During a recent episode of Constructive Conversations, I had an eye-opening discussion with tax directors Carla Brown and Corbin Rice about how tariffs are impacting the construction industry. After also participating in educational sessions with construction legal experts, I wanted to share what contractors and subcontractors need to know about navigating this challenging landscape.
First, let's be clear about how tariffs work: they're paid by the importer at the point of entry. That means if you're bringing materials into the country, you're the one paying these additional costs. For an industry that relies heavily on imported materials, this represents a significant shift in project economics.
The construction materials hit hardest by current tariffs include:
Lumber: An astounding 84% of softwood lumber comes from Canada, making this a major cost factor for framing and structural work.
Aluminum: Used in windows, doors, frames, ladders, and vehicles, much of our aluminum supply comes from abroad.
Steel: This affects everything from sheet pilings and rail parts to nails, bolts, and elevator equipment components.
These aren't niche materials - they're the backbone of most construction projects. When their costs increase suddenly, it ripples through every aspect of project planning and execution.
Beyond direct cost increases, tariffs are creating several secondary challenges:
Supply Chain Disruption: Some companies may hoard materials when they can get them, creating artificial shortages for others. If one contractor decides to stockpile a large shipment, it can leave others scrambling for supplies.
Project Delays: Waiting for materials means schedule overruns, which cascade through interconnected project timelines and affect your ability to start subsequent jobs on schedule.
Cash Flow Strain: Delays tied to project milestones can significantly impact cash flow, especially when you're paying more for materials upfront.
The tariff burden doesn't fall equally across all construction roles:
General Contractors: As the parties typically responsible for overall procurement, GCs face direct exposure to increased costs from imported materials. However, they have more control over purchasing decisions and can potentially alter project scopes and timelines in response to tariff impacts.
Subcontractors: Subs face rising costs but have less control over purchasing decisions. They're often working under fixed-price contracts, meaning they have to absorb increased material costs, directly impacting their profit margins. When GCs adjust timelines due to material delays, it can push subs behind on this job and delay their start on the next one.
Despite these challenges, the industry is finding ways to adapt:
Supplier Diversification: Companies are reaching out to vendors they haven't used before, exploring domestic suppliers, and generally diversifying their supply chains to reduce dependence on any single source or country.
Buy American Initiatives: While the goal of promoting domestic manufacturing is positive, the reality is that building up domestic capacity takes time. In some cases, it's still cheaper to buy overseas even with tariffs, but that balance is shifting.
Contract Language Evolution: This is where working with experienced construction attorneys becomes crucial. Standard construction contract templates don't typically address tariff-related cost increases, so contractors are adding escalation clauses to address potential increases and updating force majeure language to include delays caused by tariffs.
Based on discussions with construction legal experts, here are the key contract considerations:
Escalation Clauses: These help contractors mitigate the risk of unknown cost increases by allowing for price adjustments when material costs rise beyond certain thresholds.
Updated Force Majeure Language: Including delays caused by tariffs in force majeure provisions can provide protection when projects are delayed due to supply chain disruptions.
Risk Sharing Provisions: Some contractors are negotiating language that splits the effect of increased costs between the contractor and customer, rather than absorbing all the risk themselves.
I strongly recommend that every contractor establish a good relationship with a construction-experienced attorney and have them review contract language to ensure proper protection going forward.
Tariff risks are also affecting bonding and surety requirements:
Stricter Criteria: Federal projects typically have stricter bonding criteria anyway, but tariff risks are adding another layer of complexity as sureties assess the additional risk of cost overruns and delays.
Higher Bond Amounts: The increased financial stakes and material cost volatility may lead to higher bond requirements or specialized bonds to address tariff-related risks.
Banking Relationships: Your lending capabilities could also be affected as banks reassess construction loan risks in light of material cost volatility.
Technology can help manage both compliance and procurement challenges:
Real-Time Cost Tracking: Up-to-date software packages for contract tracking, cost management, budgeting, and purchase order management are essential for making informed decisions as costs fluctuate.
Change Order Management: When material costs spike, you need to identify the need for change orders immediately, not months later. Real-time tracking helps you stay on top of these situations.
Forecasting Tools: Using both historical and current data to forecast project costs can help prevent overspending and assist with cash flow management.
Automated Reporting: With new compliance requirements and the potential for overtime tax changes, having payroll software that stays updated and provides timely reporting is crucial.
Looking ahead, here's how contractors should prepare:
Budget Conservatively: Build contingencies into your budgets now for potential material cost increases and supply chain delays. It's better to be conservative and pleasantly surprised than to be caught off guard.
Diversify Supply Chains: Don't put all your eggs in one basket. Develop relationships with multiple suppliers, including domestic sources where possible.
Strengthen Financial Position: Focus on cash flow management, optimize billing processes, and maintain strong liquidity options to weather potential delays and cost increases.
Stay Informed: Join trade organizations like NAWIC, CFMA, or AGC that provide credible information and guidance. Don't rely on social media for business-critical information.
Professional Relationships: Maintain regular communication with your CPAs, attorneys, and other advisors who have construction experience. They can help you navigate these complex changes.
While tariffs present significant challenges, they're also encouraging positive changes:
Domestic Manufacturing Growth: Over time, increased domestic production could reduce our reliance on imports and create more stable supply chains.
Supply Chain Resilience: Companies forced to diversify their supplier base may end up with more resilient supply chains that are less vulnerable to future disruptions.
Innovation Opportunities: Some contractors are exploring new technologies like robotics and drones that can increase efficiency and safety while reducing labor costs.
Tariffs are reshaping the construction landscape in ways we're still learning to navigate. The key is being proactive rather than reactive. Don't wait until you're in the middle of a project to discover that your material costs have doubled or your delivery schedules have been pushed back months.
Work with your legal and financial advisors now to update your contracts, reassess your supply chains, and build appropriate contingencies into your project planning. The contractors who adapt quickly and strategically to these changes will be the ones who thrive in this new environment.
Remember, this industry has weathered many storms over the years. With proper planning, strong professional relationships, and a willingness to adapt, we can navigate these tariff challenges successfully. The goal isn't just to survive these changes, but to position your company to take advantage of the opportunities they create.
As always, stay informed, stay connected with your professional advisors, and keep building for the future.