On September 24, 2018, the latest in a series of tariffs imposed by the U.S. Government on Chinese imports took effect. The Government imposed a 10% tariff on $200 billion worth of Chinese goods. Effective January 1, 2019, the tariffs will increase to 25%. Unfortunately, it can be expected that the tariffs will affect the construction industry as a number of products subject to the tariff are products commonly used in the construction industry. The products include quartz, marble, travertine, granite, cement, certain types of flooring and wall or ceiling coverings, MDF, plywood, paints and varnishes, and certain nuts, bolts, and screws.1
These most recent tariffs are in addition to tariffs imposed on $50 billion worth of Chinese goods earlier this year. On July 6, 2018, the Government imposed a 25% tariff on $34 billion worth of Chinese products that included construction equipment such as derricks, cranes and other lifting machinery, elevators and conveyors, bulldozers, graders, levelers, scrapers, tamping machines, road rollers, front-end loaders, backhoes, shovels, clamshells, draglines, pile-drivers, pile-extractors, coal or rock cutters, tunneling machinery, and concrete or mortar mixers.2 This was followed on August 23, 2018 by a 25% tariff on $16 billion worth of Chinese imports, including iron or steel bridges and bridge sections, towers and lattice masts, columns, pillars, posts, beams and girders, steel grating for structures or parts of structures, mobile cranes, and mobile drilling derricks.3
This latest round of tariffs may not be the last. On September 7, 2018, President Trump announced that tariffs on an additional $267 billion in Chinese goods still may be imposed.
All of this may lead construction contractors to ask what they can do to protect themselves if the costs of construction equipment and materials escalate as a result. Here are some steps that contractors should consider taking:
- For your existing contracts, review your contracts. If you have a cost-reimbursement type contract, such as a cost plus fixed-fee or GMP, you likely will be able to pass on price escalations to the owner as long as the contract ceiling price or GMP is not exceeded. If you have a fixed-price contract, it’s likely that you will bear the risk of price escalations. However, you should review your contracts to see if there are any clauses that might provide relief. Clauses such as price escalation clauses, change in law clauses, and tax clauses may permit you to seek an equitable adjustment for price increases depending upon the language of the clause.
- Attempt to negotiate a price escalation clause in your contracts going forward. Make sure the clause is broad enough to cover price escalations throughout the duration of the contract regardless of the cause of the escalation. Do not limit the clause to the current tariffs or to just imported items. Some domestic manufacturers are raising their prices as well. Price escalation clauses can be beneficial for the owner as well as the contractor since the clause eliminates the need for large contingencies in bids. If you can’t negotiate a price escalation clause, include escalation as a contingency in your bid.
- Lock in subcontractor and supplier pricing as soon as possible. Review subcontractor and supplier bids and quotes to see if they include escalation provisions. You don’t want to have inconsistent liabilities where the subcontract or purchase order provides for price escalation but the prime contract does not.
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End Notes
[1] For a complete list of products, see https://ustr.gov/sites/default/files/enforcement/301Investigations/Tariff%20List-09.17.18.pdf.
[2] For a complete list of products, see https://ustr.gov/sites/default/files/enforcement/301Investigations/List%201.pdf.
[3] For a complete list of products, see https://ustr.gov/sites/default/files/enforcement/301Investigations/Final%20Second%20Tranche.pdf.
This article is by Lori Ann Lange, Esq., a partner in the Washington, DC office of the law firm of Peckar & Abramson, P.C., who specializes in government contract law, bid protests, and corporate compliance counseling. She represents a range of government contractors, including construction contractors, major defense contractors, informational technology contractors, and service contractors. She can be reached at llange@pecklaw.com or 202.293.8815 ext. 7103.