Recent governmental tariffs have sparked debate in the construction industry as parties struggle to best protect themselves from inevitable cost increases.  Depending on the size of the contract, contract negotiations may be stalled due to this issue as both owners, contractors and lenders look for certainty on pricing.  Some attorneys believe that Force Majeure clauses adequately protect contractors and give them an avenue for recovery. I don’t think that is necessarily consistent with prior law and would suggest that specifically tailored provisions be considered.  While the typical Force Majeure clause mentions “acts of government”, it usually does not specifically address tariffs nor the possibility that the tariffs caused economic hardship or significant cost impacts to warrant recovery.  

If there is no Force Majeure clause and the contract is an AIA standard form, Article 8.3.1 could be relied upon to seek additional time but not money for impacts caused by tariffs.  The pertinent language is “If the contractor is delayed at any time…….by “unavoidable casualties”, “other causes beyond the contractor’s control”, and “by other causes that the contractor asserts and the architect determines, justify delay”.  Further, parties can utilize other methods such as a project contingency, allowance or change order provisions to adequately protect their respective interests.

The best way, however, to directly address the problem is to consider a price escalation clause at the beginning of the project. This type of clause will provide the terms and conditions upon which a tariff impact would be considered.  The clause must address the triggering mechanism to ensure that all parties understand when and under what circumstances a tariff impact will be compensated.  This can take several forms including:  tying the trigger to a percentage increase for a specific product or material measured to a reliable industry accepted index; allowing the contractor to submit purchase orders or invoices procured at the beginning of the project compared to those issued later in the project;  whether the cost increase is to be shared by the parties (e.g. contractor absorbs 60% of the increase with the owner taking on 40%);  whether the contractor can utilize the contingency in the project budget to pay for the increase.

Finally, the clause should address what happens if the cost impact is so substantial that one of the parties is considering terminating the contract.  For example, the cost impact is over 30% of the entire budget and the owner wants to terminate the contract. The price escalation clause should, therefore, contain a “ceiling” or “cap” after which the parties have the right to consider termination or suspension of the contract.  If this happens, how would the contractor be compensated?  Typically, we would seek a provision whereby the contactor receives compensation for all work performed and that the termination would not be considered “for cause”.