As most construction professionals are now certainly aware, on March 8, 2018, President Trump executed two Presidential Proclamations establishing a 25 percent tariff on certain steel products and a 10 percent tariff on certain aluminum products. The amount of the tariffs and the origin countries subject to same are fluid concepts, with President Trump already having exercised his discretion in granting temporary exemptions to Canada, Mexico, South Korea, Argentina, Australia, Brazil, and countries in the European Union. (The aluminum and steel tariffs were not the first tariffs imposed by the Trump Administration. On January 23, 2018, President Trump also approved recommendations to impose a 4-year tariff on imported solar cells and modules exempting 2.5 gigawatt cells). In year one of the aluminum and steel tariffs, a 30 percent tariff was approved, which is to be reduced by 5 percent each year, resulting in a 15 percent tariff in year four. As of the writing of this article, there is significant uncertainty among American allies, like the European Union, as to whether President Trump will exercise his discretion to make the foregoing exemptions permanent. The original deadline of May 1st to make this decision was extended as the Trump Administration continues to negotiate with some of the countries currently exempted. This added level of uncertainly exacerbates the impact of the tariffs.
The implementation of the tariffs, the broad definition of applicable steel and aluminum products (which includes raw and fabricated materials), the likely extent of resultant increased costs, and the potential material shortages and delays are all likely to have a significant impact on the construction industry. The purpose of this article is to bring immediate attention to the tariffs’ potentially costly impacts on the construction industry, and while suggesting some steps to mitigate these risks and impacts, further discussion and analysis is recommended and should be explored with the assistance of counsel.
REGARDING CONTRACTS
With respect to private (non-government) construction contracts to be entered into after the Tariffs are implemented, a contractor should consider taking the following action to protect its interests (see note). If your contract has been prepared by the owner, you should presume the contract will not provide for an adjustment based upon the increased prices you may have to pay as a result of the tariffs. Therefore, it is important that you negotiate express language in the actual contract document (do not rely on an “exclusion”) carving out the tariff as an adjustment, or some other material price escalation provision that provides relief. We recommend that tariffs be addressed in the actual contract documents and not simply as exclusion in the bid documents as the likely impact to supply chain, costs, and schedule are expected to be complicated and a simple statement saying “tariffs are excluded” will not adequately respond to the complications.
REGARDING MATERIAL
In light of the fact that many experts believe the tariffs will result in material shortages and delays, as well as material price increases, contractors should make sure that the contract provisions addressing this risk provide for both cost and schedule relief resulting from material shortages, in addition to the obvious direct cost impact resulting from the tariffs themselves. One anticipated cause of delays will be the additional time required to receive the imported goods and process the tariffs with U.S. Customs or possibly the need to change suppliers to mitigate the impact of the tariffs on the price of the materials.
BE TARIFF AWARE
Don’t be caught in the middle. Be aware of this issue when negotiating and executing subcontract agreements and purchase orders for future material purchases, and avoid being solely responsible for the cost of the tariffs. The key is to make sure appropriate language is placed in subcontracts and purchase orders directly referencing the tariffs and specifically tying subcontractors and suppliers to the same contractual remedies in which the tariff issue has been dealt with in the prime contract. Do not grant subcontractors and vendors relief from pricing and schedule commitments beyond the relief that the owner ultimately grants the contractor.
With respect to a contract entered into before the tariffs are implemented, an immediate review of the contract should be undertaken to identify all provisions that potentially grant the contractor the right to recover an adjustment of the contract price for tariffs. A tariff is considered a tax. A new tariff or a change in the tariff will generally be treated as a change in the tax and potentially a change in the law enacted after the contract was entered into and, in many cases will entitle a contractor to an adjustment of the contract price. The new/increased tax may also give rise to a claim for added time as a result of material shortages and resulting delays.
POSSIBLE EXCEPTION
Under the President’s proclamation, a purchaser of aluminum or steel imports may be entitled to an exception to the tariffs. The Federal government is authorized to grant an exception to the tariff on steel or aluminum products “for any steel or aluminum article determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality.”
Once submitted, exclusion requests will be posted for a 30-day comment period whereby domestic steel and aluminum producers have the chance to object and state that the part(s) can be manufactured in the United States. Both the exclusion requests and any objection filings will be available for public viewing on regulations.gov, and, per the Commerce Department website, the entire process, including the adjudication of objections, will “normally” not exceed 90 days. That said, given what is expected to be thousands of exclusion requests being filed, it is hard to imagine there not being significant delays in the timing of the process.
Note: Government contracts present a somewhat different situation as contract terms may not be negotiable. Furthermore, contractors are cautioned not to include tariffs as an exclusion to their bid on a public project as it may cause the bid to be deemed nonresponsive.
About the authors:
Adam P. Handfinger is the Miami co-managing partner at the national construction law firm of Peckar & Abramson. Matthew S.C. Moore is the firm’s Houston co-managing partner. For more information, visit www.pecklaw.com.
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Modern Contractor Solutions, May 2018
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