Deja Vu All Over Again: Trump’s Tariffs and their Impact on Government Contractors

President Trump has called himself the “Tariff Man” and has said that “Tariffs are the greatest thing ever invented.”[1] It therefore should come as no surprise that, in the first month since taking office, he has announced sweeping tariffs against Mexico, Canada, and China. Although President Trump has since negotiated deals with Canada and Mexico to halt the proposed tariffs, and a similar deal with China could materialize too, one thing is clear: the new administration intends to leverage tariffs as a tool in international diplomacy.

One of the many practical implications of this approach to foreign policy is that government contractors may be collateral damage in a looming trade war that could significantly increase the costs of supplies and materials in unforeseeable ways. This article discusses what steps government contractors can take to preserve their interests in a rapidly changing landscape.

The Problem

Tariffs increase the cost of imported materials and thus can lead to price increases when manufacturers of finished goods who rely on those materials pass their increased material costs to customers. But this may not be feasible for government contractors with firm fixed-price contracts and options, who cannot pass along higher input prices until they sign new contracts. Tariff-driven cost increases could also affect certain flexibly priced contracts, including cost-type contracts with incentive fee provisions. Moreover, tariffs may indirectly increase the price of domestically produced goods by reducing competition from foreign sources, or lead to temporary shortages while foreign suppliers sell their products overseas on more favorable terms and domestic suppliers ramp up production to fill the gap.

Potential Solutions

Consider Whether and How Tariffs Affect Your Contract Tax Provisions

The FAR’s tax provisions may provide the best solution to the tariff issue, at least in the first instance. FAR 52.229-3, Federal, State and Local Taxes, provides for a price increase for after-imposed taxes that a contractor is “required to pay or bear as the result of legislative, judicial, or administrative action taking effect after the contract date.” Covered taxes include “any new or increased Federal excise tax or duty,” FAR 52.229-3(a), which likely includes new tariffs. FAR 29.401-3 calls for the inclusion of FAR 52.229-3 in solicitations and contracts if (1) the contract is to be performed in the United States; (2) a fixed-price contract is contemplated; and (3) the contract is expected to exceed the simplified acquisition threshold.

The inclusion of FAR 52.229-3 in a government contract may mitigate the risk of tariff-related cost increases under fixed-price contracts, but contractors should keep in mind that the FAR clause only protects contractors against tariffs that they pay directly. It does not protect against tariff-driven cost increases that contractors incur on domestically produced goods. See Pangea, Inc., ASBCA No. 62,561, 22-1 BCA ¶ 38,026 (Jan. 5, 2022) (holding that FAR 52.229-3 did not allow contractors to recover for higher domestic costs that are indirect result of tariffs on foreign products).

Contractors should also note that FAR 52.229-3(g) requires contractors to “promptly notify the Contracting Officer of all matters relating to any Federal excise tax or duty that reasonably may be expected to result in either an increase or decrease in the contract price and shall take appropriate action as the Contracting Officer directs.” Thus, if and when a contractor determines that new tariffs “reasonably may” affect its pricing, it must provide prompt notice to the relevant contracting officer. In addition, a contractor must warrant in writing that the cost of the tariff was not already factored into the contract price before it can receive a price adjustment. FAR 52.229-3(c).

Economic Price Adjustment Clauses

If the tax clauses are unavailing—for example, because a contractor experiences increased costs from domestic suppliers due to secondary market effects—the FAR’s Economic Price Adjustment (EPA) clauses might provide an alternative remedy. Those clauses are included in some fixed-price contracts “for upward and downward revision of the stated contract price upon the occurrence of specified contingencies.” FAR 16.203-1(a).

There are several types of economic price adjustments, each with its own contract clause, so it is essential to determine which—if any—is included in a given contract. For example, the clause for “Labor and Material” calls for the Contracting Officer to negotiate a price adjustment upon receiving notice of a price change. FAR 52.216-4(b). Because contractors normally must provide that notice within 60 days, it is essential to be on the alert for any price increases and to provide prompt notice to the government to avoid timeliness or waiver problems. FAR 52.216-4(a).

Even where relief is available under one of the EPA clauses, upward adjustments typically are limited to ten percent of the unit price. FAR 52.216-4(c)(4). In addition, contractors must ensure that any EPA clause in their contract covers the supplies for which prices increased. See Delfasco LLC, ASBCA Nos. 63,280, 63,402, 23-1 BCA ¶ 38,441 (Sep. 25, 2023) (holding no compensation warranted for higher iron prices when EPA was expressly limited to steel).

