By: Lisa M. Wampler and Sydney Pierce
On March 8, 2018, President Trump signed a pair of executive orders putting a 25 percent tariff on imported steel and a ten percent tariff on imported aluminum. In the eighteen months since the tariffs went into effect, the impacts of these and subsequent international trade decisions on the American construction industry have been something like a roller coaster.
Since these initial steel and aluminum tariffs, additional tariffs have been imposed and withdrawn against a variety of countries and applied to a variety of materials. The steel and aluminum tariffs did not originally apply to certain neighboring or ally countries but were extended to the European Union, Canada, and Mexico in June 2018. In May of this year, however, tariff negotiations resulted in the United States lifting the steel and aluminum tariffs from Canada and Mexico. China has been the most frequent target of tariffs, with the Trump Administration rolling out new lists of subjected products what seems like every few months, including anything from steel rods, to plastics and other raw materials used in manufacturing to, just in August 2019, imports of wood cabinetry.
How can a contractor protect itself when the price and availability of construction materials can vary so widely within such a short period of time? There are a number of solutions at both the front and back end of a construction project that contractors can utilize to avoid the risks of unpredictable pricing and availability. On the front-end, contractors can negotiate for contractual provisions that will limit the negative effects of tariffs. On the back-end, certain contractors and suppliers who import products and materials from overseas can seek exclusions from tariffs.
Effective Contract Provisions
Construction contracts should contain provisions that squarely address which parties bear the risk of tariffs. It is in everyone’s best interest to plan for the potential delay and cost impacts caused by tariffs. For contractors and suppliers, this means trying to negotiate for provisions that allow for recovery of time and/or money for materials shortages. Contractors should ensure these provisions flow down so that each tier has the same requirements.
Material Price Escalation Clause
The best way for a contractor to protect itself from price increases resulting from tariffs levied on construction materials is to include a price escalation clause in the contract. This clause allows for a price adjustment to be made in the event of a change based on an agreed-upon metric. One such metric might be the difference between the quoted material price at bid time and the price of the material as delivered. Another metric might be based on a particular material price index. This clause can change the amount to which a contractor is entitled when prices increase post-bid, but can also be drafted to be effective in the opposite instance, when a contractor is entitled to less when a price decreases post-bid.
Risk can be allocated by this clause in any number of ways, including placing all the risk of changing prices on one party, sharing the risk between owner and contractor based on a certain percentage of the material price, or including caps on the risk incurred by one party. Creative risk-sharing solutions can help avoid a situation where the contractor is forced to bear the risk for any material price increase.
Force Majeure Clause
Contractors seeking to recoup losses occasioned by an increase in the cost of materials can also rely upon force majeure provisions. Traditionally, a force majeure clause covers catastrophic or otherwise unanticipated events considered as so-called “Acts of God,” such as extreme weather, wars, strikes, and even changes in law that would make contractual performance impossible. Where a force majeure clause includes “catch-all” language, a contractor can argue that a tariff falls under its umbrella. The Trump tariffs may be particularly good candidates for coverage under a force majeure clause because many were imposed as a matter of national security. However, contractors would be better served by adding language to the clause that expressly covers governmental acts such as the imposition of tariffs.
Another potential avenue of recovery is through a contract’s tax provisions. A properly drafted contract should limit a contractor’s price to include only taxes for the work being performed under laws currently in place when the bid is accepted or the contract is entered into. The AIA A201 (2017) General Conditions of the Contract for Construction contains such a clause, which gives a contractor the ammunition to argue that it is not obligated to pay for any taxes, like the Trump Administration’s tariffs, that go into effect after the fact. Likewise, any contractor working on a federal government project that incorporates the Federal Acquisition Regulation (FAR) can take advantage of specific provisions that allow for an increase in the contract price for any after-imposed federal taxes.
Equitable Adjustments or Change Orders
A contractor may also attempt to seek an equitable adjustment or change order on the basis of commercial impracticability. Some courts have found that unforeseen price increases can be significant enough to merit an adjustment or reformation of a contract. However, other courts are not so sympathetic towards market-driven price changes and require increases of over 100% to consider performance sufficiently “impracticable.” Because of differences in law across the states and the uncertainty of success, these arguments should be pursued as a last resort.
If an owner insists on the use of a particular product subject to tariffs that cannot be found elsewhere and will not budge on compensation for any price increase, there is an exclusion process available for certain eligible parties. “Interested parties,” such as small businesses that import goods subject to tariffs, or even trade associations, can file an exclusion request with the Office of the United States Trade Representative (USTR). The USTR publishes detailed procedures that pertain to particular tariffs as applied to particular groups of products. These procedures are complex and subject to change just as unpredictably as the tariffs themselves.
Typically, the request for an exclusion must contain detailed information about the requesting party, the product for which the exclusion is sought, the requester’s relationship to that product, and the rationale for the request. The rationale must explain:
- Whether the particular product is only available from the foreign country (often China), or whether it can be obtained from the United States or another country
- Whether the requester has attempted to source the product in the United States or other countries
- Whether the imposition of the tariff will cause severe economic harm to the requester or other United States interests
- Whether the product is strategically important to certain Chinese industrial programs
After a request is filed, other interested persons have 14 days to respond in support or opposition. The requester can then reply to any responses within seven days after the close of the response period. If the request is granted, the product requested will be immune from applicable tariffs for one year from the date of the notice granting the request.
The deadline to file exclusion requests for certain Chinese products imposed in September 2018 is September 30, 2019.
Seeking an exclusion is not an option for all businesses, and Law360 has reported that the rates of success for steel and aluminum imports have been between 35% and 44%. However, even contractors that cannot seek an exclusion themselves can publicly comment on other exclusion requests or encourage their trade organizations to seek exclusions on their behalf.
Eighteen months into the Trump Tariff era, only one thing is certain: contractors must arm themselves with favorable contractual provisions that will see them through the roller coaster of changes in pricing and availability of construction materials. Where possible, contractors must also be prepared to advocate for themselves and others through the exclusion and public comment process. A savvy contractor can ride the waves of volatile markets instead of waiting for calmer waters.
Reprinted with permission from the September/October edition of BreakingGround, a Tall Timber Group publication.