Construction Managers Grapple With Budgeting, Risk In Trump Tariff Era

Operations behind the scenes of America’s construction projects have grown in complexity in recent weeks as management teams attempt to reckon with rapidly shifting trade policy and related economic fallout.

Construction firms increasingly find themselves taking part in drawn-out negotiations, questions about who should pay for which tariff and escalating risk inherent in adding time to any development endeavor.

“How do you budget with all that uncertainty, and how do contractors bid on these things?” Rider Levett Bucknall Vice President Michael O'Reilly said.

The threat of tariffs already increased material prices and cost pressures on contractors.

But with the seesawing nature of tariff application by the federal government and the uncertainty that has come with potential trade wars, many construction analysts believe contract challenges remain ahead. 

“The industry seems to have a consensus that construction costs will increase, that seems to be a common theme,” O'Reilly said. 

O'Reilly cautions that we’re still “day one” in terms of tariff impacts and that many changes, including larger changes to construction billing indexes, have yet to show up in monthly statistics. 

There are new wrinkles in figuring out budgets, contracts, procurements and pro formas, he said. 

The Associated Builders and Contractors found nonresidential input prices went up 9% in the first two months of the year.

There has been an unprecedented amount of interest in including price escalation clauses in contracts today, Associated General Contractors Senior Counsel for Construction Law and Contracts Brian Perlberg said. The tremendous uncertainty has scared contractors, who fear being stuck with a sudden price increase that may threaten their bottom line.

“It does affect negotiations, but there’s not one magic bullet,” Perlberg said. “There are increased prices, potential delays, and just the threat of more tariffs creates havoc.”

There will be an increase in tariff language in future contracts to better manage rising costs and avoid expensive arguments down the road, he said. Risk has risen considerably, meaning standard deals of the past suddenly have more potential problems and bottlenecks to face. 

Dodge Construction Network found it takes 6.5 more months for a nonresidential project to move through planning in 2025 than it did in 2019.

Contractor adjustment might include a tariff adjustment with a cap that lets owners off the hook for increases if prices exceed a certain level. While standard contracts don’t often explicitly mention tariff costs, forms from suppliers like ConsensusDocs often include language for material price escalations.

“How do we fairly own all the risk and administer it?” PMA Vice President of Strategic Operations Danny Harrington said. “It’s absolutely taking longer to go through contract negotiations, and there’s a more careful lens from an attorney’s perspective.”  

Part of the issue facing construction right now is determining the best way to fairly distribute the risk of further cost escalations across all the engaged parties, including owners, contractors and subcontractors. 

PMA’s Harrington said he had seen an example of a contractor who marked up typical American Institute of Architects contract language to pass through all tariff-related expenses to the owner. That’s one way of dealing with cost increases, but it only assigns responsibility to a single party and may not be sustainable. 

Right now, a lot of construction projects caught midstream when the tariffs went into effect are trying to figure out a balanced approach to contract language. 

As projects get closer to the design and purchase phase, the impacts of the tariffs begin to take shape. Preplanning can help mitigate some of those impacts by selecting domestically sourced materials and having contingency plans, although there is evidence tariffs can also cause domestic manufacturers to increase prices. 

The larger, more sophisticated general contractors have a better sense of what’s happening in the market in terms of price fluctuations and demand and have responded by engaging in early procurement, said Harrington. But even prepurchasing carries its own risks, including material degradation and the cost of storage space and security. 

The added cost pressures of deadlines with tariff increases, even if they’re shared between contractors and developers, will eventually weigh heavily on smaller players in the market. 

Harrington believes that there will be many scenarios where contractors absorb some of the risk of rising costs, which will affect their profitability. The smaller players and specialty contractors will only be able to do this for so long before it pushes them to potentially shutter. 

One of the biggest changes still to be addressed is the rippling economic impact of tariffs, O'Reilly said. Owners and developers need to not only factor in the rising material costs of tariffs but also explore and understand how they will impact interest rates, exchange rates and consumer confidence. Tariffs can shift the larger economic and financial landscape, and that will create a potentially different funding environment. 

The uncertainty has made it much more difficult for contractors to figure out how to bid for projects due to the conservative nature of spending right now.

“Just like the pandemic, it’s certainly a fun time,” said O'Reilly.