Managing Construction Cost Escalations Triggered by Tariffs and Market Volatility
By Recent tariffs imposed by the Trump administration on foreign imports — and the retaliatory tariffs from China and other nations — are poised to drive up the cost of construction materials. This raises a critical question: who in the contracting chain bears the risk of these escalating prices? Is it the project owner, general contractor, subcontractor, or material supplier?
The answer typically depends on the contractual agreements between the parties and the stage of the project when the price increase or tariff is introduced. For example, once a binding fixed-price contract has been executed, obtaining additional compensation for cost increases becomes far more challenging. However, regardless of the project phase, contracting parties can take steps to mitigate their exposure to price escalations.
1. Addressing Price Escalations After Contract Execution
Once a contract has been executed, the terms of the agreement will usually dictate whether a contractor or supplier is entitled to compensation for increased material costs. Increasingly, construction contracts are incorporating price escalation clauses, which fall into three primary categories:
- Any-Increase Clauses: These allow for reimbursement of any post-contract price increases, sometimes for specific materials identified in the contract, along with baseline prices.
- Threshold Clauses: These provide for compensation only if prices exceed a predetermined percentage or dollar threshold. Like any-increase clauses, they also may include baseline prices, often derived from material cost indices or catalog pricing.
- Delay Escalation Clauses: These hold prices fixed for a specified period. If project delays extend beyond the agreed time, the contractor may be reimbursed for cost increases resulting from the delay.
These clauses may also include caps on allowable increases. For instance, the Federal Acquisition Regulations (FAR) allow price escalation clauses in certain circumstances, but FAR §§ 52.216-2 and 52.216-3 default to a 10% maximum allowable increase in the contract price. Parties can and should tailor these provisions to allocate risk in a manner that reflects the realities of the project and market.
Even in the absence of a price escalation clause, contractors might find relief through other contract provisions. Some contracts permit adjustments for changes in law. For example, the ConsensusDocs 200 Owner/Constructor Agreement (Section 3.21.1) allows equitable adjustments to contract price or time due to legal changes enacted after contract signing. Whether a new tariff qualifies as a “change in law” or “change in tax” is open to interpretation and may vary case by case.
Force majeure clauses may offer another avenue for relief. While traditionally associated with unforeseeable events like natural disasters, wars, or labor strikes, some clauses (e.g., AIA A201-2017 Section 8.3.1) include language referencing “unusual delay in deliveries” or “causes beyond the Contractor’s control.” However, most force majeure provisions grant only time extensions — not additional compensation — and whether a tariff qualifies under these clauses remains debatable.
Where contractual provisions fall short, contractors may explore legal or equitable doctrines such as commercial impracticability, frustration of purpose, or mutual mistake. These, however, are difficult to prove and should be viewed as last resorts. Ultimately, the most reliable method to address material price volatility is to negotiate escalation provisions directly into the contract.
2. Addressing Price Escalations Before Contracting
Given the volatility of today’s construction materials market and the uncertainty of trade policy, stakeholders should address price escalation risks proactively — during the bidding, contract negotiation, and procurement stages.
During Bidding
Contractors and suppliers should identify materials most vulnerable to tariffs and price volatility. Bid terms that shift the entire burden of price escalation to the bidder should be approached with caution. To protect against this, contractors may incorporate price escalation language into their bids — e.g., reserving the right to adjust pricing based on future tariffs or market fluctuations. Absent such provisions, bidders might instead add contingencies or allowances or limit the time their bids remain valid. These strategies not only reduce contractor risk but may also lead to more competitive pricing for owners.
During Contract Negotiation
General contractors should advocate for the inclusion of price escalation clauses in their agreements with owners and may allow similar protections to be passed through to subcontractors. Educating owners about the potential volatility in construction pricing — and its implications for contingencies, bid pricing, and project feasibility—can help build consensus for including such provisions.
Owners, in turn, may request documentation to support base pricing — such as subcontractor quotes, cost indices, or supplier catalogs — and might seek to cap escalation amounts or require reductions if material prices decrease post-contract.
During Construction and Procurement
Contractors should closely monitor costs against their estimates and promptly notify stakeholders of any material price increases, within the timeline required by the contract. To mitigate escalation risks, contractors may consider purchasing volatile materials early or in bulk — though this may introduce storage and handling costs.
As always, early and open communication among all parties is key to avoiding costly disputes.
Whether your project is in the design phase, contracting phase, or construction phase, the best strategy is to proactively address the risk of price escalation — before it impacts your bottom line. Taking action now is far more effective than scrambling to respond after market forces or new tariffs have already caused financial strain.