CCN No. 2025-03-05
_____________________________
Key Takeaway
With the imposition of tit-for-tat tariffs by the American and Canadian governments, construction industry participants should consider how their current contracts deal with these unanticipated cost increases and what steps they might take to address the imposition or removal of tariffs in future contracts.
_____________________________
Overview
Effective March 4, 2025, the American Government has imposed a 25% tariff on nearly all Canadian products exported to the United States (the “American Tariffs”). The Canadian Government subsequently announced 25% retaliatory tariffs to be imposed on certain goods coming into Canada from the United States effective March 5, 2025 (the “Retaliatory Tariffs”). The Retaliatory Tariffs arise out of the Customs Tariff statute that allows the Canadian government to impose tariffs in response to another countries’ imposition of tariffs that negatively affect the trade of Canadian goods and services.
The Retaliatory Tariffs and the American Tariffs will have serious effects on several industries, and the construction industry is no exception. Project owners, contractors, subcontractors, and suppliers should all equally be aware of the potential impacts and how their contracts may prescribe the treatment of this risk.
_____________________________
What Does This Mean for Construction Projects in Canada?
The impact of the American Tariffs on the construction industry will mainly be on suppliers who export products into the United States (US) construction industry. However, there is also the potential for indirect impact on the Canadian construction industry when, for example, Canadian raw materials are sent to the US for manufacturing and then the manufactured product is sent back to Canada for inclusion in a project. And, yes, there is the potential for both the American Tariffs and the Retaliatory Tariffs to be assessed before the product makes it to the project site.
Otherwise, the main impacts on the Canadian construction industry will be due to the Retaliatory Tariffs. For ongoing construction projects, the initially budgeted construction cost could now skyrocket when considering the many materials and products affected by the Retaliatory Tariffs. For contractors, this cost will significantly impact their cash flow potential on their projects due to the upfront cost of purchasing materials at a rate that is 25% higher than initially accounted for.
Of the extensive list of items affected by the Retaliatory Tariffs, here are several examples of products that will likely contribute to a price increase on many construction projects:
- plastic floor coverings;
- hand tools;
- various types of wood;
- sanitary fixtures; and
- metal fixings.
To help mitigate the effects of both the American Tariffs and Retaliatory Tariffs, there are various concepts dealt with in both standard form and bespoke contracts that should be examined by all parties. These concepts should also be considered when preparing future contracts, so that the parties can quickly and efficiently deal with any future changes to the tariff percentages or any adjustment to the list of affected products. These concepts include:
- Pricing Structure
Owners and contractors alike should consider what pricing structure is most suitable for their project in light of the tariffs. For fixed-price or stipulated sum contracts that are currently in place, the parties should determine how the risk of changes to custom duties and tariffs have been addressed in their contracts. For future stipulated price or fixed price contracts, the parties might consider carving out tariffs from the contract price, such that it becomes a flow-through cost that can be easily added/adjusted/removed as the tariffs are adjusted. For projects proceeding on a cost-plus basis with no guaranteed maximum price, the tariffs will significantly increase the owners cost with potentially no mechanism to limit the additional price of materials due to the tariffs. For projects with a target price mechanism (e.g., IPD or Alliance), the parties will have to discuss if the tariffs fall within the risk-register contingency or are a condition that warrants a contract amendment and adjustment to the target price.
- Taxes, Custom Duties, and Tariffs
Construction contracts often already contain clauses that address post-contract execution adjustments to “taxes”, “custom duties”, “import duties”, and/or “tariffs” and their impact on the contactor’s compensation, if any. These clauses may also be valuable to project owners in the event that the American Tariffs or the Retaliatory Tariffs (or both) are withdrawn. Once removed, the clause dealing with taxes and duties may prescribe a decrease in the contract price to account for the lifting of the applicable tariff(s).
- Price Escalation
The use of price escalation clauses surged following the COVID-19 pandemic as the market became unpredictable following the (hopefully) once-in-a-lifetime event. Many contracts now, as a boilerplate provision, include price escalation rights. Parties should carefully scrutinize their price escalation provisions to see if those provisions either intentionally, or by chance, account for price escalation as a result of tariff imposition.
- Change in Law / Change of Law
Similar to the taxes and duties clause, parties should also consider whether the terms of the change in law clause in their construction contracts are broad enough to determine which party bears the risk of new tariffs following contract formation. Typically, we anticipate that a change in law provision will be a “backstop” provision that the parties will rely upon where there is no express taxes and duties provision.
Here to Help
Further to Cassels comments on the tariffs from the Cassels International Trade Group, the Cassels Construction Group will continue to monitor the developments and report on significant updates for the construction industry. For more information on the impacts of the American Tariffs or the Retaliatory Tariffs on your ongoing or future construction projects, do not hesitate to reach out to anyone on the Cassels Construction Law team. We are here to help.