Page 32 - RE-NJ

SPONSORED CONTENT
Managing Tariff Risk in
Construction Contracting
Billy Nelson
Contracts Attorney
Direct: (205) 458-8078 | Mobile:
(509) 280-6337
[email protected]
2720 3rd Avenue S, Suite 100
Birmingham, AL 35233
Alexandra “Alex” Underwood
Contracts Attorney
Direct: (205) 332-1309 | Mobile:
(850) 326-3279
alex.underwood@epicbrokers.
com
2720 3rd Avenue S, Suite 100
Birmingham, AL 35233
Robert L. Sobel
Senior Vice President
Direct: (201) 475-4442 | Mobile:
(201) 306-2222
[email protected]
45 Eisenhower Drive, Suite 280
Paramus, NJ 07652
Tariff risk remains a signifi cant challenge for contractors in the construction
industry, particularly for construction fi rms that face substantial exposure
but possess limited bargaining power.
Over the past year, trade policy has grown increasingly unpredictable,
with tariffs being deployed less as tools for managing domestic economic
conditions and more as instruments of national power. For contractors
working projects under fi xed-price agreements, the mid-contract
imposition of tariffs that suddenly and unexpectedly increase the cost of
imported materials such as steel, aluminum, copper, electrical switchgear,
HVAC systems, etc., can result in unrecoverable losses when the contract
lacks fl exibility in its pricing and schedule terms.
To better understand the stakes, consider this hypothetical example:
Ironclad Structures LLC entered into a $100,000 fi xed-price contract,
budgeting 15 percent for steel and 50 percent for other materials, without
locking in supplier pricing. After tariffs raised steel costs by 40 percent and
other materials by 10 percent, expenses rose from $65,000 to $76,000,
reducing Ironclad’s projected $10,000 profi t to just $2,400. Rumors of tariff
reversals led importers to delay shipments, causing shortages and further
complications for smaller buyers like Ironclad. Unable to source steel on
time, the company missed its deadline, incurred $10,000 in penalties and
ended up with a $7,600 loss.
From this example, we can identify two key ways in which unpredictable
tariffs introduce risk into a construction project.
First, tariffs can drive up prices not only for the targeted commodity or
component, but across a broad range of material inputs. Someone in the
contracting chain must absorb the impact of those increases, and without
fi rm pricing or escalation protections, that burden often falls on the mid-
tier contractor.
Second, when tariffs are both signifi cant and unpredictable, importers
may delay shipments or store goods in bonded warehouses to avoid
unfavorable rates. These tactics can lead to material shortages and
project delays, triggering consequential and liquidated damages that are
ultimately borne by the contractor.
Fortunately, contractors have several strategies available to manage tariff-
related risk:
1. Specifi c tariff cost provisions: Contractors should seek to allocate
tariff-related cost risk explicitly in the contract. If the upstream
agreement is silent on tariffs, propose language allowing for price
adjustments if tariffs are imposed or increased after contract
execution. If tariff-specifi c language is included, downstream
contractors should attempt to soften it through redlines, retaining
part of the risk while shifting the remainder upstream. Where leverage
is limited, the contractor may need to fl ow the risk down to their
subcontractors.
2. Price Escalation clauses: Indexed- or escalation-based pricing ties
contract pricing to a published commodity index, such as the Producer
Price Index for steel or electrical equipment. If the index increases beyond
a defi ned threshold, the contract price adjusts accordingly.
For example:
“The Contract Price for steel components shall be adjusted in accordance
with changes to the Producer Price Index for Steel Mill Products. If the
index increases more than fi ve percent from the baseline established at
contract execution, Downstream Party shall be entitled to a corresponding
price adjustment.”
3. Firm supply/equipment costs: Contractors can mitigate tariff risk by
locking in supplier pricing for the project’s duration through fi xed-price
purchase orders or preorders with defi ned cancellation and termination-
for-convenience terms.
For example:
“Supplier agrees to hold pricing fi rm through [Date], subject only to
termination for convenience by Contractor with [X] days’ notice and no
penalty beyond actual incurred costs.”
4. Partial cost-reimbursable pricing: For discrete, high-risk procurement
items (such as imported HVAC systems or specialty switchgear)
contractors may use cost-reimbursable or unit-rate pricing. This limits
exposure while maintaining price certainty for the remainder of the
project.
5. Mutual termination for convenience: Contractors may negotiate a
termination-for-convenience clause applicable to both parties. While
typically reserved for upstream parties, this clause can provide an exit if
the project becomes fi nancially unviable due to tariff impacts.
For example:
“Downstream Party may terminate this Agreement for convenience upon
[X] days’ written notice. In such event, Downstream Party shall be entitled
to payment for work performed through the date of termination, plus
reasonable demobilization costs.”
6. Force majeure: Contractors should negotiate force majeure clauses
to treat tariff-related delays as excusable, avoiding penalties such as
liquidated damages. Contracts might state that delays resulting from
new or increased tariffs qualify as force majeure events, granting time
extensions and relief from damages. When upstream, contractors may
seek to limit downstream relief by narrowing the clause’s scope.
7. Financial hedging: Outside the contract, mid-tier contractors may
consider fi nancial hedging strategies to mitigate tariff-related risk. In
consultation with a qualifi ed fi nancial advisor, they might use exchange-
traded instruments such as commodity futures or options to hedge
against price increases in key materials like steel, aluminum or copper.
The use of these strategies depends on factors such as contractor
leverage, contract terms, tariff exposure and project fi nancials. These are
fl exible tools within a broader risk management framework and may be
applied individually or in combination. Contractors should consult legal
and fi nancial professionals when determining which strategies best suit
their circumstances.
If you have questions about this topic, or if you are interested in tariff-
related risk management language for your contracts, please reach out to
us.