Strategies for construction projects impacted by Canada-U.S. tariffs

This article first appeared in Build Manitoba, a publication of the Winnipeg Construction Association. 

The ongoing trade “war” between the U.S. and Canada, who in the last several months have implemented tariffs on the others’ goods (with additional measures potentially on the way), is likely to have a significant impact on the Canadian construction industry.

In addition to the potential hard cost impact on Canadian construction projects where US-sourced materials are subject to additional tariffs, the significant uncertainty being introduced to project supply chains poses additional challenges to the industry.

As the numerous potential considerations may be overwhelming, it is important to remember the proactive next steps for any time a project faces an unexpected crisis:

1. Review project specific risk for tariff-related impacts
2. Discuss mitigation strategies with project counterparts
3. Take steps to diversify alternate sources of key materials and supplies
4. Review your templates to understand how tariff-related risk is addressed
5. Consider how tariffs may impact the solvency of your project counterparts
6. Plan for potential delays in sourcing key advisers or labour from the United States
7. Engage strategic advisers, including legal counsel, to develop a planned tariff response

It is essential to understand the tariff risk that exists within both for existing and future construction contracts.

Existing contracts: Determine the contractual sources for tariff risk

Many construction companies have spent the last several months reviewing their existing contracts for tariff-related risks. The following is a short list of major contract areas that may be relevant to how responsibility for tariff-related impacts are handled.

1. Incoterms and other express allocations of responsibilities for tariffs – Many contracts expressly allocate responsibility for tariffs and/or changes to tariffs. If your contract adopts Incoterms, you must determine the Incoterm being used and how the Incoterm affects the allocation of tariff risk. It is also important to determine whether the contract has overridden the applicable Incoterm or has other provisions inconsistent with the chosen Incoterm (which is common in title transfer and risk of loss provisions).
2. Contract price model – The contract model is a primary risk allocation tool on tariffs. While each contract is unique in its terms, cost reimbursable contracts would allow increased material or labour costs due to tariffs to be “flowed through” to the Owner. However, lump sum or other contract models with fixed pricing components may limit tariff related pricing changes to those caused by a change in law or other eligible relief event.
3. Changes in law – How the contract defines a change in law will determine whether the current tariff measures are sufficient to constitute a change in law which could justify an increase in the contract price. Contracts regularly provide relief for changes in law such as additional compensation and/or additional time.
4. Delays and force majeure – Events of force majeure often include “governmental action” or “any cause beyond reasonable control.” Force majeure clauses are often narrowly construed and require the claiming party to bear the burden of proof. The availability of a force majeure clause applying to the recent tariffs will be highly dependent on the language of your contract. Additionally, the impact of tariffs on both parties could potentially trigger difficult assessments of concurrent delay depending on the contract and whether tariff related cost increases were caused by a prior delay event.
5. Notice requirements – Contract notice requirements often have strict timelines. Contractors should be aware of when the notice requirement is triggered in their contracts. To avoid potential disputes over notice timing, Contractors should carefully consider when a tariff related claim “arises” under their contract.
6. Migration – Generally, all parties have a duty to mitigate their losses. Contractors should review their contracts for general and specific mitigation obligations, as well as the consequences of failing to take action.
7. Material escalation clauses – Tariff-related price impacts could potentially trigger contractual material escalation clauses, which are often linked to market indices.
8. Termination – Due to tariffs, some contracts may be impractical to continue performing, causing contractors to seek contract termination. When determining the options for terminating a contract, consider whether there are unilateral options — whether it be for convenience, due to insolvency or as a result of an extended force majeure, if applicable. Contractors should carefully review the impact that each termination scenario has on contract compensation, as they often differ depending on the “type” of termination.
9. Good faith – Under Canadian law, there is a duty for parties to act in good faith. Further, it takes a great deal of hard work and effort to develop long-term relationships in the construction industry. Therefore, ensure that you consider both your ongoing business relationships and your duty to act in good faith before reacting to tariffs.

While the entirety of the contract should always be reviewed, these are some of the key clauses that can impact tariff-related risks and potential claims.

Future contracts: Consider risks associated with tariffs

In addition to considering all of the contractual risks above, there are several “big picture” considerations that contractors can take when reviewing future projects and contracts:

1. Understand project risks – Contractors are increasingly asked to understand and quantify the tariff risks/vulnerabilities in their work and work together with Owners to manage these risks. A clear understanding of the project’s supply chain is critical.
2. Be mindful of tariff-related procurement requirements – Some owners using formal procurement processes are considering, or have already introduced, tariff-related elements into their procurement evaluations and contracts. Contractors responding to these procurements should ensure they are responsive to these elements.
3. Project delivery model approaches – Align on project delivery approaches that appropriately manages/assigns tariff-related risk to the Project. The contract can be utilized as a tool to encourage collaboration. A collaborative delivery model and early contractor involvement may be useful for assessing and addressing tariff risks.

Conclusion

Fundamentally, the recent tariff and trade related challenges have introduced significant uncertainty to the Canadian construction industry. Much like five years ago during the early stages of the COVID-19 pandemic, projects are likely to experience a period of intense review to ensure they meet the new market realities. Construction companies should, if they have not done so already, immediately begin strategizing to ensure they are not unexpectedly bearing any unforeseen cost increases resulting from the ongoing trade war.

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