The unprecedented expansion of new tariffs by the Trump administration through Executive Order 14257 issued on April 2, 2025, will undoubtedly affect thousands of existing construction projects and the negotiation and drafting of any contracts for new construction projects for the foreseeable future.
This significant escalation in US trade policy, which was enacted under the International Emergency Economic Powers Act, was intended to address alleged disparities in tariff rates and trade deficits, includes two components:
- A 10 percent universal tariff on all imports; (effective April 5, 2025) and
- Reciprocal tariff rates that are specific to 57 countries with rates ranging from 11 percent to 50 percent (effective April 9, 2025). More specifically, the new reciprocal tariffs being imposed upon the two largest trade partners for the United States, China and the European Union, are respectively 34 percent and 20 percent.
The reciprocal tariffs are cumulative of previously imposed tariffs, which in some cases result in tariffs greater than 70 percent being imposed on some goods. As part of the new trade policy, significant reciprocal tariffs are being assessed against many allies of the United States, including Canada, Japan, Taiwan, Israel and India.
How Tariffs Impact Construction Contracts and Projects
The new tariffs are expected to significantly increase the costs of new construction projects by approximately 10 percent and delay projects because of supply chain disruptions across the globe, which could significantly decrease profit margins for contractors and cause project owners to scale back the scope of upcoming projects or suspend those projects altogether.
The impacts of the new tariffs will be significant for materials that are vital for most projects, including steel, aluminum, lumber, copper, concrete, dry wall, appliances and other electronic component parts, and is expected to cost the US construction industry billions of dollars in the coming year. These materials are often crucial to the critical path systems for most commercial projects, including structural wall, foundation, floor, ceiling and roof systems.
The new tariffs are particularly problematic for contractors who have GMP contracts (e.g., AIA A101-2017) with owners who desire some degree of certainty about how much a project will ultimately cost, especially public or quasi-public projects that rely on bond financing or large private projects reliant on lenders. When material costs increase significantly for a project governed by a GMP contract, the contractor is typically obligated to incur those increases. On the other hand, owners are disproportionally impacted by projects governed by the cost of the work plus a fee contract (e.g., AIA A103-2017) because increased costs are passed along to the owner.
In both scenarios, these contracts generally lack effective mechanisms to address significantly increased material costs due to tariffs. Change Orders are generally ineffective at addressing significantly increased costs because they are reactive in nature, often require the agreement of both parties and do not provide the parties with a mechanism to terminate the project if agreement cannot be reached. If one party refuses to agree to an increase in project costs through a Change Order, a dispute will often follow, which can delay the project, erode the trust between the parties and increase litigation or arbitration costs.
Likewise, contingency and allowance clauses are not particularly effective in addressing significant price increases because the amounts typically budgeted into these clauses (less than 5 percent) is not enough to address significant increases in material costs that will be caused by the new tariffs that start at 10 percent.
Force Majeure clauses are also not necessarily effective to address significantly increased material costs because they are mostly intended to address unforeseen events, like acts of God or extreme weather events, that completely prevent the performance of one party.
Considering the extensive media coverage of the Trump administration’s tariffs, both before and after the election, it is hard to imagine any dispute resolution process will consider the new tariffs as unforeseeable. Moreover, Courts have been reluctant to apply force majeure clauses for commercial impracticability that may make a project less profitable, or unprofitable for one party, because losing money on a project does not prevent performance.
Often left unaddressed in construction contracts, rising tariffs threaten to discourage parties from engaging in new projects, or worse, scuttle projects that are ongoing. Indeed, a recent construction contract negotiation that Bracewell was involved in shortly after the November election, but before any tariffs had been assessed, was significantly prolonged and complicated by protracted haggling over language in force majeure, contingency, change order and other contractual provisions that could be impacted by the new tariffs. Ultimately, the parties were only able to move forward because of an agreed price adjustment clause that was written in the construction contracts.
