Optimizing Construction Contracts to Combat Tariff-Related Price Escalation

U.S. government-imposed tariffs on construction materials and equipment imported from key trade partners, including Mexico, Canada and China, have added a new layer of volatility to construction project planning. The sweeping 25% tariff on imported steel and aluminum alone has drastically altered the playing field on new development and construction. While domestic producers are ramping up output with increased production, this increase has not been enough to offset the loss of imports. 

Additionally, the increased demand on domestic producers could have the effect of price increases on domestic products and delays due to heavy demand. Consequently, owners have found themselves receiving requests from contractors for additional compensation or extensions of time due to the widespread effects of tariffs. This raises the question: How can owners and developers protect themselves from both current and anticipated tariff-related cost overruns and project delays? The first step is straightforward — an agreement that expressly delineates the risk allocation between the key project stakeholders.

Construction agreements offer owners the opportunity to be proactive instead of reactive to market trends. While tariffs that impact key materials and equipment are beyond any single developer’s control, the impact on a project does not have to be. With thoughtful contract language, early coordination and a collaborative mindset, owners can reduce uncertainty and protect project costs. The key is to create a framework that balances fairness with financial discipline, ensuring projects stay on track throughout this ever-changing market. This framework can be achieved using a variety of tried-and-true contractual alternatives.

Fixed-Price Agreements Mitigate Material Cost Volatility 

Where feasible, stipulated sum agreements may offer the most predictability for all project stakeholders. Stipulated sum, or lump sum, contracts remain one of the most effective tools for owners and developers to manage cost uncertainty in the face of tariff-related volatility. Under these types of agreements, contractors assume the risk of material and labor cost increases after the contract is executed. This provides both owners and contractors a defined project cost from the outset. While utilizing a stipulated sum agreement offers cost predictability, in a constantly shifting market, contractors may be unwilling to enter this type of contract if it requires the contractor absorb the entire tariff risk. Consequently, the trade-off between cost certainty and market responsiveness may require more specific and detailed contractual and practical solutions.

Escalation Clauses Manage Tariff-Driven Price Increases

Contract language related to price escalation offers a straightforward solution to mitigate the risks of project delays and increased financial liability. There are various methods stakeholders can implement to address these escalated costs. While parties can choose to address a material price increase via change order if the situation later arises, change orders can be fraught with disagreement and uncertainty. Conversely, price escalation clauses in the contract present a method by which key project stakeholders can negotiate and agree on how they will manage increased costs prior to any such increase and/or project delay. At best, owners can push for anti-escalation language holding contractors to fixed prices for materials, set at the time of contract execution. At worst, an owner should seek to cap its maximum exposure for any escalation claim to maintain more certainty on the total budget. 

Importantly, any tariff-induced price escalation should include alternatives for both tariffs in existence at the time of contract execution as well as any tariffs implemented thereafter. While owners may agree to share the burden of rising material prices with contractors to get a deal done, they do not need to take on any other cost associated with the escalation, such as overhead and profit, and the contractor’s fee. Price escalation clauses can be complex and should attempt to cover any contingencies that may arise at the onset of a cost increase. Failing to tackle price escalation issues can quickly cause a project to exceed its budget and/or impact the schedule, putting owners at a loss before ever reaching completion.

Thorough price escalation clauses work to afford the most protection for owners and developers. For example, owners can require contractors to take on the obligation of proving an escalated cost and demonstrating entitlement to funds from allowances or contingency. To that end, developers previously may have factored in a 5% material cost owner contingency (outside of the guaranteed maximum price) prior to 2025; today, the same stakeholders may want to factor a 15% to 20% contingency. Contractors can also be tasked with mitigating and minimizing escalation costs by procuring materials early and keeping them stored on- or off-site. Owners can ensure they receive the benefit of any de-escalation through a deductive change order, and they can negotiate to maintain amplified audit rights on escalation issues. 

The parties can also simply opt to use allowances of agreed-upon amounts for specific commodities affected by tariffs in lieu of tapping into contingency. Tariff allowances should be subject to a cap so the owner’s exposure is limited to a certain and agreed upon amount. One hundred percent of any unused amounts included in a contingency or allowance should be returned to the owner at the project completion. These examples are by no means exhaustive, but they serve to illustrate some of the options owners have at their disposal to reduce risks associated with price escalation. Accordingly, a comprehensive price escalation clause can significantly curb unforeseen and unwanted exposure.

Price escalation clauses are not the only instances where contract language should be comprehensive. Unclear force majeure clauses afford contractors the argument that new or changed tariffs are an “unforeseeable” event, entitling them to relief under the agreement’s force majeure language. While an argument can certainly be made by all parties on this point, owners should take a preemptory approach when drafting such clauses. To that end, owners can either ensure a force majeure clause is narrowly drafted to focus on events like natural disasters instead of market shifts or trade policy changes or limit a contractor’s remedies for a force majeure event to an extension of the contract time only. Drafting various clauses throughout an agreement that work fluidly and in tandem offers the best form of protection for the parties’ competing interests.

Other alternatives that can limit an owner’s exposure to tariff-related time and cost impacts include contingency funds and performance bonds or subcontractor default insurance. In instances where the basis of payment for work is the cost of the work plus a fee subject to a guaranteed maximum price (GMP), an owner may require the contractor to allocate contingency to cover the price escalations. This approach affords the contractor relief while an owner can cap its potential exposure to the total amount allocated for contingency under the GMP. 

Additionally, on larger projects, a GMP with a shared savings provision can offer a balance where owners are provided an upside if actual costs come below budget, while still capping overall exposure. Opting for payment and performance bonds may also offer an avenue for risk management resulting from tariff-imposed cost overruns. Owners can require a contractor to furnish performance bonds securing the contractor’s obligations under the construction contract. Performance bonds in particular can secure a contractor’s performance in the event a contractor fails to perform due to insolvency or termination for default, by arranging for either completion of the contract work, or payment to the owner in the amount required to complete the work. In the event a contractor defaults or fails to complete the work due to price escalation, a performance bond may provide some security for a project owner.

Procurement Safeguards Reduce Exposure to Market Changes

Of course, monitoring market trends and implementing a material procurement strategy in tandem with maintaining a contract that expressly addresses escalation issues affords the most protection to all parties involved on a project. Leveraging early procurement and direct material purchasing strategies allows project stakeholders to get ahead of tariff increases and supply chain disruptions. Utilizing warehouses to store materials procured and stockpiled in advance, working with a trusted supplier who can offer competitive pricing and a stable supply chain, and diversifying material suppliers are some practical ways parties can mitigate risks due to material price fluctuations. 

To reap the benefit of such early procurement, owners can provide deposit or prepayment mechanisms for early buyout items and incorporate early procurement as part of the preconstruction phase of work. Of course, regularly monitoring global and domestic markets — especially commodity markets — can help owners stay informed about potential price increases. By staying ahead of market trends, owners can make informed decisions about timing purchases or locking in prices in light of tariffs that are implemented, forthcoming or subject to change.

Trump-era tariffs have already impacted a range of construction materials such as steel and aluminum, and they continue to create volatility in material costs. Implementing contract clauses with greater specificity allows for more certainty and avoids disputes. Pairing a thorough construction agreement with robust procurement practices will prove invaluable to owners attempting to mitigate tariff-related risks in the coming years.

Editor’s Note: This article was written in May 2025.