Tariffs, trade tensions and material cost escalations are more than just headlines—they are challenges that contractors face every day. In our recent Q&A webinar, we tackled contractors’ pressing questions on protecting themselves from these issues. Below, we share key takeaways and insights to help contractors navigate these risks.
Include Protective Language in Bids and Contracts
Owners often argue that contractors should have accounted for price increases in their bids. We recommend including language that reserves the right to seek additional compensation for tariffs or material cost increases. Doing so puts the owner on notice and strengthens your position in contract negotiations. Keep in mind that integration clauses—often found in contracts—can override any bid language not specifically incorporated into the final agreement. Ensure that any protective language included in a bid is also reflected in the signed contract.
Drafting Effective Escalation Clauses
Contractors have several options for escalation clauses, from straightforward to more detailed. A simple clause might allow a change order if costs rise beyond a certain percentage, such as 5%. Trade-specific clauses can tie increases to indexes relevant to your work, such as asphalt or steel. More complex clauses may require contractors to provide documentation and secure approval before buying materials at higher prices. We also shared examples of escalation clauses that allocate risk differently, including pro-contractor, pro-owner and middle-ground options. The key takeaway: there is no one-size-fits-all escalation clause—contractors should work with legal counsel to tailor clauses to their projects and risks.
Force Majeure and Tariff Considerations
Tariffs can lead to cost increases and project delays. It’s important to review force majeure clauses to determine if tariffs qualify as an excusable delay. Depending on your contract, you may receive additional time but not necessarily additional compensation, especially if it includes a no-damage-for-delay clause. States differ in how they interpret these clauses, so it’s critical to include tariffs as a specific risk in your force majeure provisions. Sample clauses from the presentation demonstrated how adding tariffs as a trigger can help preserve your rights.
Dealing With Existing Contracts
What if you’re already under contract? Review your agreement for escalation or no-escalation clauses. If a no-escalation clause is present, it may limit your options, but all contracts allow for change orders. Even if the contract is silent on escalation, you may be able to seek an equitable adjustment if you can show the cost increase was truly unforeseen at the time of contracting. Documentation from suppliers and subcontractors—especially quotes from the time of bid and at the time of purchase—is essential to support a request for an adjustment. We also noted that some federal contracts may allow for reimbursement of tariffs imposed after contract award, depending on the contract language.
Practical Negotiation Tips
Contractors and owners often share a common goal: keeping the project on track. Open communication about potential price fluctuations can lead to solutions that balance risk. When negotiating, consider that some owners may now be more open to sharing escalation risk. Even in federal fixed-price contracts without price escalation clauses, contractors may have arguments for equitable adjustments, depending on the contract language. Regardless of the project type, the key is to talk about escalation risks early and often.
Conclusion
Managing tariffs and escalation risks in construction contracts is critical. If you have questions about drafting escalation clauses, addressing force majeure or negotiating equitable adjustments, contact us at Cohen Seglias. We can help ensure your contracts support your success.
