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

Mar 3 update: Donald Trump announces, “Very importantly, tomorrow, tariffs, 25 per cent on Canada and 25 per cent on Mexico, and that will start. So, they’re gonna have to have a tariff… No room left for Mexico or Canada. They’re all set, they go into effect tomorrow.”

Feb 11 update: The United States has indicated it will impose a “true 25% tariff on steel and elevate the tariff to 25% on aluminum, anticipated to come into effect March 12.”

Feb 3 update: Tariffs have been postponed for “at least 30 days.”

The emerging trade “war” between the United States and Canada, who have both announced tariffs on the others’ goods, is likely to have a significant impact on the Canadian construction industry and planned and ongoing projects.

In this article, we provide a general overview of the incoming tariffs and considerations for how parties reviewing their construction contracts should approach potentially increased costs and delays from tariffs on both a backward and forward looking basis.

Summary of new tariffs/duties

The United States has imposed the following tariffs/duties on Canada:

1. President Trump has signed the executive order applying tariffs on Canada starting with a 25% tariff (the only departure being a 10% tariff on energy). There are no other exceptions. Duties are to go in place on Tuesday, February 4, 2025, and will be published in U.S. federal register. View text of the executive order.
2. The stated authority for the duties is the IEEPA, based on the national border emergency, principally around fentanyl. The Trump Administration has stated that duties are to stay in place until the U.S. is satisfied that Canada has remedied alleged drug trade issues.
3. The executive order contains a retaliation clause that, if Canada retaliates, duties could increase.

In response, Canada has imposed the following tariffs/duties on the United States:

1. Canada is imposing retaliatory tariffs of 25% on $155-billion worth of U.S. goods, with $30 billion beginning Tuesday, February 4, 2025, and $125 billion to follow shortly thereafter, likely after a 21-day comment period to allow Canadian businesses to prepare. The response includes broad swaths of economic activity.
2. Canada has published the U.S. surtax order containing the list of tariff codes on which retaliation will apply on February 4. View the order.
3. The second round of duties is proposed to be significantly broader. The Canadian government has indicated that the second round “will include products such as passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles and recreational boats”).
4. Canada has also indicated that other non-tariff measures are in consideration by federal and provincial governments including relating to critical minerals, energy, procurement and other partnerships.

Impact of tariffs on construction

The recent imposition of tariffs by the United States on Canadian goods and Canada’s corresponding response may have significant impacts for the construction industry in Canada.

In many respects, the Canadian and U.S. construction industries have become integrated, with Canadian suppliers selling many materials and supplies to the U.S. (i.e. lumber) and many Canadian constructors and owners relying heavily on materials and supplies from the U.S. (i.e. machinery, equipment, steel, etc.). In addition, many Canadian projects rely on specialized service providers and engineers from the U.S. as critical components of projects.

The impact these tariffs are likely to have on the Canadian construction industry is likely to be both swift and severe. Canadian projects are likely to experience increased costs and/or project delays.

This means it is now critical for project owners and constructors to review their existing contracts and templates regarding the treatment of tariffs. For example, on changes in law, see GC 10.1 of CCDC 2 – 2020:

GC 10.1 TAXES AND DUTIES

10.1.1 The Contract Price shall include all taxes and customs duties in effect at the time of the bid closing except for Value Added Taxes payable by the Owner to the Contractor as stipulated in Article A-4 of the Agreement — CONTRACT PRICE.

10.1.2 Any increase or decrease in costs to the Contractor due to changes in taxes and duties after the time of the bid closing shall increase or decrease the Contract Price accordingly.

Tariff considerations for current and future projects

While the exact impacts are unknown, early and immediate steps that can be taken by all industry participants (owners, contractors, suppliers) centre on timely and effective contract management and an understanding of how risk has been assigned in prior and future contracts.

When reviewing existing and new contracts for tariffs, parties should be mindful of the following:

1. Risk allocation – What is the contract model? For instance, different contract models may lead to different results – who bears the cost risk in a fully cost-reimbursable or cost-plus contract may vary significantly from who will bear the risk in a fixed price contract where the general contractor controls material procurement on a fixed price basis.
2. Incoterms – Has the risk of tariffs or a more general category which tariffs may fall into been assigned to a specific party? If your contract adopts incoterms, what term is used and how does it affect the allocation of tariff risk?
3. Change of law – How does the contract define a change in law and are the current tariff measures sufficient to constitute one? Which party owns the risk of a change in law?
4. Solvency risk – Parties that are particularly impacted by tariffs may be faced with solvency issues, which may impact their ability to perform on projects. Owners and general contractors should be mindful of potentially solvency issues throughout their project supply chain.
5. Notice periods – Is there a notice period for raising a claim for a change in price due to new tariffs?
6. Timing of procurement – Is one party responsible for delaying a material purchase that should have been made pre-tariff into the post-tariff period? For future projects, will potential provincial or federal prohibitions on awarding contracts to American contractors impact procurements?
7. Validity of quotes/pricing – Are existing quotes and proposals still valid for pricing or do they need to be updated and resubmitted? How long can or should pricing be held or bid periods open for new projects?

Given the wide range of potential considerations, “what comes next?” may appear overwhelming. However, the proactive next steps are no different than any time a project faces a unexpected crisis:

1. Engage counsel and strategic advisers
2. Review project specific risk
3. Discuss mitigation strategies with your project counterparts
4. Review your templates
5. Look to alternate sources of key materials and supplies to diversify your supply chain
6. Be mindful of how these tariffs may impact the solvency of your project counterparts
7. Anticipate delays in sourcing key advisers/labour from the U.S.

Much like the five years ago during the early stages of the COVID-19 pandemic, construction projects and contracts are likely to experience a period of intense review to ensure they meet the new market realities. Parties should begin immediately strategizing to ensure they are not unexpectedly bearing any unforeseen cost increases resulting from the brewing trade war.

Want to learn more? Sign up to watch the free, 90-minute webinar: Contract and Procurement Considerations in the Age of Tariffs

For more information, contact one of the authors or a member of our construction & infrastructure group.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

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