Negotiating the Impacts of Tariffs in Today’s Construction Contracts

The firm’s Dylan Goldberg authored an article that was posted on Monday, Nov. 3, in the Daily Business Review website, which is published by American Lawyer Media and is one of South Florida’s most respected and authoritative sources for legal and real estate news. His article, which is titled “Negotiating the Impacts of Tariffs in Today’s Construction Contracts,” focuses on how increases in material costs due to tariffs are forcing residential and commercial construction firms to rethink their contracts and add in provisions and contingencies to reduce potential risks.

Dylan’s article reads:

. . . The resulting increases in project costs, delays and cancellations are making fixed-price construction contracts more challenging. Contractors are being forced to either absorb higher costs or pass them on to clients, but the industry-standard contracts from the American Institute of Architects do not specifically address tariffs.

The growing volatility in the prices for materials is making it essential for the parties in construction agreements to negotiate terms addressing the impacts of tariffs. However, owners typically push for contractors to bear any risks for price increases, and they pursue the use of contracts with fixed contract sums and no adjustments for tariffs.

Such contracts may be suitable for contractors that have adequate stable domestic suppliers and face low risks of major price increases during projects with short duration periods. But for those entering into agreements for long-term projects during which there will be substantial risks of price increases from tariffs, provisions that call for adjustments have become imperative.

Agreements in which owners must pay for price increases for materials that go beyond a set threshold are becoming common for such engagements. Such contracts may include terms stating that if the costs of materials increase by 5% or more from the execution of the agreement due to tariffs, the contractor may submit a change order to account for the increased costs and the owner will be responsible for the increased tariff costs. Alternatively, if the price does not exceed the 5% threshold, then the contract sum will remain unchanged and the tariff costs will be passed on to the contractor.

This approach apportions the risks stemming from price increases due to the tariffs onto both parties. Owners should seek to require their contractors to purchase all the materials for the entirety of the project within a certain number of days of the execution of the agreement to mitigate the risks of increases, and they will wish to mandate that contractors provide all the supporting documentation demonstrating any price increases caused by tariffs within a certain number of days from the onset of the change.

Another option is to include a construction contingency in the form of a predetermined amount or percentage of the contract to cover costs for unpredictable changes due to tariffs. Such contingencies are typically used for a guaranteed maximum price agreement that can be reached when contractors obtain prior written approvals from owners for increases due to tariffs.

In such accords, owners will require their contractors to properly record and document each application for payment towards the contingency for tariff-related changes. They will also wish to negotiate that any unused contingency funds must be returned to the owner upon completion of the project, but contractors will seek to have such unused funds divided between the parties.

Also worthy of consideration is the use of contracts that include an allowance for the costs of items that cannot be determined with certainty when a bid proposal is submitted. If the actual costs are greater or less than the allowance, then the contract sum would be equitably adjusted via a change order. . .

Dylan concludes his article by noting that the parties for all such contracts that take tariffs into account may also wish to negotiate the inclusion of maximum caps on any adjustments. He writes that these and other provisions in today’s construction contracts are being implemented to safeguard the financial interests of owners and contractors, which should rely on the guidance and advice of highly experienced construction attorneys for all their contracts with provisions addressing the uncertainties created by tariffs.

Our firm salutes Dylan for sharing his insights into these timely issues for property owners and contractors with the readers of the Daily Business Review. Click here to read the complete article in the DBR’s website (registration required).

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