the tariff (i.e., the 25% increase plus incidental costs such as those due to supply chain issues).
A middle ground may be reached by allocating the risk of specific tariffs in the contract. For example, a contract may assign the risk of new tariffs to the contractor generally, but carve out certain essential or specialty items that are needed for the work, clarifying that only tariff costs related to those specific items entitle a contractor to an equitable adjustment. Such a clause better equalizes the amount of risk assumed by the parties. Other common ways to limit price escalation clauses are to either cap the total amount of price escalation that a contractor may be entitled to, or to require a certain increase in cost (typically by percentage of the overall cost of the work) before a price escalation clause is triggered (i.e. a contractor is not entitled to additional costs until price escalation increases the total cost of the work by 10%). There are countless ways to limit or shape a price escalation clause to fit the needs of a particular project and the new tariff environment is sure to lead to more creative contracting in the future.
Pre-Purchase of Material
Clearly allocating the risk of tariffs up front might also prompt the parties to agree on a pre-purchase of materials. If one party will bear the risk of material price increases, the parties may try to mitigate that impact by agreeing to pre-purchase commonly tariffed items, such as steel and aluminum, at the start of the job and storing those materials until they are needed on the project. If off-site storage is needed, the parties will need to agree on who is ultimately liable to pay those storage costs. While a pre-purchase of material comes with its own risks, such risks may be worthwhile as compared to potential tariff impacts.
Force Majeure Clauses
Force majeure clauses exist in nearly every contract, and came to the forefront of the legal landscape during the COVID-19 pandemic. In these clauses, parties allocate the risk for certain actions that are not the fault of either party. Some of these clauses will specifically mention tariffs or other Government acts or laws, but many will not. Many force majeure clauses address time impacts only, and only provide for an equitable adjustment to the contractor of the contract time, not price. Like other force majeure events, tariffs also cause delays. Tariffs may lead to delays caused by supply chain disruptions, delays from sourcing alternative material suppliers, or delays resulting from requests for tariff exemptions. Depending on how specifically (or not) your force majeure clause was written, there could be arguments that the contractor is liable for absorbing tariff costs, or that such tariffs are a force majeure event for which the contractor is entitled to compensation.
Contingency Clauses
Many contracts include a contractor contingency clause, wherein the parties agree to increase the overall contract price by a set amount of contingency that may only be used by the contractor when specified events occur. If the contingency is not fully used during the project, the savings are typically split by the contractor and owner. By including new tariffs as an allowable contingency event in the contract, the parties can cover the risk of tariffs by allocating money that may be used to pay for those tariffs, but also allow for a scenario where no new tariffs are issued during the project and the contingency can be split between the parties. This approach allocates some risk to both parties. The owner will always pay some amount for the contractor’s contingency (even if the owner gets part of the contingency back as a savings), but the contractor risks being liable for any amounts in excess of the contingency.
Changes Clauses
Virtually every construction contract contains a clause authorizing an increase in the contract price or time when certain changes occur. While a new tariff would not typically be considered a change in the work, the parties could agree at the time of contracting to agree that a new tariff is considered a compensable change. This is particularly true where tariffs could decrease overseas production, thus increasing shipping times and delaying completion of the project. While including tariffs as a compensable change puts the risk of tariffs primarily on the owner, a contractor will need to satisfy specified procedural and substantive steps to claim an increase in the contract price or time as a result of the change.
Tax and “Applicable Law” Clauses
Many contracts also include clauses related to who is responsible for certain taxes on the job. If these clauses are broad enough to include tariffs, and provide some guidance as to taxes enacted at the time of contracting, as compared to taxes enacted after contracting, such a clause may provide an avenue for relief to a contractor (or, conversely, provide the owner with leverage to push back on absorbing such costs).
Similar to tax clauses, most contracts include a clause stating that a contractor is responsible for complying with “applicable laws” in its performance of the work. “Applicable laws” may be defined as laws in effect at the time of contracting, or laws in effect during performance of the work. Depending on the definition of “applicable laws,” an argument could be made that a contractor is or is not responsible for the costs of tariffs enacted after contracting.
Termination Clauses
Finally, the contract termination provisions, while likely not affording either party additional costs, may allow for termination of the contract without penalty as a result of tariffs. While this is a more extreme election, a party may decide that the cost impacts of a tariff are so significant that it warrants such action. The right to terminate for convenience is most commonly held by the owner who may decide that moving forward with the project in light of tariffs is too big of a risk to, for example, financing obligations. Contractors less frequently have the right to terminate a contract for convenience. However, in agreements where the contractor has such a right to terminate for convenience, but lacks a clear ability to recover for increased tariff costs, the contractor might decide it is more advantageous to cut its losses than continue work and incur potentially unrecoverable costs.
Conclusion
Tariffs are here to stay, at least in the short term. While this is likely to lead to price uncertainty on projects, this uncertainty can be addressed in contract negotiations. Whether a project is underway or terms are still being negotiated, developers and contractors alike should consult with their counsel on how best to protect themselves as we once again navigate a “new normal” in the construction industry.
[1] Trump’s Tariffs Get a Legal Challenge, Wall St. J., available online at https://www.wsj.com/opinion/trump-tariffs-lawsuit-ieepa-simplified-supreme-court-83cd70f9 (Apr. 4, 2025).
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