Managing Tariff Volatility: A North American Construction Perspective

The construction industry is navigating unprecedented challenges as turbulence caused by both current tariffs and potential tariffs have created ripple effects across North American supply chains. Recent data indicates an estimated 3% to 5% increase in total project costs, affecting everything from basic materials to fixtures and appliances. This volatility is forcing construction executives to fundamentally rethink their approach to risk management and project planning, such as supply chain resilience, contract structure and contingency budgets.

Building a Resilient Cross-Border Supply Chain

For construction executives, the business impact extends into the deeply interconnected North American construction market, shedding light on the complex dynamics between U.S. and Canadian operations. For example, steel fabricators in Quebec have reported a striking difference in risk tolerance between the two nations: While Canadian projects face delays or cancellations, U.S. clients are willing to absorb tariff costs to maintain material flow. This difference in attitudes between countries highlights the critical nature of cross-border supply chains and the industry’s interdependence.

Some construction executives are conducting in-depth audits to better understand where they’re exposed to international materials, and some firms are diversifying supplier networks or even warehousing critical materials in advance to hedge against future material shortages. For many construction executives, these moves reflect lessons learned during the COVID-19 pandemic, when supply chain instability wreaked havoc on timelines and budgets. Now, companies are applying the same mindset of building operational resiliency to mitigate the impact of trade policy uncertainty.

However, the tariff effects go beyond direct material costs. Secondary impacts include increased transportation costs due to equipment tariffs, as logistics companies pass on higher expenses for commercial vehicles. Even projects using domestically sourced materials feel the impact through transportation costs and components that rely on international supply chains.

With material costs climbing and trade policies shifting unpredictably, contractors are facing more financial pressure mid-project than ever before. These unexpected increases can squeeze already-tight margins and throw off budgets that were locked in months earlier. In search of a safety net, many turn to their contracts — or the courts — for relief. But that’s where things get tricky.

 

Why Contracts Matter More Than Courts

When costs spike mid-project, many construction executives look for legal protections to mitigate the financial impact. But the reality is that most courts don’t offer relief just because materials got more expensive. Tariffs, inflation and supply chain disruptions are viewed as part of doing business, especially in the construction industry where costs are not fixed.

To mitigate potential reputational risk, many construction leaders are now building more flexibility into contracts from the start. This includes clear language around who absorbs tariff-related costs, when prices can be adjusted, and what happens if global trade conditions shift during a project. The goal is to prevent finger-pointing later by getting ahead of the issue during negotiations.

 

Contractual Language as a Risk Management Tool

Beyond legal language, the structure of contracts itself can make a big difference in how well contractors can adjust to tariff-related swings. Here’s how different project contracts are playing out in this environment.

Fixed-price contracts still appeal to owners who want cost certainty, but general contractors (GCs) are growing wary. In a volatile market, absorbing unexpected cost hikes can wipe out margins. Many GCs are now pricing in extra room or asking for built-in protections if tariffs spike.

Time and materials or cost-plus agreements give GCs more room to pass through material costs, but they shift the risk to owners. These models work best when both sides trust each other and commit to transparency.

Design-build models offer speed and integration, which can help avoid delays tied to tariff-sensitive materials. But again, how risk is allocated depends entirely on how the contract is written.

More owners and contractors are also using escalation clauses, i.e., provisions that allow material pricing to shift in response to changes in indexes or tariffs. Others are adding renegotiation triggers, so if tariffs rise more than a certain percentage, both parties agree to come back to the table and talk about adjustments.

 

The Role of Contingencies & Insurance

Another trend many construction executives are implementing is bigger contingency budgets. Some construction leaders are now setting aside 11% to 12% in bids — up from the traditional 5% to 10% — to account for unpredictable cost increases. This shift also has insurance implications as coverages also need to rise to account for higher valuations. Project valuations are rising to reflect potential material hikes, and builders’ risk programs are being reexamined to ensure coverage matches today’s market realities.

 

Looking Ahead: Permanent Changes in Risk Management

Many leaders in the construction industry recognize that even if today’s tariffs are rolled back or not implemented, developing strategies to mitigate the impact of supply chain challenges and economic uncertainty is key for mitigating long-term risk and ensuring business continuity.

For many construction executives, the focus now is on staying agile so they can adapt to continued uncertainty. Owners and contractors that plan ahead rather than react after the fact are better positioned to navigate a fast-changing environment. For firms operating across borders or sourcing internationally, these strategies are no longer optional — they are essential.