For Department of Defense contractors, the Defense FAR Supplement provides additional guidance on price adjustments for basic steel and aluminum products and for nonstandard steel items. See DFARS 216.203-4-70; 252.216-7000; 252-216-7001. As with the FAR clauses, the DFARS clauses require prompt notice to the Contracting Officer and impose a 10 percent maximum on the price increases. A contractor seeking a price adjustment may also be required to show its math, including by making available all relevant records used in the computation. See DFARS 252.216-7001(f)(3).

Although EPA clauses may offer a solution for some contractors, not all contracts contain the requisite clause. The government is under no obligation to compensate contractors for sudden price increases when a contract does not contain an EPA clause. See Ace Elecs. Def. Sys., ASBCA No. 63,224, 22-1 BCA ¶ 38,213 (Oct. 5, 2022) (no compensation, even when government recognized “financial stress” that cost increase placed on contractor). Contractors should carefully review their contracts for EPA clauses that may allow a price increase in light of escalating material costs.

Other Remedies

Remedies beyond those afforded by the tax and EPA clauses noted above are limited. A claim based on a changes clause or breach of contract theory is unlikely to succeed. Contractors frequently turn to the changes clauses when government action interferes with their ability to perform the contract as agreed. Those remedy-granting clauses recognize that the government has extraordinary power to change the terms of its contracts unilaterally, and, in return, contractors are entitled to an equitable adjustment in the contract price or schedule.

In tariff context, however, the government has not formally changed the contract. Instead, government conduct has the effect of indirectly increasing the cost of performance; therefore, contractors considering this path must show that a “constructive change” has occurred. A constructive change occurs when the government has taken actions that have the same effect as a written change order signed by the contracting officer. The imposition of new tariffs likely would not constitute a constructive change. See FAR 52.243-1 to 7.

The changes clauses identify the possible modifications or events that could qualify as a constructive change. For example, FAR 52.243-1 applies to fixed-price contracts when government action has the effect of modifying the specifications, the method of shipment or packing, or the place of delivery. Similarly, FAR 52.243-3 applies to time-and-materials or labor-hours contracts when government action modifies the description of services to be performed, the time of performance, the place of performance of the services, specifications for supplies, the method of shipment or packing of supplies, the place of delivery, or the amount of government-furnished property. None of the modifications identified in the changes clauses addresses the imposition of new tariffs. Accordingly, it is unlikely that the new tariffs would qualify as a constructive change. Instead, such conduct may be covered by the Sovereign Acts Doctrine, discussed below.

Sovereign Acts Doctrine

Under the Sovereign Acts Doctrine, the United States Government is not liable for breach of a contract resulting from a public and general act within its sovereign power. The enactment of a tariff likely falls under this doctrine, which stems from the Court of Claims’ decision in Deming v. United States, 1 Ct. Cl. 190 (1865). In Deming, the court held that the United States is not liable for losses caused by duties imposed by Congress after the contract was formed. The facts of the case are relatively straightforward. Deming entered into a contract to provide rations to the Marine Corps. After the contract was formed, Congress imposed an additional duty on some of the supplies needed to perform the contract. As a result, Deming performed the contract at a loss. He claimed that the government’s action imposed new conditions upon his performance of the contract, which caused him to suffer monetary damages. The court differentiated between the government acting as a party to a contract and the government “exercising its sovereign power of providing laws for the welfare of the State.” Deming, 1 Ct. Cl. at 191. In dismissing the case, the court explained:

A contract between the government and a private party cannot be specially affected by the enactment of a general law. The statute bears upon it as it bears upon all similar contracts between citizens, and affects it in no other way. In form, the claimant brings this action against the United States for imposing new conditions upon his contract; in fact he brings it for exercising their sovereign right of enacting laws.

Id. The upshot is that—in the absence of contract provisions such as the Federal, State, and Local Taxes clause or an Economic Price Adjustment clause—the government cannot be made to pay for the financial consequences of a generally applicable tax or duty.

The ASBCA clarified the reach of the Sovereign Acts Doctrine during the COVID-19 pandemic, when an array of shutdowns, public health measures, and supply chain disruptions impeded contract performance. When a health order had general applicability—i.e., contractors were not singled out for different treatment—the Sovereign Acts Doctrine protected the government and prevented contractor recovery. See, e.g., JE Dunn Const. Co., ASBCA No. 62,963, 22-1 BCA ¶ 38,123 (Apr. 25, 2022); Aptim Fed. Servs., LLC, ASBCA No. 62,982, 22-1 BCA ¶ 38,127 (Apr. 28, 2022). Tariffs generally will fall into this category of general applicability.

