Recent Tariffs Impact Construction Project Costs
Recent changes in trade policy, particularly the imposition of tariffs on construction materials, have introduced significant new challenges for construction firms. As management, you’re likely grappling with the immediate question: how will tariffs affect the costs of construction projects already in progress, especially when it comes to projects with pre-existing, fixed-price contracts? At Bleakley Platt & Schmidt, LLP, we’ve been working closely with our construction clients to address these very concerns, where the central issue is managing price escalation after contracts have been signed.
Many construction firms today find themselves with hundreds of active projects where contracts with owners are already in place. In such situations, the written contract typically governs the relationship. Therefore, a thorough examination of each contract’s specific terms is crucial to determine if there is a contractual basis to seek additional compensation due to tariff-based price increases occurring post-contract execution.
The most direct avenue for relief often lies within a price escalation clause. These clauses are designed to anticipate and address unforeseen material cost increases. Generally, they fall into three common categories:
First, there are “any-increase” escalation clauses. These provisions are the most straightforward, entitling a downstream contractor or supplier to reimbursement for virtually any price increases that occur after the contract’s execution.
Threshold escalation clauses are the second type. These clauses only allow additional compensation if significant price increases occur after signing the contract and exceed a predetermined percentage or dollar amount. This acts as a protective measure against minor fluctuations while still providing recourse for substantial cost jumps.
Finally, delay escalation clauses come into play when project timelines extend beyond expectations. These clauses maintain a fixed price for a limited period but allow for additional compensation to the downstream contractor if the project is delayed beyond a specified number of days or a particular date, thereby accounting for the increased costs incurred during the extended period.
Given the current tariff environment, it is paramount for contractors to diligently review each active contract for the presence of a price escalation clause. Moreover, moving forward, the inclusion of such a clause in any new project contracts should be a high priority for proactive risk management.
Learn more about the role of price escalation clauses in construction contracts here.
What if your existing contracts lack a price escalation clause? While less direct, other contractual provisions might still offer a path to relief from price escalation in construction. Some contracts, for instance, include language that permits extra compensation for changes in law that occur after the parties enter into an agreement. Tariffs, being governmental impositions, could potentially fall under such a provision, depending on the precise wording of your contract.
Another area to explore is whether you can assert force majeure. These clauses typically address delays or non-performance caused by extraordinary events beyond the control of the parties, such as natural disasters, wars, or strikes. The question of whether tariffs qualify as a force majeure event is still evolving in the courts. New York law, notably, tends to interpret force majeure clauses narrowly. This means that performance is generally excused only when the contract specifically lists the event that prevents performance. Therefore, unless your force majeure clause explicitly mentions the imposition of unanticipated tariffs, it might not be deemed a qualifying event. However, a broadly worded force majeure clause, or one with an inclusive “catch-all” provision, could still potentially encompass tariff-related impacts.
Beyond specific contractual language, legal or equitable arguments asserting commercial impracticability, impossibility, or frustration of purpose might offer avenues of relief from tariff-based cost increases. In situations where a contract lacks any cost escalation or force majeure clause, or other provisions addressing unforeseen circumstances, performance might still potentially be excused under the legal doctrine of impossibility.
Ultimately, the most prudent approach for any construction firm is to address material price escalation proactively within the contract itself, rather than relying on potentially uncertain legal and factual arguments after the fact. We at Bleakley Platt & Schmidt, LLP strongly advocate for negotiating appropriate price escalation clauses in all new construction contracts. This foresight can save your firm significant financial strain and legal headaches down the line.
Bleakley Platt & Schmidt, LLP’s Contruction Law Practice Group provides tailored guidance on navigating the impact of tariffs on construction materials and can help fortify your contracts against future price escalation. Strategic planning today can protect your projects and your bottom line tomorrow. Contact Jonathan A. Murphy at (914) 287-6165 or jamurphy@bpslaw.com.