Texas Construction Law Blog

Since February 2025, numerous tariffs affecting the construction industry have been announced, imposed, and paused. These tariffs present a problem for parties drafting and negotiating construction contracts—namely how to allocate and address double digit cost increases caused by tariffs. Tariffs may also lead to unpleasant surprises for parties with construction contracts in place that do not specifically allocate tariff risks. This blog post explores strategies parties can use to address tariff risks in contract drafting and negotiation, as well as provides a framework to understand how existing construction contracts may handle tariffs.

Porter Hedges hosted a CLE in April 2025 covering this topic in detail. See here for a recording.

1.  Drafting and negotiating contract clauses to address tariffs.

Owners, contractors, and suppliers should consider incorporating tariff-specific clauses in construction contracts to make sure all parties are on the same page for who bears the risk of tariffs and tariff-driven price escalation. Consider the following provisions:

• Add a specific tariff provision that identifies the “importer of record.” One way to address tariff risks is to have a provision specifically identifying which party will pay them. Parties can do this by identifying who will be the “importer of record”—the party responsible for paying import duties, tariffs, and ensuring that the goods and materials at issue clear customs. While some owners may seek to push this risk to contractors/suppliers, other owners may choose to take on this risk and act as the importer of record to avoid excessive tariff contingency being baked into the contract price by the contractor. 
• Add tariffs to the change in law provisions. Many change in law provisions do not mention “tariffs” or “duties,” or define “law” too narrowly to cover the executive orders under which the recent tariffs have been imposed. Those concepts should be added to your change in law provision if you are negotiating a construction contract in this current environment. You should also consider whether it makes sense to broaden the definition of “applicable law” beyond the governing law of the agreement. For instance, if the project is in the United States, a retaliatory tariff or export restriction imposed by a foreign country may not be a change in law under agreements with a narrow definition of “law.” If that is not your intended result, consider including a broad definition of “applicable law” to include “any and all applicable laws and orders of any and all governmental bodies.”
• Tariff risk-sharing provisions. Parties may also choose to share tariff risk instead of allocating it to only one party. One option is to include an express provision that the contractor is entitled to additional compensation only if (1) a new tariff is imposed after the order for materials is placed and (2) if the contractor or its subcontractor actually pays the tariff to the government, but not if prices rise generally in response to tariffs. Another option is to add language allowing tariffs to be a pass-through item billable separately on invoices. This would occur if the contractor excluded tariffs from its bid. Owners should consider agreeing to this to avoid a fixed price inflated with contingency, and to get the benefit if announced or threatened tariffs do not materialize or are rescinded during the project.
• Using price escalation provisions. Adding a price escalation clause could help allocate the risk of material price increases that are driven by tariff changes. Owners typically seek to limit these provisions narrowly to materials of concern and to tie the escalation to an index. Contractors typically seek to expand these provisions and make them cost based. 
• Using allowances to address tariff uncertainty. Another way parties can address tariff-related price uncertainty is to negotiate an allowance for specific materials that may be subject to tariffs. This provision could require the contractor to estimate the price of the items or materials as part of the contract price but would entitle the contractor to reimbursement at actual cost. From the owner’s perspective, any allowance provision should require that contractors submit supporting documentation. Owners should also consider requiring multiple quotes or bids to establish price reasonableness. 

2.  Understanding how the contract allocates tariff risk when the contract does not specifically address tariffs.

For parties that find themselves with an existing construction contract that does not address tariffs specifically, understanding how typical contract provisions may allocate tariff risks is crucial. Even without a specific tariff provision, tariff risks may still be allocated by multiple provisions in the contract.

Contract price structure. Depending on the price structure of the contract, tariff risks may be allocated to the contractor or to the owner by default. In lump sum or fixed price contracts, the contractor will typically bear the risk of paying tariffs and of tariff-related price increases if the contract is otherwise silent. By contrast, in time and materials or cost-plus contracts where the contractor is permitted to charge for materials at actual cost plus a markup, the owner will generally bear those risks.

Change in law. Many, but not all, form construction contracts contain form change in law provisions, which generally entitle the affected party to both cost and schedule relief as a result of a change in law after the contract is signed. However, some change in law provisions do not have a broad enough definition of the “law” to cover the executive orders under which the recent tariffs have been imposed. Other change in law provisions may exclude from the definition changes in law that are announced before the contract is signed but not yet effective. 

Tax provisions. Because tariffs are a type of tax, tariff risks may be allocated in the agreement’s tax provisions even if the word “tariff” is not used. The contract price in lump sum contracts will often expressly include all taxes and define taxes broadly. In such cases, tariffs may ultimately be borne by the contractor. But many contracts define taxes more narrowly or exclude taxes from the contract price. For instance, the AIA A201 General Conditions refers to the contractor paying “sales, consumer, use, and similar taxes” but does not define “taxes.” Because “sales, consumer, and use taxes” are assessed by states, and tariffs are assessed by the federal government, tariffs do not fit neatly in that definition. If your tax provision only addresses sales, use, and similar taxes, tariffs are not likely included. 

Force majeure. We have already started to see parties giving notice of force majeure in response to tariffs. However, force majeure clauses are generally a square peg in a round hole when it comes to tariffs. Tariffs are not typically listed in force majeure provisions. As a result, the applicability of a force majeure provision often depends on whether there is catch-all language and whether tariffs are sufficiently similar to the other items in the provision’s enumerated list of force majeure events. 

Even when tariffs may arguably fall within the scope of the force majeure provision, force majeure is likely to be a poor fit because force majeure provisions typically allow for schedule relief but not cost relief. If your force majeure provision only allows for an extension of time, it likely will not help recover cost increases due to tariffs. Further, parties should be wary of relying on such provisions to excuse performance due to financial hardship. Courts are often reluctant to interpret force majeure provisions as covering increased costs—particularly where the imposition of tariffs was foreseeable at the time of contracting, and the parties had the opportunity to allocate the risk of shifting market prices in their contract.

For example, in Kyocera Corp. v. Hemlock Semiconductor, the Michigan First District Court of Appeals declined to excuse performance under a contract that was unprofitable due to a tariff-fueled trade war. 313 Mich. App. 437, 446-56 (2015). The Court held that financial hardship resulting from government market manipulation did not trigger the contract’s force majeure provision, even though it explicitly included “acts of the government.” Id.

Termination: what if tariffs make the contract or project uneconomic? Construction contracts generally have two types of termination provisions: (1) for default or cause, and (2) for convenience (meaning for any reason without cause). Typically, owners have the ability to terminate both for cause and for convenience, while contractors may only have the ability to terminate for cause. Events of default are usually limited to material breaches of the contract, or the insolvency of the counterparty, and tax change or economic conditions typically will not be grounds for termination for cause. As a result, if a party does not have termination for convenience rights, it is unlikely that party will be able to use the termination for cause provision to get out of the contract.

However, if the owner has termination for convenience rights, that will likely be an option in the event tariffs make the project uneconomic. These provisions typically require the owner to pay the contractor for all work performed through the date of termination, costs incurred because of the termination, and in some cases, additional cancellation charges or a termination fee.

Takeaways

The recent flurry of tariffs presents a complex problem for the construction industry to solve. By understanding their impact, parties can be better prepared to draft specific provisions and negotiate those risks in new construction contracts, as well as to understand their risk if the existing contract does not specifically address tariffs.