Addressing Tariffs in a Construction Contract: A Lawyer’s Perspective

In 2024, many real estate developers pressed pause on new projects. Interest rates for multifamily loans were too high and the office market was still recovering from “work from home,” at least in the Pacific Northwest (where the market remains). Toward year end, falling interest rates breathed life into these harder-hit markets and 2025 looked brighter.

Unfortunately, now the specter of new tariffs is raising anxiety levels. Steel, lumber and appliances, for instance, are commonly imported. Consequently, clients have begun asking how to address tariffs when negotiating construction contracts.

Let’s begin with the legal foundation for fixed price (FP) contracts and guaranteed maximum price (GMP) contracts. Under an FP contract, the contractor is paid a sum certain and bears the risk of costs exceeding that sum, unless it is expressly entitled to a change order. Under GMP contracts, the contractor is paid its approved costs plus its fee, not to exceed an agreed-upon maximum, unless it is expressly entitled to a change order. When either a GMP contract or an FP contract is silent concerning risk for changes in law, including tariffs, arguably the contractor carries the risk by virtue of its fixed or guaranteed price. Standard GMP and FP contract forms published by the American Institute of Architects do not address tariffs expressly, which is why some contractors request changes to these forms.

One way for a contractor to shift the risk of new tariffs back onto the owner is by negotiating for a changes-in-law clause. Generally, tariffs are laws passed by Congress or derived from laws where Congress delegates tariff authority to the president, who then creates the tariff. A contract stating that costs resulting from changes in laws after the contract is executed may entitle a contractor to a change order for tariff-related costs.

Allowances are another way to shift price escalation risks posed by tariffs. Under most allowance clauses, the amount allocated for a product or material is a placeholder. The project owner will ultimately pay the actual cost of the allowance item, whether it goes up or down, and the GMP may be adjusted accordingly through a change order. When lumber prices skyrocketed during the pandemic, many contractors listed their lumber packages as an allowance.

Let’s not forget about the contingency account. There is usually no contingency account in an FP contract because the price is fixed. Under GMP contracts, the price is not fixed. The contractor is paid approved costs and its fee, up to the GMP. Because of this structure, most GMP contracts also include a 2-5 percent (of the GMP) contingency account, which acts as a “buffer” intended for certain costs otherwise not reimbursable on the basis of a change order, including for tariffs. If tariffs are an approved contingency expense, whether the contractor is entitled to apply markup on amounts paid should be considered.

Also, because unspent contingency is sometimes shared with the contractor under a savings clause, even when a contractor is entitled to a change order for future tariffs, owners should consider whether contingency must be exhausted first before the contractor may request a change order for this expense. Otherwise, the owner may have to pay savings out of unspent contingency and pay a change order for tariffs – a potentially painful lesson.

Many owners are comfortable sharing tariff risk but want their contractor to have skin in the game so that interests are aligned. For larger projects, consider sharing risk in tranches. For instance, after contingency is exhausted, the contractor may cover the first $1 million in unexpected costs and the owner covers the balance (without markup). Alternatively, the risk can be split 50/50, including in savings if pricing is ultimately lower than expected. Another lever to adjust up or down is the contractor fee. One could argue that if an owner carries tariff risk entirely, it should receive a reduction in that fee.

Currently, some well-capitalized developers are so concerned about future tariffs that they are considering buying products now under their existing pre-construction services agreements. Insurance, shipping, storage and title are all considerations in early procurement. During the pandemic, one client saved millions of dollars (on a $100 million lumber package) by buying early.

Owners and contractors are aligned in wanting shovels in the ground and successful projects in their portfolios. For some projects, tariffs may be an insurmountable obstacle. For others, there may be enough room for both sides to sharpen their pencils and proceed, by reasonably allocating risk for the right price.

Colm Nelson is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Seattle office. Contact him at 206-386-7525 or colm.nelson@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the DJC guarantees the accuracy or completeness of any information published herein.