Actions to Take Now to Prepare for Potential Major Impacts of Proposed Tariffs
The change of administration has brought with it a number of proposed tariffs on a wide variety of countries and goods. These tariffs, if implemented, will have far-reaching effects on material availability, project timelines, and contract costs. In addition, external factors such as the California wildfires and massive data center buildouts may impact the availability of materials. As companies prepare for the potential imminent impact of these proposed tariffs, there are a number of considerations and proactive measures you can take now to prepare for the new market conditions ahead.
Major Impacts on Material Costs and Availability
As ENR noted, new tariffs could cause a sudden and significant rise in the cost of critical construction materials, especially those sourced from abroad. Potentially impacted materials include billions of dollars of lumber and metals imported from Canada, gypsum (a key component of drywall) from Mexico and Canada, and Chinese steel and aluminum, along with several others. If other industries begin purchasing bulk quantities in anticipation of these cost hikes, construction contractors may encounter reduced availability of essential items, leading to otherwise unexpected delays in project schedules.
Strategies for Mitigation and Risk Management
- Buy Out Subcontracts Early
Finalizing subcontracts at present pricing levels can protect you from future increases. Locking in rates before tariffs are imposed limits exposure to any rapid jumps in material or labor costs. Before buying out a subcontract, be sure to carefully review each subcontractor's history of reliability, terms for delays or substitutions, and existing escalation clauses in subcontracts. - Purchase Stockpiles of Critical Materials
Building an inventory of essential resources can ensure that your current and upcoming projects are not halted by sudden price surges or shortages. Before purchasing, evaluate storage requirements, shelf life, and any carrying costs related to holding extra inventory. Maintain clear records for accurate accounting and forecasting. - Include Cost Escalation Provisions in Contracts
Incorporating cost escalation language allows contract amounts to adjust should tariffs or other market factors raise material prices substantially. This language is especially critical for longer-duration projects or those where certain trades and suppliers are not yet secured at contract inception. When incorporating these provisions, clearly define triggering events for cost adjustments and the calculation methods. Work with legal counsel to ensure these clauses comply with your jurisdiction's laws and standard industry practices.
Upcoming Regulatory Considerations and Timeline
While there is no definitive timetable for when or how tariffs will take effect, indications from the administration point to swift action. The administration has suggested that tariffs on goods from Canada and Mexico might begin as soon as February 1. Some tariffs may be introduced in stages or on a targeted basis, affecting certain products first. Be sure to monitor official government announcements and trade publications to stay informed about which materials and goods are most likely to be impacted and when to expect tariffs to take effect.
We recommend that contractors immediately begin evaluating their current and future projects, identifying materials most susceptible to price fluctuations or shortages, and formulate a plan to address these risks. As things become more clear in the coming weeks, Preti Flaherty's Construction Law Group is available to assist with contract review and drafting, strategic planning, risk analysis, and dispute resolution.