The Trump Administration has announced that effective February 4, 2025, a 25% tariff will be levied on virtually all goods imported from Canada. Much of the lumber used for construction in New Hampshire – indeed, nationwide – comes from Canada. The same is true of steel. If these tariffs are maintained, our construction industry will feel the pinch.
Tariffs are essentially taxes on imported goods, charged as a percentage of the purchase price and paid at the port of entry by the importer (typically an American company) to the U.S. Customs and Border Protection Service. A tariff on construction materials means the importer must pay more, a cost which importers will pass along to their contractor consumers whenever possible. Substitute domestic products, if available, will experience an increase in demand, meaning they will cost more too.
Can builders pass the increased costs on to consumers? That depends on their contracts. Most construction contracts require all taxes to be paid by the contractor – and if a tariff is deemed a tax, contractors operating under fixed price contracts will rarely be entitled to an adjustment in the contract sum to cover the increased cost absent a price escalation clause (see Blog #100).
Section 3.6 of the AIA A201-2017 General Conditions has a bit of a twist on this: “The Contractor shall pay sales, consumer, use and similar taxes for the Work provided by the Contractor that are legally enacted when bids are received or negotiations concluded, whether or not yet effective or merely scheduled to go into effect.” ConsensusDocs® 200 Section 3.21.1 is similar: “The Contract Price or Contract Time shall be equitably adjusted by Change Order for additional costs resulting from any changes in Laws, which were not reasonably anticipated and then enacted after the date of this Agreement.” Likewise the EJCDC form C-700 provides in Section 7.10.C: “Owner or Contractor may give notice to the other party of any changes after the submission of Contractor’s Bid (or after the date when Contractor became bound under a negotiated contract) in Laws or Regulations having an effect on the cost or time of performance of the Work, including but not limited to changes in Laws or Regulations having an effect on procuring permits and on sales, use, value-added, consumption, and other similar taxes.” Use of one of these form contracts may provide some wiggle room for price adjustments if the bid was prior to Trump’s announcement of the new tariffs.
Form contracts aside, contracting parties are free to provide for such an adjustment, and it is predictable that going forward some contractors will negotiate for precisely that. Those who are unsuccessful in negotiating such price protections will instead attempt to protect themselves by padding their bids against uncertainty in price fluctuations and/or holding their bid prices for shorter periods (say, five days instead of thirty).
On public federal projects, an equitable adjustment to the contract price is available under FAR 52-229.3 for new taxes that arise during a project. If a tariff constitutes a new tax under this regulation, relief is available. But a 2022 Armed Services Board of Contract Appeals decision casts doubt on this. Pangea, Inc., ASBCA Nos. 62561, 62640, 22-1 BCA ¶ 38,026 (Jan. 4, 2022) (“Pangea does not persuade us that an increase in the price of domestic steel resulting from a tariff on foreign steel is a “Federal tax” within the meaning of FAR 52.229-3.”).
A 25% tariff on Canadian imports is unlikely to last long once its harmful effects on U.S. businesses and consumers are realized. Canada will retaliate with its own measures. The Canadian dollar will fall in value, lessening demand for U.S. exports generally. And inflation will see an uptick. The political pressure on Trump to reverse course will be intense. And he can easily spin the reversal to save face, simply by declaring that his goal of pressuring Canada to crack down on the flow of undocumented migrants and fentanyl was met.
[Update: The tariffs have now been delayed by 30 days.]
Tariffs are essentially taxes on imported goods, charged as a percentage of the purchase price and paid at the port of entry by the importer (typically an American company) to the U.S. Customs and Border Protection Service. A tariff on construction materials means the importer must pay more, a cost which importers will pass along to their contractor consumers whenever possible. Substitute domestic products, if available, will experience an increase in demand, meaning they will cost more too.
Can builders pass the increased costs on to consumers? That depends on their contracts. Most construction contracts require all taxes to be paid by the contractor – and if a tariff is deemed a tax, contractors operating under fixed price contracts will rarely be entitled to an adjustment in the contract sum to cover the increased cost absent a price escalation clause (see Blog #100).
Section 3.6 of the AIA A201-2017 General Conditions has a bit of a twist on this: “The Contractor shall pay sales, consumer, use and similar taxes for the Work provided by the Contractor that are legally enacted when bids are received or negotiations concluded, whether or not yet effective or merely scheduled to go into effect.” ConsensusDocs® 200 Section 3.21.1 is similar: “The Contract Price or Contract Time shall be equitably adjusted by Change Order for additional costs resulting from any changes in Laws, which were not reasonably anticipated and then enacted after the date of this Agreement.” Likewise the EJCDC form C-700 provides in Section 7.10.C: “Owner or Contractor may give notice to the other party of any changes after the submission of Contractor’s Bid (or after the date when Contractor became bound under a negotiated contract) in Laws or Regulations having an effect on the cost or time of performance of the Work, including but not limited to changes in Laws or Regulations having an effect on procuring permits and on sales, use, value-added, consumption, and other similar taxes.” Use of one of these form contracts may provide some wiggle room for price adjustments if the bid was prior to Trump’s announcement of the new tariffs.
Form contracts aside, contracting parties are free to provide for such an adjustment, and it is predictable that going forward some contractors will negotiate for precisely that. Those who are unsuccessful in negotiating such price protections will instead attempt to protect themselves by padding their bids against uncertainty in price fluctuations and/or holding their bid prices for shorter periods (say, five days instead of thirty).
On public federal projects, an equitable adjustment to the contract price is available under FAR 52-229.3 for new taxes that arise during a project. If a tariff constitutes a new tax under this regulation, relief is available. But a 2022 Armed Services Board of Contract Appeals decision casts doubt on this. Pangea, Inc., ASBCA Nos. 62561, 62640, 22-1 BCA ¶ 38,026 (Jan. 4, 2022) (“Pangea does not persuade us that an increase in the price of domestic steel resulting from a tariff on foreign steel is a “Federal tax” within the meaning of FAR 52.229-3.”).
A 25% tariff on Canadian imports is unlikely to last long once its harmful effects on U.S. businesses and consumers are realized. Canada will retaliate with its own measures. The Canadian dollar will fall in value, lessening demand for U.S. exports generally. And inflation will see an uptick. The political pressure on Trump to reverse course will be intense. And he can easily spin the reversal to save face, simply by declaring that his goal of pressuring Canada to crack down on the flow of undocumented migrants and fentanyl was met.
[Update: The tariffs have now been delayed by 30 days.]
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