Time to Talk Tariffs and Construction Projects

From rising material costs to the shifting landscape of construction contracts, all of those who work in the construction industry needs to consider how tariffs will impact their current and future projects. This also requires reviewing construction contracts to better understand how tariffs will impact current and future projects.

The Impact of Tariffs on the Construction Industry

The 25% tariff on Canadian goods, particularly steel and aluminum, is expected to have significant impact on the construction industry. Here are some of the ways

Increased Material Costs: Tariffs will likely lead to higher prices for certain materials. The rising costs is expected to increase the overall cost of construction projects.
Delayed Project Timelines: As tariffs make materials more expensive, contractors and subcontractors may need to find alternative suppliers or delay sourcing materials. This could lead to longer procurement times and more complicated supply chain logistics.
Reduced Profit Margins: Contractors and subcontractors working with fixed-price contracts may find their profit margins shrinking, especially if they have already committed to project costs without factoring in these unexpected price hikes. Owners may also be unable to fund the additional costs if they are responsible for the escalating costs. All of this can lead to insolvencies, delays and surety claims.
Less Projects or Smaller Projects: Higher material costs could impact the overall number of construction projects. The uncertainty, cost increase and likely delays could push potential owners to explore alternatives, or whether to proceed at all.

What Should You Look for In Your Construction Contracts?

Below are some key areas to focus on when reviewing contracts considering the new tariff landscape:

Price Escalation Clauses: This clause may (check to see how it is drafted!) allow those doing the work to adjust the contract price if the cost of materials rise due to factors beyond their control, such as tariffs, taxes, duties, etc. The price escalation clause may set out a formula or process for determining how the additional costs may be determined. Consider adding clauses to specifically deal with tariffs to contracts that are currently being negotiated.
Force Majeure Clauses: The introduction of tariffs may also be seen as an unexpected event or "force majeure" (unforeseen circumstance) that could impact project timelines and costs. Including a robust force majeure clause can help ensure that both parties are protected in case delays occur due to trade-related disruptions, such as material shortages or supply chain delays. Consider the force majeure clause in your contract and check the language!
Supply Chain Flexibility: Contracts may incorporate provisions that give contractors and subcontractors flexibility in sourcing materials. A clause that allows for substitutions or alternative suppliers can be invaluable, especially if tariffs make certain materials prohibitively expensive or hard to obtain.
Schedules: Due to the risk of material delays, construction contracts should also carefully define project timelines and set reasonable expectations for delivery dates and the ability to extend the time required to complete the work. Delays resulting from tariffs and the global supply chain may require additional time to source materials and may be a compensable or not compensable time extension.
Dispute Resolution Mechanisms: Given the potential for disputes over contract terms related to tariffs, it's critical to have clear mechanisms for resolving disputes.

Conclusion:

It is important to consider your contract model and specific contract terms. Cost management, flexibility and communication will be important for all parties as we all navigate through these uncertain times.

This article is information and not legal advice.