\nMatthew Long<\/p>\n
Courtesy of Cohen Seglias<\/p>\n
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\u201cMaterial price increase terms became more common during the first Trump administration, and were ubiquitous during the pandemic,\u201d said Long. \u201cDuring that time, owners were generally forced to accept these terms. Contractors have continued to request material price escalation terms in recent years, with less success.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nLong said he anticipates a resurgence in material price escalation terms during the second Trump administration. In fact, many industry standard contracts, such as those from ConsensusDocs, now include addendums for material price escalation, said Zack Rippeon, a partner in the Atlanta office of law firm Smith Currie Oles.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\u201cThe word \u2018tariff\u2019 probably doesn\u2019t exist in any standard form contracts,\u201d said Rippeon. \u201cBut the concept of material escalation is absolutely something that is discussed and negotiated.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nA question of money and time<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\nDavid Suchar, a partner at Maslon, a Minneapolis-based law firm, noted while standard industry contracts often do not address tariffs, contractors can still protect themselves.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\u201cConstruction contracts can address issues associated with tariffs\u201d via escalation provisions, said Suchar. \u201cThey would typically allow contractors to seek additional compensation if tariffs cause increases in costs for certain project materials.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nNevertheless, Rippeon added that tariffs, beyond driving up costs, also extend project timelines by delaying material deliveries. If a contractor is waiting on foreign-sourced materials that are now subject to tariffs, they could face schedule overruns.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\u201cIt\u2019s not just about the money \u2014 even if I can pay more or have an avenue to have somebody reimburse me that money, how much longer is it now going to take me to get that material?\u201d said Rippeon. \u201cSo, I think the protections for contractors need to focus on both, not just on the cost impact of tariffs, but also the cost on time impact.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nOther useful clauses<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\nAnother common approach to mitigating the effects of tariffs is to use change-in-law clauses, said James Doerfler, partner in the project and construction group at Reed Smith, a Pittsburgh-based law firm.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\n\n
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\nJames Doerfler<\/p>\n
Permission granted by Reed Smith<\/p>\n
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\u201cIf you\u2019re a contractor and you had a new tariff that was enacted after the contract was implemented, you would look to your contract to see whether or not the tariff would qualify as a change-in-law,\u201d said Doerfler. \u201cSimilarly, you would look at the force majeure provision to see whether or not it fits as a way of justifying a change order.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nForce majeure clauses cover unforeseen events that make performance impossible or excessively costly. Some contractors may argue that tariffs meet this threshold, but whether a court or owner will agree is a separate matter, said Monica Dozier, partner at Bradley, a Birmingham, Alabama-based law firm.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\n\u201cTariffs are generally considered import taxes,\u201d said Dozier. \u201cContractors should pay close attention to contract terms regarding tax responsibility, changes in law and even force majeure events to understand their potential rights and remedies in the event of a change in tariffs.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nSuchar warned against relying too heavily on force majeure clauses, as they are typically limited in scope and often only provide schedule relief, rather than additional compensation.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\u201cParties sometimes turn to force majeure clauses for cost increases after the fact but this is not a preferred route,\u201d said Suchar. \u201cIt is more effective to describe the potential issue and deal with it specifically. Force majeure clauses also often allow only for extensions of time and not additional compensation.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nThe most obvious solution \u2014 writing tariff-related clauses into contracts \u2014 is a tough sell, said Rippeon. Owners have historically rejected these provisions, arguing they introduce cost uncertainty and risk to their budgets, said William Thomas, a construction attorney at St. Louis-based law firm Gausnell, O\u2019Keefe & Thomas and chair of the International Association of Defense Counsel\u2019s construction law and litigation committee.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nEven if a contractor insists on a tariff-related protection clause, owners may simply choose another bid without one. These types of clauses would also often require contractors to build in so much of a cost cushion they would no longer be the lower bidder, said Andrew Richards, co-chair of the construction practice group at Kaufman Dolowich, a Woodbury, New York-based law firm.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\nWhat type of contract is best?<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\nContracts with contingencies and allowances allow for adjustments in material pricing, said Colm Nelson, chair of the real estate industry group at Stoel Rives, a Portland, Oregon-based law firm.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n\u201cA lot of construction contracts are guaranteed maximum price contracts. In those contracts, the contractor is paid based on cost, plus its fee, plus a contingency up to a guaranteed maximum price,\u201d said Nelson. \u201cSo, one question is, \u2018What is the contingency for, and can it be used for unexpected increases in tariffs?\u2019 Use of contingency is a point of negotiation.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\nNelson also noted that allowances can be another tool to manage tariff-related cost fluctuations. If materials fall under an allowance, the contract price can move up or down based on real-time cost changes.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n