By Shoshana Rothman, Merchants Bonding
Tariffs on construction materials mean contractors likely face increased costs and availability issues that could disrupt project budgets and timelines. A trusted surety partner can help tame the turmoil that tariffs can impose by providing expert guidance on contracts. Contracts are an important way to proactively safeguard clients’ projects; reviewing and negotiating key contract clauses can help mitigate the risks associated with material cost volatility.
Specific Contract Clauses To Protect Against Tariff Increases
1. Force Majeure: Protecting Against Unforeseen Delays
A force majeure clause protects contractors from unexpected events beyond their control, including material shortages or supply chain disruptions caused by tariffs. Ensure your contract explicitly includes “governmental actions” or “market disruptions” as qualifying events for time extensions and relief from penalties.
2. Change-in-Law: Adjusting for Regulatory Shifts
A change-in-law provision allows for contract adjustments if government policies, such as new tariffs, significantly impact project costs or schedules. Contractors should ensure that any tariff or import restriction qualifies as a trigger for contract modifications.
3. Material Price Escalation: Managing Rising Costs
A material price escalation clause provides a structured way to adjust contract prices if material costs exceed a predefined threshold. These clauses may reference published indices (e.g., Producer Price Index) or require supplier invoices to justify price adjustments.
4. Allowance Provisions: Budgeting for Price Variability
Contracts with allowance provisions set estimated costs for materials, adjusting the budget if actual prices exceed the allowance. This approach provides flexibility in dealing with tariff-driven price fluctuations. Contractors should ensure allowances reflect current market trends and clearly define reconciliation terms.
5. Substitution Clauses: Ensuring Material Flexibility
Substitution clauses allow contractors to propose alternative materials when specified products become unavailable or too costly due to tariffs. Having the ability to switch to locally sourced or alternative materials can help control costs and prevent delays. Contractors should negotiate broad substitution rights.
6. Notice and Claim Procedures: Securing Cost and Time Adjustments
Notice and claim procedures define how contractors provide formal notice of cost, schedule impacts, or other events giving rise to a claim. When tariffs lead to material price hikes or supply chain disruptions, contractors must follow contract-specified timelines, documentation requirements, and approval processes to seek reimbursement or schedule relief.
Future-Proofing Construction Contracts
As tariffs introduce new challenges to construction pricing and supply chains, contractors must proactively review and negotiate contracts with an eye toward protection against cost volatility, schedule impacts, and regulatory changes. Working with legal and risk management professionals to tailor those clauses to the current economic climate can ensure long-term project success.
Get Expert Surety Bond Guidance
Rely on Merchants Bonding’s, or your own bonding company’s, expertise to help contractors navigate uncertain economic conditions.
How do I get a Surety Bond?
Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use Merchant’s Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.
About the Author:
Shoshana “Shana” Rothman is a Senior Contract Claims Attorney at Merchants Bonding Company. Shana’s extensive legal career spans the breadth of the construction industry, having represented sureties, general contractors, subcontractors, and developers before joining Merchants Bonding Company. This article was reprinted with permission from Merchant’s Bonding.
