IndyBar: Navigating Tariff Turbulence in Construction Contracts

By Byrin Romney, Easter + Cavosie

In the current trade environment, tariff volatility demands thoughtful consideration by owners and contractors. Below is a three-step process for evaluating tariff risks inherent in any construction contract.

1. Identify Who Bears the Risk by Default

First, determine which party ordinarily bears the risk of price increases due to tariffs. This depends upon the pricing structure in the contract. In stipulated sum and guaranteed maximum price (“GMP”) contracts, the contractor is paid a fixed amount and therefore bears the risk of costs exceeding that amount, including price increases due to tariffs. Conversely, in cost-plus contracts, the contractor is paid its actual costs plus a fee, typically a percentage mark-up on actual costs. Without a cap on construction costs, the owner bears the risk of tariff-related cost increases.

2. Determine Whether Any Existing Clauses Address Tariffs

Second, review existing clauses that may change who bears responsibility for tariff-related cost increases, such as the following:

Force Majeure Clause: These clauses typically give the contractor a right to seek additional time and/or money from the owner based upon events beyond the contractor’s control. Tariffs could be specifically listed in a force majeure clause, or they could fall under a catch all for “causes beyond the contractor’s reasonable control.” Force majeure clauses in construction contracts, however, often only allow time extensions and not cost increases.

Change in Law Clause: These clauses typically give the contractor the right to a change order for changes in law enacted after contract execution. A new tariff, or a change in an existing tariff, could be considered a change in law. However, it is unclear whether a court would consider a tariff a “law” under these clauses.

Tax Clause: These clauses typically require the contractor to pay all sales taxes, use taxes, or other similar taxes, and sometimes give the contractor relief if there are new taxes that go into effect after contract execution. Tariffs are not necessarily “similar” to sales or use taxes, but courts may be willing to treat them the same under these provisions.

3. Approaches for Allocating Risks via a Tariff Clause

Third, consider adding a tariff-specific clause, which is the best way to clearly allocate the parties’ risks and mitigate potential disputes. Common approaches include the following:

Date-Specific Approach: In this approach, one party (usually the contractor) accepts all risk for tariffs in existence as of a certain date, such as the bid date or contract date, while the other party (usually the owner) accepts all tariff risks arising thereafter. Beware of the difference between “enacted” and “effective.” Some tariffs may be enacted but are not yet effective. If the contract assigns risk of all enacted tariffs to the contractor, that may include some tariffs that have not yet come into effect, and for which the cost impacts are unknown.

Material-Specific Approach: If the risk pertains only to certain materials, such as steel, aluminum, copper, stone, or lumber, the parties may limit the contractor’s or owner’s exposure to only those items.

Contingency Approach: A contingency fund may be built into the contract price to account for costs that are foreseeable but undetermined at the time of contracting. With a tariff contingency, the owner agrees to pay for tariff-related price increases up to the contingency amount, but the contractor bears the risk of overages.

Allowance Approach: This is similar to the contingency approach, but the owner bears the risk of cost overages. With a tariff allowance, the owner and contractor agree to an allowance within the contract price to account for tariff-related cost increases. Once the allowance is used, the contractor is entitled to a change order for any additional tariff-related costs.

Percentage Approach: The owner and the contractor may agree that if material prices escalate due to tariffs, each party is responsible for a certain percentage of the increase.

The options are endless. Regardless of the mechanism used, however, the parties should specify the procedures and conditions for making a claim for tariff-related cost increases. Key considerations include: the type of documentation required to evidence tariff impacts; the contractor’s duty to mitigate costs through timely buyout, storage, or use of substitutes; the time within which a claim must be made; and whether the contractor should be entitled to a mark-up for overhead and profit on tariff-related cost increases. Lastly, as trade deals calm pricing volatility, contractors and owners should also consider which party receives potential cost savings caused by the removal of tariffs after contract execution.•

4. Conclusion

Clear contracts help all parties understand their risks and remedies. For guidance negotiating or litigating tariff provisions, contact the experienced construction attorneys at Easter & Cavosie.•

Byrin Romney is a construction attorney at Easter + Cavosie. His hybrid practice involves negotiating and litigating construction contracts on behalf of owners, contractors, subcontractors, and design professionals. He is a graduate of the Indianapolis Bar Association’s Bar Leader Series, Class XXI, and remains an active member of the organization. He also serves on the executive council of the Indiana State Bar Association’s Construction and Surety Law Section and as chair of the Indianapolis chapter of the J. Reuben Clark Law Society.