When contemplating advice for contractors or suppliers trying to navigate the current tariff environment, I find President Dwight D. Eisenhower’s wartime advice insightful, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Why is this on point? Given the frequently changing and unpredictable nature of tariff application by the current administration, “plans,” which must be based on information known or expected, are likely useless.
But planning is different. Planning involves thinking about the current conditions, identifying potential risks and changes to the expected conditions, highlighting possible blind spots and, most importantly, identifying the various ways in which goals can still be achieved despite the risks and changes. For a simple example, your evening plan may be to drop your daughter at soccer practice and run to the grocery store during the practice to pick up dinner while your spouse picks up your other child from an after-school activity. This plan may work great until your spouse is prevented from making the school pick-up due to an extended meeting. We know that evening plans can get disturbed, and a plan may still be good despite an occasional curveball. But what if you knew there was a high likelihood that your spouse would get held at work for that meeting? If you knew there was a significant client meeting starting at 4 PM. Would you still go with that plan, or would you think of alternatives or backup plans if something happens? Would you think about the communication needed to ensure those backup plans can be implemented? We plan in this fashion all the time in our daily lives. Applying this framework to legal relationships is necessary under the current turbulent trade environment.
Planning involves thinking about practices and communication for all job phases—from bidding and contracting to construction administration and even claims.
Bidding and Contracting
Reviewing contracts carefully and understanding who owns the risk for price escalation is imperative. Shifting that risk to the other party may be the plan. For example, a subcontractor may include a term stating that the initial contract value is based on pricing conditions existing at the time of contracting and reserving the subcontractor’s right to seek contract price adjustments in the event of future price increases. But what if the general contractor refuses to accept such a term? Is the deal dead? Does the subcontractor just accept the risk? Not necessarily.
The planning could involve several options, such as:
a) Proposing a middle-ground term that shares the risk of price escalation due to tariffs,
b) Negotiating reimbursement for storage and payment of stored materials so that materials can be ordered immediately, or
c) Limiting the scope of work to more price-stable scopes or breaking the project into smaller projects.
We do not suggest that these are desirable options over stable pricing. However, given the known instability of pricing, thinking about the different ways a deal can be structured before giving a quote is important. If estimators used the same forms and contracts from last year, and there is no discussion on various ways to approach the risk of material escalation, at best, a contractor has lost the opportunity to discuss whether the other party is open to better terms to counter escalation, and at worst the contractor has locked itself into a contract that will cause major losses.
Construction Administration
Planning for the risk of escalation can also continue throughout the project. A contractor should review the force majeure clauses in all existing contracts to determine whether tariffs would fall under the force majeure and allow relief. Surveying contracts to know which may allow risk transfers upstream for tariffs and which contracts provide zero relief will allow a contractor to triage its resources and staff time. If a contract includes a price escalation or a helpful force majeure clause, a contractor should submit change order requests for all price increases as soon as they arise and provide documentation of the price on which the bid was based.
Likewise, as soon as a project manager learns of a significant cost increase, the contract or project manager should promptly request a substitution if similar material is available at a lower price. This should also be conveyed if the lower-priced material has a longer lead time. Many owners will grant no-cost time extensions only if a contractor asks. While still a costly solution, this may be the “lesser of two evils.” Any substitution request should document the cost increase of the originally specified item. If denied, the contractor may be better positioned in a claim situation.
Claims
While disputes at the end of a project are never the desired goal of contractors, well-perfected claims are much more likely to lead to a timely and favorable result. We have been involved in hundreds of construction claims over the course of our careers, and there are two opposing types of claims that clients ask me to prosecute. Throughout a project, some contractors will keep an eye on how they intend to prove their claim and will ensure that they give written notice, document impacts in real time and gather backup documentation to support costs. For others, they may have only noted an impact during a project meeting and issued a one-page change order request at the end of the project. The former claim typically yields a quicker and more favorable result.
Planning for potential disputes is particularly important when considering interim releases. Certainly, no contractor plans to release a claim they still intend to assert, but it happens frequently. If a contractor signs an interim release with each monthly invoice that releases all claims arising from the completed work, then the contractor will not be able to assert a claim at the end of the project for anything that occurred before the last month of work. Processes must be established for the accounting department to discuss with project management before submitting an invoice to ensure that releases are modified to protect any potential claim, even if the claim has not been calculated or finalized. This is also true of any price escalation or force majeure claim.
Closing Thoughts
The construction industry, in particular, faces challenges from an unstable global trading order, as many projects take years to complete, and pricing is provided months or even years before work or material is installed. However, planning for the ways that risk can be shifted or rights asserted may provide avenues to reduce the impact of uncertainty.
