Business and Legal Insights

President-elect Donald Trump recently stated on November 25, 2024, his intention to impose tariffs of 25% on all goods coming from Mexico and Canada on his first day in office unless those countries do more to stop the flow of migrants and the opioid fentanyl into the United States.[1] Among other commodities, significant amounts of lumber and steel critical to the construction industry come from Canada.[2]  Cement and gypsum for drywall are also imported from Mexico and Canada in significant quantities. 

Leaving aside the potentially positive macro effect such tariffs and other actions of the incoming Trump administration may have on the U.S. economy or on U.S. foreign relations, to the extent the threatened tariffs are imposed after Trump takes office in early 2025, they could significantly increase the prices of these crucial materials to the construction industry.  Even the threat of tariffs could cause prices to increase, as well as resulting material shortages or other supply chain issues.  While contractors may not be able to fully insulate themselves from such potential pricing and supply chain pressures, there are actions that they should consider taking now to try to prepare for and mitigate the effects on their business. 

Monitor the Commodities Markets

First, contractors should closely monitor the commodities market for materials in order to be prepared for potential price increases, and to be able to take advantage of opportunities to hedge by, for example, using futures contracts to lock in the prices of key materials.  Industry cost indexes like the Producer Price Index for Construction Materials, or ENR Construction Cost Data, can provide valuable insights into market trends and fluctuations.

Prepare in Advance of Bidding

Contractors can also take steps in the bidding phase of upcoming projects to try to protect themselves by including qualifications in their proposals regarding material prices, such as time limits on the quoted prices. Contractors may also want to consider building in additional contingency in their proposals to attempt to account for material price increases.  Contractors can also lessen the risk of increased prices by focusing on bidding the right projects that are good fits for the contractor’s strength’s and experience, and also spending extra time and effort to accurately estimate and price the work being bid before submitting a proposal.  Building and maintaining strong relationships with key suppliers can also help with potentially obtaining early information on coming price increases, or may allow for negotiation of price protections or early-pay or volume-based discounts.

Negotiate Contracts Carefully

Once project work is awarded or obtained, contractors can take steps in connection with contract negotiation to attempt to mitigate material price escalation and supply chain risk.  For example, material price escalation clauses can allow for a change order to account for price increases when prices increase by certain predetermined thresholds, typically stated as some percentage increase, after which the contractor is permitted to seek a change order to account for the added cost in excess of the threshold.  A variation on price escalation clauses, sometimes referred to as a collar provision, would also include a similar mechanism to lower costs to the owner to account for decreases in materials prices, and may more readily acceptable to a project owner in negotiations than a pure price escalation clause.  Force majeure clauses may also potentially offer relief to a contractor, but typically only to the extent they include language that addresses and defines unusual material price increases and/or material shortages as a force majeure event giving rise to relief, so efforts to negotiate such language where possible should be considered. 

Take Advantage of Opportunities to Lock in Costs or Adjust Where Possible

During performance of the work, contractors may also be able to engage in early buy out of certain scopes and/or materials to try to lock in more favorable prices.  This could also include negotiations with project owners for early release of certain work, such as steel or concrete, to allow for earlier upfront material purchases.  Contractors should also be cognizant of and act on materials with long lead times to ensure timely receipt to avoid project delays.  In certain cases, alternate materials may need to be considered, and early engagement with the project design team and owner will likely be beneficial in this regard.   To the extent there are contractual avenues for relief, such as a material price escalation clause, contractors will want to ensure that they maintain documentation of price and material availability in order to be able to substantiate their contractual rights to escalation. 

Conclusion

The potential tariffs that may be enacted by the next Presidential administration may certainly have some positive overall effects for the economy or U.S. foreign relations, but there is also near-term risk for contractors that tariffs may result in price escalation and potential supply chain issues for critical imported construction materials.  Although each situation is unique and a qualified construction lawyer should be consulted for specific legal advice, as discussed above, by actively monitoring commodities markets, carefully considering bids, working with key suppliers, owners and other stakeholders, and attempting to negotiate more favorable contractual provisions, contractors may be able to mitigate the potential negative effects and better protect their bottom line. 

[1] https://www.reuters.com/world/us/trump-promises-25-tariff-products-mexico-canada-2024-11-25/ (last visited Dec. 9, 2024).

[2] https://www.wsj.com/economy/trump-immigration-deportation-policy-construction-impact-b8db1120 (last visited Dec. 9, 2024).