The Tariff Clause You Didn’t Draft: Insights from Construction Counsel on Steel Tariffs, Price Escalation, and Trade Volatility
By: Edward Seglias and Matthew Skaroff
Global Steel Production: A Growing Disparity
In 2017, China produced 831 million tons of raw steel. The U.S. fell in fourth place, with 81.6 million tons, behind India and Japan. Seven years later, in 2024, the United States produced 79 million tons of steel and China over 1 billion.
On its face, foreign production and import of steel into the United States may offer the temporary gift of lower prices. But questions abound regarding the quality of foreign steel. Others have raised concerns about the impact of closing domestic mills, a pressured fabrication industry, and the growing reliance on foreign countries for a material critical for American construction, infrastructure, and defense.
In 2017, the Department of Commerce explored these issues during a nine-month investigation, ultimately concluding that high import volumes of foreign steel weakened the U.S. Steel Industry. At that time, the DOC recognized that imports of foreign steel had risen above 25% and plant closures in the United States would threaten the United States’ ability to produce steel for defense needs.
Why Section 232 Was Invoked – Then and Now
Section 232 of the Trade Expansion Act of 1962 allows for the restriction of imports that threaten national security. On that ground, President Trump invoked Section 232 in 2018 to impose a 25% tariff on foreign-produced raw steel. Prior to 2018, it had not been used since 1986. Following Trump’s 2018 proclamation, the tariffs were amended with various exemptions, including exemptions for certain countries and regions like Canada, Mexico, EU, Australia, South Korea, and Brazil.
Just as in 2018, those same issues and concerns regarding foreign steel still exist today. China’s total steel production has increased, while the United States’ production has dropped. In February 2025, President Trump further updated the Section 232 steel tariffs by removing all exemptions and raising the total tariff rate from 25% to 50%.
Cohen Seglias and Steel
In January 2019, Edward Seglias was appointed as general counsel to the American Institute of Steel Construction (AISC), a little less than one year after the enactment of the Section 232 steel tariffs. In addition to our involvement with AISC, Cohen Seglias regularly represents steel fabricators and erectors throughout the country on construction contract disputes. We also frequently represent owners and general contractors who use steel in construction. Matthew Skaroff has worked alongside Seglias on many AISC matters and steel disputes.
Following the original implementation of Section 232 and following its update this year, we have fielded many questions from clients and the industry regarding the tariffs, how they could possibly affect pricing for already-signed contracts and construction jobs that were underway, and what language or strategies should be pursued in future contracts. One hallmark of the current tariff regime seems to be uncertainty regarding the current and future tariffs, which does not make easy planning for multimillion dollar projects and for parties who use steel.
Collateral Damage in Construction: When Timing and Tariffs Collide
Even on the most efficient projects, construction planning is not particularly rapid. Plans are designed, plans are priced, bids are received, and contracts-on-contracts are executed. Typically, it is only after that process—and after the budget is contractually committed—that materials are purchased.
As a result, any parties facing an unexpected tariff before the purchase of materials risk a potential budget bust. Following the 2018 tariffs, we witnessed bankruptcies for certain less-diligent parties where their lack of ability to navigate unexpected tariffs constituted at least one factor in their demise. Given the interconnected nature of construction, one bankrupt party can derail a project for all involved.
Following the February update to Section 232, we expect to see ripple effects on projects and in the construction industry over the next year or so, as we saw following 2018.
Mitigating Tariff Risks in Construction Contracts
Beyond steel, anyone following the news is likely aware that we are in an era where a new and unexpected tariff can be announced at any time. Parties to construction contracts can use strategies to mitigate that risk.
Construction contracting should not be a “winner-take all” game, in which a party seeks to place as much risk as possible on the other side. As noted above, parties are interdependent in construction. If a contractor fails during the middle of construction, an owner may have a “slam dunk” breach of contract case, but no one really wins if the project is half-finished, the contractor is insolvent, and the owner must pay out of pocket to complete the work. Similarly, a bankrupt owner is of no benefit to a contractor. Rather than “winner take all,” in construction contracting a risk should be allocated to the party who has the best ability to control it. Uncontrollable risks should be allocated in a way that minimizes their impact on the parties and the project.
Other than the government, no one can control tariffs. One of the most effective ways to mitigate that risk is by using a contingency fund. A contingency fund generally is an explicit cushion of funds recognized by the parties in the contract and available for use in certain agreed circumstances, like to cover costs arising from unexpected delays, tariffs, errors, or force majeure events. A contingency fund is a staple of good project planning, and we have witnessed many construction disputes that spiraled because of the lack of available funds.
In standard industry practice, contingency funds are generally limited to prime contracts between owners and general contractors. However, subcontractors can generally access those funds through change order requests made to the general contractor, which in turn the general contractor can pass along to the owner.
Most standard subcontracts do not have an explicit clause that allows a subcontractor to request a price increase for tariffs. If a subcontractor is lucky, its subcontract will contain a force majeure clause that allows cost increases based on force majeure events. But the use of such clauses in favor of subcontractors is not widespread. Regardless, in the event of an unexpected tariff or increase in material price, there is generally no penalty for asking for additional compensation, especially if it poses a material risk to the project. Additionally, a general contractor who has available contingency funds should be inclined to assist. Some may even argue that the subcontractor has a right to such funds, depending on the specific “flow-down” language of the subcontract and how it incorporates the prime contract with the owner.
In addition to contingency clauses, we occasionally see and write escalation clauses that share the risk of cost increases to material by splitting the increased cost in some way between the parties. These clauses often contain a trigger when the price for some material exceeds an agreed threshold, and these clauses may provide that the two parties share the excess cost 50/50 or by some other proportion. In some cases, we have seen a cap on the shared cost. Clauses like this can be entirely customized by the parties and should be written in line with their bidding, estimates, and budgets for the project. The Pennsylvania Department of Transportation, for example, uses similar clauses when addressing certain commodity costs on their projects.
Positive Effects of Section 232 and Major Flaws
Notwithstanding the risk posed by the current unpredictability of tariffs, they could have positive effects, especially as they relate to steel. Steel is a crucial material for domestic construction, infrastructure, and defense. Tariffs on foreign steel incentivize buyers to buy domestically, which in theory should strengthen the United States steel industry and ensuring its healthy existence in the future.
However, the Section 232 tariffs are not perfect. Currently, the tariffs cover raw steel but not fabricated steel. As a result, fabricators in foreign countries can purchase American steel, fabricate it abroad at reduced prices, and ship it back into the United States without facing Section 232 tariffs. This loophole, unfortunately, undermines the effectiveness of the Section 232 tariffs.
A strong capability for producing raw steel in the United States is important. But it is almost worthless without a robust industry of domestic fabricators who can actually fabricate the steel so that it can be used. The AISC, and much of the steel fabricators in the United States advocate for the elimination of this major flaw in the current tariff structure.
“The Tariff Clause You Didn’t Draft”
When addressing uncertainty, lawyers should guide their construction clients to solutions that mitigate their risk rather than lead them to Pyrrhic victories. Construction attorneys should seek to handle uncontrollable risks with devices like contingences and escalation terms. Do not let either of these simple clauses become “the tariff clause you didn’t draft.”
Reprinted with permission from the August 12, 2025 edition of “The Legal Intelligencer” © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
