The construction sector is gearing up for a potential wave of material price increases as new and proposed tariffs under President Trump's administration raise concerns. This situation echoes the challenges faced during the first term, when steel prices spiked by 14%, eventually settling at a 10% increase by the end of 2019. With nonresidential construction spending already declining and material costs on the rise, contractors are revisiting strategies to safeguard themselves from volatile market conditions. Drawing from experiences during the pandemic, they are exploring contract clauses that allow for adjustments in pricing due to market fluctuations.
Industry Responds to Tariff Challenges with Strategic Contract Adjustments
In the face of impending tariff-related price hikes, contractors are adopting proactive measures to mitigate financial risks. During the previous administration, the industry witnessed significant shifts in material costs, prompting many to incorporate material escalation clauses into their contracts. These clauses enable adjustments in pricing due to unforeseen market volatility, a practice that gained traction during the pandemic. Matthew Long, a construction partner at Cohen Seglias, notes that while owners initially resisted these terms, the unprecedented economic disruptions forced them to reconsider.
As the industry anticipates another round of tariff-induced challenges, experts like Zack Rippeon from Smith Currie Oles highlight the importance of addressing both cost and time impacts. Tariffs not only inflate material prices but also delay deliveries, potentially extending project timelines. James Doerfler from Reed Smith suggests leveraging change-in-law clauses to navigate these uncertainties. These provisions can justify changes in contract terms if new tariffs are introduced after the agreement is signed.
However, relying solely on force majeure clauses may not be sufficient, warns David Suchar from Maslon. These clauses typically provide schedule relief but rarely offer additional compensation. Instead, contractors should focus on negotiating specific tariff-related protections within their contracts. Alternative risk-sharing approaches, such as splitting large projects into smaller phases or agreeing on shared cost overruns, are also gaining popularity. John Neary from Akerman emphasizes that risk allocation for tariffs is a key negotiation point between stakeholders, with various strategies available to address potential cost increases.
Ultimately, the most effective solution lies in writing tariff-related clauses directly into contracts. While this approach faces resistance from owners concerned about budget uncertainty, it remains a critical tool for contractors seeking to protect themselves from unpredictable market forces. Contracts structured with contingencies and allowances provide flexibility, allowing for adjustments in material pricing based on real-time changes. In contrast, lump-sum contracts leave contractors more vulnerable to material price volatility due to their fixed-price nature.
From a journalistic perspective, this evolving landscape underscores the importance of adaptable contract structures in managing economic uncertainties. As tariffs continue to influence material costs, the construction industry must remain vigilant and innovative in its contractual agreements to ensure project viability and financial stability. The lessons learned from past challenges will undoubtedly shape future negotiations and practices, fostering a more resilient and responsive construction sector.