Contractors’ Responses to Rising Tariffs’ Impact on Material Costs

Material costs in construction are being significantly affected by tariffs imposed by the current administration. Contractors should carefully review their contracts to determine their options for recovering these increased costs. The ability to recover tariff-related expenses depends on the contract terms. Below are some frequently asked questions (FAQs) to help navigate this issue.

To help contractors quickly find key takeaways, we have summarized the guidance recently shared by SMACNA. For the full details, please refer to the original document here.

1. What are tariffs?

A tariff is a tax imposed on imported goods. These taxes are collected at ports of entry. Many essential materials used in construction, such as steel, aluminum, fasteners, and HVAC components, are imported. For example, a 25% tariff on aluminum from Canada or a 10% tariff on HVAC parts from China can significantly impact contractors’ costs and bid structures.

2. What are reciprocal tariffs?

A reciprocal tariff is a trade measure where one country imposes tariffs in response to those enacted by another country. These tariffs aim to balance trade but can also lead to supply chain disruptions, increased prices, and slowed economic growth.

3. How can federal contractors recover rising material costs due to tariffs?

Federal Acquisition Regulation (FAR) contracts may contain provisions allowing for cost recovery. Contractors should examine their agreements for the following clauses:

New Tax Provision Adjustment (FAR 52.229-3)

• Allows for price increases due to new federal taxes or duties imposed after the contract date.

• Contractors must notify the Contracting Officer promptly.

• Applies only if no contingency for the tariff was included in the original bid.

Economic Price Adjustment (FAR 52.216-4)

• Allows price adjustments for material cost increases.

• Contractors must notify the Contracting Officer within 60 days of the price increase.

• Increases are usually capped at 10% of the original unit price.

Flexibly Priced Federal Contracts (FAR 31.201-2)

• Cost-reimbursement and other adjustable contracts may allow for increased material costs.

• Costs must be reasonable, allocable, and in line with Cost Accounting Standards.

4. How can contractors protect themselves from rising costs in private contracts?

For private contracts, the following provisions can help mitigate risks:

Cost-Plus Contracts

• The owner absorbs cost increases, reducing contractor risk.

• Contractors should ensure the "Construction Costs Defined" provision includes tariff-related expenses.

Price Escalation Clauses

• Allows price adjustments when material costs rise significantly.

• Not included in standard contracts (e.g., AIA, ConsensusDocs) but can be negotiated into agreements.

Force Majeure Clauses

• May provide relief if tariffs are deemed unforeseeable events.

• Enforceability varies by jurisdiction.

Impracticability/Impossibility Defenses

• Can be invoked when performance becomes unreasonably difficult or expensive.

• Requires proving that increased costs were unforeseen and beyond control.

Final Considerations

Contractors should proactively negotiate contract terms to account for potential tariff-related cost increases. Consulting legal counsel for contract review and strategic adjustments is highly recommended.