Addressing Tariff and Duty Increases in Public and Private Contracts

In the construction industry, the threat of tariffs is beginning to impact pricing.  Because many projects are locked into fixed prices through bids, pricing amendments, or other contractual mechanisms, for months or even years before purchases are made, the threat of uncertain material and supply cost increases is driving up prices from subcontractors and suppliers, and, in turn, from contractors to owners.

The question is how can the industry deal with this issue?  One way to mitigate this risk is to contractually allow for adjustments if tariffs or duties are imposed or increased after the contractor goes at risk for the contract price.  Alternatively, owners can leave the issue for the market, allowing contractors to handicap the likelihood, extent, and applicability of tariffs on the materials, equipment, and supplies needed for a given project.  For reasons discussed below, many owners will opt for the former approach.

Why Rational Contractors Include Contingencies

Rational contractors include contingencies because they must account for unpredictable variables that could impact project costs. Tariffs and duties are prime examples—when imposed or increased after a contract is signed, they can drastically affect material costs. Without a contingency, contractors risk absorbing those costs themselves, which can wipe out profit margins or even lead to financial losses.

In competitive bidding environments—particularly on public projects where "lowest and best" is the standard—leaving tariff risk to the market often means the most desperate or least cautious contractor wins. This can set the stage for disputes when costs inevitably spike. Including reasonable contingencies protects contractors from financial exposure while allowing for a more thoughtful and comprehensive bid.

Why Contingencies Are Bad for Owners

While contractors can and should have contingencies in their bids as rational actors, minimizing the amount of contingencies will directly decrease the price owners pay.  I think of contingencies like insurance premiums: the owner is paying the contractor a fee in exchange for the owner’s transfer of risk.  In circumstances where the contractor is in a better place than the owner to estimate what the actual cost will be, should the contingency occur, then I would not question an owner’s decision to allocate such risk to the contractor—that is an efficient risk transfer.  However, where, as in the case with tariffs, the contractors are in no better a position than the owner to handicap the likelihood that a tariff will be imposed, the amount of the tariff, or the duration of the tariff, then transferring the risk to the contractor only has two effects (and neither is ideal):

1. Artificially Inflated Prices: Owners end up paying more—even if tariffs never materialize or are short-lived. Therefore, the price increase is not rational because it does not correlate with the increase in cost incurred by the contractor.
2. Leads to Poor Contractor Selection: Where price is a significant factor in selecting a contractor—especially on public projects where, for example, owners are often required to select the “lowest and best” bidder—the contractor with the thinnest margin or the most need for work might win the bid. That’s a breeding ground for future claims and litigation when those thin contingencies (i.e., irrational or inaccurate) inevitably break under real-world conditions.

Clarity Is Non-Negotiable

If you’re going to include an adjustment clause, it has to clearly articulate the risk transfer in unmistakable terms—think conspicuously. If there’s any ambiguity, contractors might still build in some level of contingency—because if they’re uncertain about the risk they are assuming, rational contractors will put a number on it. To ensure clarity, define the term directly in the contract. Something like “after-imposed taxes”, defined to include duty and tariff increases, is a good start and how the FAR approaches the issue.

The goal is to make it unmistakably clear that any increase in tariffs occurring after the contract pricing is firm will result in a corresponding increase to the contract price.  As an aside, I would suggest that such an increase should not include profit, as the risk has shifted completely to the owner.  As an owner, if the language leaves room for debate, you might as well not include it at all.

Alternative Strategies to Mitigate Tariff Risk

In addition to a contract price adjustment tool, owners and contractors should also consider additional strategies to control the impact and uncertainty of tariffs:

• Stored Materials: Allow (and even incentivize) contractors to pre-purchase and store critical materials early to lock in prices before tariffs hit.
• Owner-Procured Equipment: Owners can directly purchase long-lead items to reduce uncertainty.  Those advance purchases can later be assigned to the selected contractor.  Of course, if the equipment is potentially subject to tariff after the purchase and before delivery, the same issues addressed above would apply.
• Substitution Flexibility: Incorporate robust "or-equal" clauses to allow for alternative materials not subject to tariffs to be substituted if a tariff is later imposed on the specified item.

Final Thought

Considering the significant tariff risk in the current environment, leaving the issue unaddressed in construction contracts is a recipe for potential disputes and inflated bids. A clear and precise adjustment clause—paired with thoughtful procurement strategies—can help owners avoid unnecessary cost increases while giving contractors confidence that they won’t be left bearing unanticipated financial burdens. Do it right, and you’ll save money and headaches down the road.