The Trump administration's imposition of tariffs on steel, aluminum, lumber, and other construction materials, in combination with increased tariffs on raw materials and finished goods from China, Japan, the EU, and approximately 60 other countries, are roiling development and construction in the U.S. Ostensibly to protect (or revive) existing domestic markets, tariffs are raising prices and disrupting existing supply chains, leading to delays and shortages. Although there is no silver bullet, there are strategies for owners and developers (O/D) to employ to mitigate the risks associated with new and/or increased tariffs on construction materials and equipment.
1. Diversify Your Sourcing Options
This is not the time for your project's specifications to automatically include the same products and manufacturers that were specified on projects before 2025. Instead, design contracts should clearly express your expectation that, given the current tariff regime, the architect will endeavor to identify material and equipment meeting the project's requirements from U.S.-based suppliers or suppliers from countries with no or lower tariffs.
Your ability to diversify sourcing options will be enhanced using "design-assist" contracting. "Design-assist" contracting is the process of bringing a contractor or construction manager on board during the project's design phase to help develop the project's design and to perform various preconstruction services, including value-engineering. Like your design contracts, your request for proposal to contractors will need to be revised for 2025. You will want your contractor/bidders to identify their (and their subcontractors') primary and alternative sources of supply to determine early on if they will be able to help you achieve your goal of supply chain optimization.
2. Advance Procurement
If funds are available, consider purchasing high-value materials and equipment early to reduce your exposure to future price increases. As with the common practice of procuring long lead-time items during a project's design phase, a "limited authorization to proceed" can be issued to the contractor with whom you are still negotiating a price for the entire project, or O/Ds can purchase the materials directly and assign the purchase orders to the contractor ultimately selected. If the products will arrive before work commences, the former is preferred from a liability perspective, so that procurement and installation remain under one roof. Of course, storage costs will need to be taken into account in the cost/benefit calculation of this option.
3. Include a Tariff-Specific Price Escalation or Contingency Provision in Your Construction Contracts
Whether your construction contract is one for a lump sum or a cost-plus fee with guaranteed maximum price (GMP), a carefully drafted tariff-specific escalation provision (TSP) more often than not belongs in your construction agreements in today's market. In fixed-price contracts the contractor (and its subcontractor/supplier) typically bear the risk of material cost increases after the contract price is established. In the current environment in the absence of a TSP, a prudent fixed-price contractor will invariably include some cushion in its bid to protect itself against the enactment of new or increased tariffs after its bid becomes legally binding (each, a "Future Tariff"). A TSP will prevent the O/D from having to pay for a contingency that may not, in fact, occur (at the same time as it establishes that the cost of existing tariffs is included in the contract price).
Any TSP must require the contractor to notify the O/D promptly after learning of a price increase resulting from a Future Tariff to afford the O/D an opportunity to make proactive budget adjustments or alternative sourcing strategies. In addition, any TSP will prescribe the conditions that will entitle the contractor to receive a price increase as a result of a Future Tariff. In principle, these conditions in the aggregate will require the contractor to demonstrate that the Future Tariff was unavoidable. Finally, any TSP should afford the O/D the opportunity to recoup all or some part of the contract price increase if the expected Future Tariff is rescinded or reduced before the contractor actually incurs the increased cost.
In GMP contracts similar rules will apply. However, because GMP contracts typically include a contractor contingency, the TSP would include Future Tariffs as an allowable contingency while prescribing the conditions that the contractor must satisfy to access the contingency funds resulting from a Future Tariff.[1]
4. Understand the Impact of Your Contract's Force Majeure Provisions
Even if a TSP is not feasible given the status of your Project, O/Ds should review the force majeure provisions in their current agreements to understand their potential exposure for Future Tariffs. Ordinarily, cost increases due to Future Tariffs would likely be considered foreseeable risks given the current climate and, therefore, would not excuse a contractor's nonperformance on grounds of either force majeure or commercial impracticability under the Uniform Commercial Code.
At the same time, many force majeure provisions afford the contractor only additional time to perform but not additional compensation. However, as always, the devil is in the details: some force majeure provisions have been defined to include "changes in the law," or force majeure may be included among the categories of "compensable delay" for which the contractor would be owed additional money. In either instance, an unsuspecting O/D could find itself saddled with the consequences of Future Tariffs.
5. Review Your Contractor's Supply Contracts/Purchase Orders
Ultimately, the price for material and equipment to be delivered to a jobsite depends on the agreements of sale that contractors and subcontractors make with their suppliers. In the current environment, prudent O/Ds should consider having their counsel review these sales agreements in connection with high-value material and equipment. Even though these agreements (subcontracts) do not alter the prime contract's terms, an O/D is far better off avoiding a problem in the first place than potentially inheriting one from its contractor.
Ideally, the contractor and supplier will sign purchase contracts that establish the terms and conditions of sale in lieu of relying on the terms and conditions in quotes, purchase orders (PO), and/or invoices. Signed contracts avoid the uncertainty that arises if there are conflicting terms in each party's forms. O/Ds will want to determine if the sales agreement permits the supplier to increase its price because of Future Tariffs, which the prime contract seeks to avoid but which the contractor will undoubtedly attempt to flow to the O/D.
If, however, a signed contract is not how the contractor and supplier do business, O/Ds will want to review and, if necessary, modify the PO form to prohibit the price escalation that the prime contract seeks to avoid. For example, the PO should expressly state that the PO will control over any conflicting quote, confirmation, and/or invoice, and that any attempt by a supplier to reserve the right to adjust its price because of Future Tariffs is null and void.
6. Require Robust Quality Assurance/Control and Commissioning
Utilizing alternative products and/or manufacturers increases the risk of defects in design and/or construction because your design and construction teams will have had less experience specifying and installing them. If third-party peer review of construction documents is not feasible, consider requiring a review of the project's permit and/or construction documents by members of your chosen design firm not directly involved in the project before submitting them for permit or bidding.
As with critical assemblies on any project, insist that the specifications require mock-ups regarding the installation of products that your contractor and its subcontractors have not used on a regular basis. Finally, the use of alternative products increases the critical role that vigorous commissioning of mechanical systems and equipment plays in ensuring the products are both operating properly and meeting required performance criteria. Attempting savings on the commissioning budget is not recommended.
If you'd like to discuss your company's construction tariff risks, please contact the author.
[1] In addition to the "must-haves" mentioned above, other TSP options are available depending on the parties' relationship, bargaining strength, and risk tolerance: for example, a price escalation may not be permitted until after price escalations increase the contractor's total cost of the work by a defined percentage; and/or the TSP would apply only to specified materials or equipment; and/or the O/D's price escalation exposure could be capped at a fixed amount.