After Hurricane Irma, I wrote an article that contractors should revisit the force majeure provisions in their construction contracts. Not later. But Now. The force majeure provision is an important provision in a construction contract to account for certain uncertainties that you have NO control over.
Recently, another reason has given rise to contractors needing to revisit their force majeure provisions, as well as any provisions dealing with material escalations. Not later. But now. The imposition of raw steel and aluminum tariffs (tax on imported goods) and the back-and-forth regarding a potential trade war leads to the kind of uncertainty that should be assessed as a risk. A risk in both time and cost from material escalations.
Contractors want to revisit their force majeure provisions, as well as any material escalation language, for these two reasons.
First, you want to ensure any delay, to the extent there is any, associated with the tariffs or potential trade war provides for a time extension. Any impact a contractor has with the delivery or fabrication of raw steel due to the imposition of tariffs should result in an extension of time.
Second, and probably the bigger concern, is associated with price. Higher raw steel and aluminum costs could mean you based your price on inaccurate supplier and/or subcontractor pricing (pricing that did not factor in tariffs), particularly if the raw steel has not been pre-ordered or pre-delivered. Escalating material pricing is a concern.
Moving forward, I suggest including language in the force majeure provision that accounts for the imposition of tariffs and the concern of a trade war just to be safe. Clarity in a contract is always better. But, adding this language will account for time, but not the escalation of steel and aluminum pricing due to the tariffs.
If you are entering a lump sum contract, consider factoring this issue into your pricing. Or, alternatively, identify an allowance associated with these materials so that you are not penalized based on actual pricing that accounts for the tariff Another thing you can do is include a contingency in your lump sum contract with language that allows you to use the contingency for this purpose. The difference between the allowance and contingency is there is still contractor-risk with the contingency if the costs exceed the contingency agreed upon in the contract. Finally, you can include a carefully crafted material escalations provision that does not require you to bear the risk of certain material escalations.
If you are entering into a Guaranteed Maximum Price (GMP) contract, you want to factor this escalating material pricing into the GMP cap. Most GMP contracts have (and, if not, they should have) a line item for contingency. The contingency amount should be increased (or there should be a separate contingency) to account for this issue with language that allows the contractor to use the contingency for escalating material pricing. Alternatively, you can identify that due to the uncertainty associated with steel or aluminum pricing (or perhaps any other pricing) the GMP includes certain allowance items which will increase the contract through change order if the cost of the item exceeds the allowance. Finally, you can include a carefully crafted material escalations provision so that you are not bearing the risk of this uncertainty, i.e., material escalations entitle you to a change order.
The politics behind the tariffs are irrelevant. What is relevant, however, is the uncertainty behind the impact and pricing associated with the imposition of tariffs and the risk assessment that needs to be factored in to deal with this uncertainty. This uncertainty affects the costs and potential time associated with obtaining raw materials to fabricate and incorporate into an owner’s construction project.
If this issue is currently impacting an on-going project, be proactive and consult an attorney that can review the language in your existing contract(s) and help, as need be, craft a change order request or claim based upon what has already been agreed to.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.