Reducing uncertainty in order to better predict an outcome is generally preferable. For the U.S. construction industry and others that rely heavily on imported steel and aluminum it is becoming more difficult to reduce uncertainty as a result of recent increased tariffs.
Tariffs Announced and Exemptions Expired June 1
In March and April 2018, new proclamations were announced raising U.S. import taxes on foreign steel and aluminum, adding an additional 25% ad valorem for steel and 10% ad valorem for aluminum. These taxes or “tariffs” are based on the country of origin, not the country of export. Effective June 1, 2018, temporary exemptions for European countries, Canada and Mexico expired and the tariffs now apply to all countries of origin for steel except Argentina, Australia, Brazil and South Korea and all countries of origin for aluminum except Argentina, Australia and Brazil. As of September 2017, roughly 25% of U.S. steel imports came from now non-exempt Canada and Mexico. The tariffs include not only raw materials, but also imported manufactured products that include steel or aluminum from non-exempt countries.
Potential Implications for the Construction Industry
Those that rely on imported steel or aluminum from the non-exempt countries, should now adjust and adapt to these increased tariffs. The tariffs have created uncertainty about supply availability and escalating costs. It is widely reported that steel prices have increased steeply over the past several months. The new tariffs especially impact those involved in existing fixed price contracts who may now face shrinking profits. However, it is not just fixed price contracts that are affected as cost plus contracts may become more precarious depending on the budget. Negotiating new contracts may also become more difficult given uncertainty about supply or how much prices will increase.
Fixed Price Contracts
Those involved in fixed price construction contracts should refer to the specific terms of the contract documents to determine potential exposure and whether they provide for a way to mitigate, share or shift the increased costs. Provisions such as a “change in law,” “force majeure,” change in conditions or material escalation clause may provide relief. It is critical to be aware of the contractual definitions applicable to these clauses and any conditions precedent or notice provisions that must be satisfied in order to invoke them.
In most form contracts “force majeure” provisions provide only for unanticipated or unforeseeable circumstances such as war, natural disaster or other acts of God that prevent contractors from fulfilling their obligations. It may be difficult to establish that an increased tariff leading to higher prices is unanticipated or unforeseeable. Most major form contracts do not include a “change in law” provision. A change in condition provision that provides for more than changes to the physical conditions may allow changes in the pricing structure. Material escalation clauses seem the most obvious answer for relief from escalating costs. However, when included, there may be very specific conditions that must be met to invoke a material escalation clause. While “change in law,” “force majeure,” change in conditions or material escalation clauses may not necessarily be a perfect fit for this scenario, one or more of them may be helpful, especially if the definition is more broad.
Forecasters estimate the price of steel and aluminum will continue to increase. Therefore, it may be prudent to purchase the material allotment needed for a project sooner rather than wait for prices to rise further. If so, considerations that may not have been contemplated by the original contract include where the material will be stored, who will pay for storage and who bears the risk if there is damage to the materials while they are being stored.
In addition to price concerns, supply may become an issue, which could lead to delays. Contractors should be familiar with the specific contractual requirements for requesting additional time due to factors outside of their control.
Seek advice from trusted legal counsel regarding existing fixed price contracts or the negotiation of new contracts that could be impacted by these tariffs.