Planning for Construction Costs in the Face of Tariff Uncertainty
[Since drafting this article, the Trump administration and the Chinese government have agreed to a 90-day pause on most retaliatory tariffs, slashing the tariff rate on Chinese imports from 145% to 30% and levies on the United States from 125% to 10%.]
Reciprocal Tariffs Imposed on Global Markets
The “reciprocal” tariffs announced on April 2nd, 2025, by the Trump administration to address what Trump declared a "large and persistent U.S. trade deficit," were one of the largest shocks to the international trade industry in more than a century. The Trump administration’s tariffs raised the U.S. effective tariff rate from 2% to well above 20% for nearly 90 countries. Of those countries targeted by the Trump administration, Canada and Mexico were hit with an additional 25% tariff on imports, and China with an additional 10% tariff on imports (now totaling nearly 55%).
How will the tariffs impact the construction industry?
The construction industry is poised to witness the most immediate and tangible effects of the Trump tariffs as materials such as steel, aluminum, and lumber–all imported into the U.S. in significant quantities–see sharp increases in costs, as well as supply chain disruptions and delays. The U.S. is the largest importer of steel in the world. In fact, roughly a quarter of all steel used in the U.S. is imported, and most comes from Mexico and Canada. In a similar fashion, nearly 30% of all softwood lumber consumed in the U.S. is imported, and roughly a half of this is imported into the U.S. from Canada. It remains an open question whether U.S. manufacturing has the ability to pick up the slack of these industries should the Trump tariffs–which will presumably remain high for an extended period of time–force American businesses, companies, and consumers to turn to American producers. The tariffs will certainly impact supply chains and may lead to material shortages in the near future, further driving up costs.
Are tariff costs addressed in existing contracts?
Contracts for construction projects prior to the tariff announcement likely do not contain a provision to protect from price increases due to tariffs. Stipulated Sum and Guaranteed Maximum Price grants have ceilings on construction costs that likely do not account for tariff-related costs.
.Alternatively, any amount needed above that set price to cover the increased price of materials due to tariffs on steel, aluminum, lumber, electrical components, etc., will need to be submitted as a change order request and approved by the project owner. This is risky for contractors if the owner has no obligation to approve the change order(s). However, the risk is not fully borne by the contractor because, at the end of the day, the project is the owner’s responsibility, and the contractor will not be expected to fund the project. The parties will need to collaborate to address increased costs to allow the project to proceed and account for this newfound burden.
A contingency is a specified amount added to account for unforeseen costs, conditions, and/or situations that increase the cost of the project. Contingency Clauses are generally highly negotiated with specific applicable contingencies, approval processes, and strict protocols to manage the contingency funds. Even if the contingency can be used, the contingency may not be enough to cover increased costs due to the recent tariffs. Escalation Clauses are also highly negotiated, specifically to address the increase in material costs due to specific scenarios such as the ever-changing tariff situation we find ourselves in as of the date of this article. It is possible that contingency or escalation clauses may address how to handle these costs if they are broadly drafted. However, these clauses typically contemplate specific causes, and tariffs may not have been an issue of concern at the time of drafting.
How can I protect myself from future material cost increases?
If the responsibility of tariff-related costs are not appropriately addressed at the outset, projects may risk change order disputes, delays, suspension or abandonment.
Generally, the cost of funding and paying for a given project is the responsibility of the owner. Notwithstanding, when dealing with guaranteed maximum price (GMP) cost-plus contracts where the contractor or subcontractor is responsible for costs that exceed the GMP, contractors and subcontractors could be on the hook for increased material costs, as a result of the tariffs. The uncertainties of a construction project are often addressed and/or accounted for in several ways, most commonly through mechanisms such as change orders, contingencies, escalation clauses and via force majeure clauses. Contractors would be smart to include escalation clauses that increase the contract sum due to tariff costs or account for the anticipated cost increases in a contingency. However, owners, understandably, will want certainty on their full financial exposure.
One option is to push contractors to source as much of their materials and inventory from regions with lower tariffs, if not from within the U.S.
Second, owners may insist on limitations on escalation clauses. For instance, the escalation provisions can be narrowly tailored to (a) cover only specific materials; (b) apply only after a minimum threshold is exceeded (i.e. costs beyond solo of the initial line item cost); or (c) establish a ceiling on additional payments due to tariff increases.
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