While the impact of tariffs remains uncertain following the Trump administration’s Liberation Day, David B. Applefeld, a partner with Shapiro Sher Guinot & Sandler in Baltimore who concentrates his practice in the areas of construction law and commercial litigation, encourages multifamily owners and contractors to take steps to protect themselves and their projects in this changing environment.
He says a proactive and transparent approach is the best way for the stakeholders to navigate these issues, protect their new construction projects, and avoid future disputes.
“We know the tariff issue out there, and we know that, once implemented, tariffs have the potential to substantially affect the cost of certain construction materials—steel, lumber, electrical components, petroleum products,” he says. “Taking preemptive steps now gives the parties some control over how these issues will be addressed when they arise, so as to mitigate the potential for defaults or dispute, as opposed to doing nothing and hoping for the best.”
A first good step, Applefeld says, is to conduct a thorough review of existing contracts and contract forms.
“I think the best practice recognizes that tariffs create uncertainty and risk, address how that risk will be allocated between the parties through their contracts, and create an escape valve. No owner wants to complete a project that is not financially viable, and no contractor wants to take on an unknown risk,” he notes.
Applefeld says it starts with having contracts reviewed and drafted in a manner that addresses tariff-related impacts on theconstruction process. This includes not only cost increases, which can be substantial, but also delays that affect the path of construction. “Not all form contracts are the same, and most do not adequately address these issues,” he explains.
Prudent parties—the developer or owner who is building the project and the contractor—should recognize these issuesand work out an arrangement that both sides can live with during the contract negotiation phase. Part of that arrangement could be a mutual agreement to separate on agreed terms in the event the project becomes unfeasible.
“All contracts start as a blank piece of paper. The parties are not wedded to a specific formula and are free to include whatever terms they wish. Once an agreement is reached and the document is signed, it becomes enforceable and will control the relationship going forward,” he says.
This gives the parties the freedom to add provisions that specifically address tariffs and other unanticipated governmental actions that could impact the construction process. He notes, “A well-drafted contract will include clearly defined triggering events, such as a certain percentage cost increase that is attributable to a newly imposed tariff.”
Another proactive step he recommends is analyzing material sourcing for current and future projects.
“Owners and contractors need to have the foresight to recognize that material sourcing might also be an issue,” he says. “For example, when preparing contract specifications, owners and the design team should be cognizant of potential trade barriers and look for alternative products that might be more accessible, more affordable, and not involve international trade.”
He notes that bonding can be another tool available to owners to protect their projects.
“A performance bond is a three-party agreement whereby a surety guarantees that the contractor will complete the project in accordance with the terms of its contract. If the contractor defaults, the bonding company steps in and completes the contract or pays the owner for the cost to do so. Most public projects require that the contractor obtain a bond. Bonding is also an option available to private owners,” Applefeld says. “There is a cost benefit analysis for private owners, however, because the contractor’s cost to obtain a bond is typically passed on to the owner as part of the contract price. This increased contract price should be weighed against the owner’s comfort of knowing that the contractor’s performance is backed by a third-party that guarantees the project will be built on time and on budget.”
Applefeld also cautions that sitting at your desk hoping nothing happens is a dangerous risk.
“Now is the time to conduct a thorough review of existing projects, as well as those projects that are under consideration or in negotiation. Be proactive, get a handle on the potential impact of tariffs, and develop a plan that will allow you to address them when they arise,” he adds.
