On March 8, 2018, President Donald Trump ordered new tariffs on steel and aluminum imports. The United States will soon impose a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum. With the measure scheduled to take effect on March 23, owners, contractors and subcontractors – especially those performing under fixed or lump-sum arrangements – are bracing for increases in the price of these commodities and exploring ways to possibly mitigate, shift or recoup the resultant financial consequences. In addition to orders for future delivery, and given the length of time for shipments to arrive in the U.S. from some nations, the tariffs will likely apply to steel and aluminum orders already in transit, creating immediate issues that may need to be addressed.
The new tariffs are especially concerning for contractors and subcontractors performing under firm fixed-price contracts. In general, fixed-price arrangements are popular because they allow both contractors and owners greater cost/pricing certainty over the length of an engagement. However, the political circumstances surrounding the imposition of the new tariffs, as well as their magnitude, were probably not reasonably foreseeable and to be accounted for, and therefore the new tariffs could introduce significant volatility to contractors' budgets and consequent ability to deliver projects on time and budget.
There is precedent for concern. In November 2017, a 21 percent tariff imposed on imported Canadian timber, which is used in 25 percent of wood-framed projects in the U.S., contributed to a nationwide rise in construction costs for single and mid-family homes. Much like when the Canadian timber tariff was imposed, firms currently engaged in fixed-price contracts may be forced to absorb the increased costs due to the new steel and aluminum tariffs. While details of the tariffs are still emerging, such as whether steel and aluminum from Mexico and Canada will be exempt from the tariffs, significant questions remain for the foreseeable future.
As we await the release of further details regarding implementation of the new tariffs, contractors and suppliers are encouraged to review their agreements to understand how the new tariffs could affect both current projects and those in the pipeline. For example, does a contractual "change in law" provision allow for an equitable contract adjustment or, at least, an opportunity for contract price negotiations? Will the new tariffs – given their tie to the "national security concern" that the President alluded to in rolling out the tariffs – qualify as a "force majeure event" that could excuse delays and justify contract price adjustments? Do the contracts contain a material escalation clause that may be triggered by the new tariffs? For owners, contractors and subcontractors currently negotiating new construction project agreements, careful attention should be paid to how, or if, the proposed contract language will address these tariff risks. Also, it would be prudent for potentially affected parties to inquire into the origin or provenance of any steel or aluminum to better gauge the impact that these commodities may have on existing or contemplated contracts (or to demand that any steel or aluminum not yet purchased be acquired from a tariff-exempt location).
Our Construction practice is carefully monitoring developments and will publish additional alerts as information that may affect your business becomes available.
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