On February 1, 2025, President Trump announced that tariffs of 25% will be imposed on goods imported from Mexico and Canada (with the exception of Canadian energy resources which will be subject to a 10% tariff). In addition, a 10% tariff will also be imposed on certain goods imported from China. The administration’s stated justification for this emergency action is to address the threat posed by illegal aliens and drugs, including fentanyl, that are flowing into the United States. While the details of the tariffs remain unclear, these tariffs will undoubtedly impact both the cost and availability of critical materials required for construction projects across the United States. Accordingly, all contractors would be wise to immediately evaluate applicable clauses in existing contracts that may offer some relief from the time and cost impact resulting from tariffs.

The construction industry has certainly dealt with its fair share of unanticipated cost impacts in recent years. The industry confronted numerous disputes as a result of price escalation during the Covid-19 pandemic. If anything, the pandemic has taught construction professionals that contract clauses, such as price escalation clauses and force majeure clauses, are essential to provide protection against external factors that drive up the price of materials during contract performance. Standard form contracts may not be suitable where tariffs, not a pandemic, are a cause of major impacts to construction projects. Thus, the question is which, if any, contractual provisions contractors should look for (or include in future contracts) to protect themselves from price escalation due to tariffs.

Price Escalation Clause

The most obvious way to combat price increases due to tariffs is a price escalation clause. First encountered after the price of oil increased 260% between September 1973 and March 1974, these clauses have become more prevalent in recent years. Escalation clauses provide a mechanism to allocate the risk of material and price increases, and mitigate the financial risk associated with volatile prices. An escalation clause transfers the risk of major price fluctuations to the project owner, allowing for contract price adjustments based on significant changes in underlying costs. By distributing the risk of unpredictable cost increases, these clauses provide the parties a more fair and balanced approach to construction project pricing.

Each phase of the construction project requires different strategies to manage cost escalation because it is often difficult to identify potential materials that could be subject to escalation during the life of the project. During the design phase, this could mean assigning a member of the estimating department to monitor supply chain trends and the applicable product price indices to track increases in items affected by tariffs. This could also include identifying high-risk scopes and educating the owner of the risks associated with the scope.

During the contract negotiation phase, contractors should negotiate for the inclusion of provisions that allow for recovery of time and/or money for material shortages due to tariffs. When negotiating a price escalation clause, contractors must make certain that the clause includes specific definitions of “trigger events.” Trigger events are specific conditions that activate the clause’s provisions. For example, contractors should negotiate price escalation clauses that specifically refer to new tariffs imposed on materials and equipment to recover in situations where the prices increase.

Understandably, some owners may object to a one-way cost escalation clause that does not contemplate downward adjustments if construction costs decrease. Accordingly, the parties may also consider an escalation clause that contemplates both upward and downward adjustments to the contract price triggered by an increase or decrease in excess of an agreed percentage of baseline costs.

By clearly allocating the risk of cost impacts due to unforeseen events such as tariffs, escalation clauses provide a structured method to fairly address cost fluctuations, reduce disputes during the course of performance, and ultimately increase the likelihood that the project will be completed on time. As with all issues experienced on a project, it is imperative for contractors to timely notify the project owner of anticipated cost escalation (or material availability issues) resulting from tariffs. The contractor should also maintain and provided detailed supporting documentation for all claims under an escalation clause.

Change in Law Clauses

Some contracts provide for relief for price escalations through a “Change in Law” clause. Typically, these clauses are designed to provide relief when a change in the law that existed at the time of contract execution has a negative impact on a project. Typically, these clauses will only provide relief under circumstances where the change in law was unforeseeable. Whether the tariffs recently imposed by President Trump are considered foreseeable will be a fact intensive question that depends on the circumstances of each individual project. Nonetheless, if a contractor entered into a contract long before these tariffs were implemented (or discussed during the Presidential campaign), a contractor should have a strong argument that the tariffs were unforeseeable at the time the contract was executed, and therefore, the contractor should be entitled to additional time or money. On the other hand, the tariffs would not constitute a change in law with respect to contracts executed after the tariffs were imposed. Given the uncertainty of the scope of the existing tariffs, contractors should insist that a change in law clause contemplates any new tariffs that are applicable to materials and equipment it may utilize during the course of a construction project.

Force Majeure

Force majeure is a French phrase that means superior or irresistible force. Force Majeure clauses are common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care. Importantly, it is a creation of contract where the parties define certain events that, upon their occurrence, relieve a party from liability for non-performance or delayed performance caused by the specified event. These causes are narrowly construed and excuse non-performance only where the event is specifically identified in the parties’ contract. Traditionally, the risk of tariffs and government action are allocated by the parties’ contract and do not constitute a force majeure event; however, a contractor could be entitled to relief (typically an extension of time only) if the force majeure clause specifically references events such as tariffs, supply chain disruptions, or unforeseeable cost escalation.

Practical Considerations

In addition to the provisions discussed above, it is important for contractors to evaluate the country of origin for materials and equipment that must be purchased for any ongoing projects to evaluate the impact of tariffs. The tariffs may be unavoidable if the project specifications specifically require materials or equipment that can only be obtained from a country subject to the tariffs; however, project owners may be willing to relax those requirements if the material can be obtained more quickly or at a lower cost from a different manufacturer. With this in mind, it is important for contractors and owners to promptly consider the impacts of tariffs on ongoing projects and take prompt action to mitigate those impacts where possible.