President Trump’s prospective assessment of 25% tariffs on certain materials coming from Canada and Mexico, and prospective 10% tariffs on certain material from China, may increase contractor costs in fulfillment of construction contracts. While the details of which materials are tariffed will be clarified in the coming days, impacts on project costs may be substantial. Who is responsible to pay or absorb these costs?
Project participants should consider promptly reviewing the contract regarding liability for tax increases. Additionally, contractors should consider reviewing the source of all materials, included those from outside the United States. Prudent contractors will immediately determine where tariffs may increase costs and the availability of substitute American made products. To the extent contractors believe they are entitled to pass these costs to customers, then extra costs/claim notice requirements must be promptly triggered.
Proactive contractors and owners will review the cost impact together to determine and confirm:
1) If the contractor has the ability to continue and absorb any additional costs that fall on the contractor, (or does the financial impact materially prevent the contractor from completing the work)
2) If costs are passed to the owner, for the owner to determine whether the project is still viable and cash flows (you cannot raise rent simply because the materials cost more to obtain), and
3) If adjustment in project schedule or suspension is possible to see if the tariffs will remain long term or be adjusted as political negotiations move forward.
Further, proactive contractors will also want to connect with their subcontractors and vendors to assess the impact of the tariffs. In particular, equipment vendors will be impacted directly and immediately, so it will be wise to determine how they plan to handle the tariffs.
Tariffs on foreign goods will likely increase the value of American made products. It may also spur more American manufacturing, but that takes time before product is available in the domestic market. Conversely, the tariffs may decrease the underlying cost of the foreign made goods, so that when the tariff is placed on it, it matches the price of the American made materials.
What is clear is that project participants at all levels should be ready to have their hands around the quickly changing material and price landscape and share information in real time to permit all parties to review the impact of price increases on the project, and the ability or desire of parties to perform. Parties contracting now for new projects and improvements should consider evaluating if their proposed contract addresses substantial cost revisions, increased costs of construction materials, further unpredictable tariffs and tax revisions, and the potential of the project to withstand increased inflation.