However, the Sovereign Acts Doctrine does not give a contracting office license to forgo cooperating with a contractor in good faith to mitigate the harms of the government action. See McCarthy HITT – Next NGA West, ASBCA No. 63,571, 2023 WL 9179193 (Dec. 20, 2023). Contractors thus should work with the government to mitigate the impacts of tariffs, even when they are unlikely to receive compensation for cost increases.

Side Effects: Shortages and Schedule Delays

In addition to the obvious financial consequences of tariffs, one potential side effect may be supply shortages and schedule delays. Although they are intended to bolster domestic manufacturers, tariffs may create a temporary reduction in the availability of goods as foreign suppliers look elsewhere to sell their products on more favorable terms and domestic suppliers have not yet increased their production capacity to supply domestic needs. If so, contractors may face schedule delays due to an inability to acquire necessary materials. Fortunately, those delays may be excusable.

Excusable delays in fixed-price supply and service contracts are governed by the Default clause contained in FAR 52.249-8(c), which states that “the Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor.” The clause provides a list of examples that would entitle a contractor to an excusable delay, which includes “acts of Government in either its sovereign or contractual capacity.” FAR 52.249-8(c)(2). Similarly, excusable delays in fixed‑price construction contracts are dealt with in the Default clause in FAR 52.249-10(b), which states that “[t]he Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause if – (1) the delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor.” Relevant causes may include “acts of the Government in either its sovereign or contractual capacity.” FAR 52.249-10(b)(1)(ii).

Consistent with these clauses, the courts and boards have recognized that a contractor that experiences supply shortages beyond its control is entitled to a schedule extension. For example, in J.D. Hedin Construction Co. v. United States, 408 F.2d 424, 428-30 (Ct. Cl. 1969), the Court of Claims held that a delay caused by an unforeseeable cement shortage may give rise to an excusable delay. And in Maverick Diversified, Inc., ASBCA No. 19454, 75-1 BCA ¶ 11,114 (Feb. 12, 1975), the Armed Services Board of Contract Appeals recognized that, where a contractor establishes that a steel shortage is the cause of its delay, that delay is excusable.

If a contractor is entitled to an excusable delay but the contracting officer does not grant a schedule modification, then the contractor may be entitled to compensation for “constructive acceleration.” Under that theory, the excusable delay implicitly modifies the contract, to allow the contractor an extended period of performance. When the contracting officer insists that the contractor must stick to the original schedule, that is another government-caused modification, for which the contractor is entitled to compensation. See, e.g., Ace Constructors, Inc. v. United States, 70 Fed. Cl. 253, 281 (2006) (finding constructive acceleration when delay was excused but contracting officer did not move deadlines); IAP Worldwide Servs., Inc., ASBCA Nos. 59397, 59398, 59399, 17-1 BCA ¶ 36763 (May 17, 2017) (holding that government constructively accelerated performance of contract for supply of power plants in Afghanistan when it failed to grant an extension for excusable delay due to border closure).

What the Future Holds

To quote the Magic Eight Ball, the picture is cloudy. It is clear the new administration views tariffs very favorably and intends to deploy them, at minimum, as a negotiation tactic. This alone creates significant uncertainty and could result in cascading economic effects. Whatever the future holds, however, contractors should take stock of their contractual rights now so they can swiftly provide notice under any applicable contract if and when a tariff creates impacts. Contractors should also consider what, if any, impact potential tariffs may have on active or pending bid or proposal activities and closely examine the remedy‑granting clauses that may be included in the resulting contracts.

Even contractors who do not buy goods subject to tariffs may see ricochet effects from possible retaliatory measures, such as reductions in foreign government purchases of U.S. defense and aerospace technology and platforms. If a tariff squabble becomes a trade war, those purchases may become one of the frontlines. Those unintended and unpredictable knock-on consequences might eventually become the tariffs’ most significant effect on U.S. defense and aerospace contractors.

Ethan Sterenfeld, a law clerk in our Washington, D.C. office, contributed to the writing of this article.

[1] Trump Favors Huge New Tariffs. How Do They Work? PBS News, Sep. 27, 2024, https://www.pbs.org/newshour/economy/trump-favors-huge-new-tariffs-how-do-they-work (last accessed Feb. 6, 2025).