Attorneys explain how contract structure and language can make or break your ability to weather cost hikes

With the global trade landscape shifting once again, U.S. contractors are being hit with uncertainty as new tariffs loom over material prices. The volatility is driving many in the construction industry to re-evaluate how their contracts can either expose them to risk — or shield them from it.

“Business just can’t stop,” note Mason Hester and Austin Moorman, construction attorneys at Dallas-based law firm Munsch Hardt. “There is a need for parties in the construction industry to continue to effectively price work and enter into commercially viable contracts with owners.”

The two lawyers have seen firsthand how different contract types can either support or hinder a contractor’s ability to adjust to unpredictable pricing shifts. While some contractors are raising bids by as much as 20%, others are pausing negotiations altogether, hoping for more stable footing.

Let’s break down how different contract models can affect risk when tariffs start to hit.

Cost-Plus and GMP Contracts: More Flexibility — With Caveats

When tariffs push material costs higher, cost-plus contracts can offer contractors some protection. These agreements allow for expenses to be passed along to the project owner, assuming they qualify as legitimate job costs.

“In this case, cost-plus contracts are your friend,” Moorman explained. “Under this type of agreement, you can argue the tariffs are a part of the cost of the work and materials, and pass those costs onto the owner.”

Still, it’s not always that simple.

“It is important to remember, however, that even in a cost-plus contract, the contractor arguably has a duty to use reasonable efforts to minimize the costs incurred,” Moorman said. “Care should also be taken to review the contract to make sure the tariffs do not fall under an exception to the list of compensable costs.”

And if the contract includes a Guaranteed Maximum Price (GMP) clause, things get even more complex. If the rising costs push the contractor above the GMP cap, the contractor could be on the hook for the overages.

Tariffs can also cause project delays due to shortages or shipping disruptions. In these cases, contractors should check whether the contract’s force majeure clause provides potential relief.

Lump Sum Contracts: High Risk, High Responsibility

“Fixed” or lump sum contracts present a stiffer challenge when it comes to adjusting for price swings. In jurisdictions like Texas, once a contractor signs a lump sum deal, they are generally locked into that price regardless of future market shifts.

“Generally speaking, in Texas if a contractor agrees to construct an improvement for a fixed sum, the contractor assumes all risks of subsequent price increases in the work,” Hester explained. “The flipside is they reap the benefits of a price decrease.”

For contractors already bound to lump sum agreements, the best hope may lie in a price escalation clause — a provision that became increasingly common during the COVID-19 pandemic.

Standard Contract Language: Look for Loopholes

Even widely-used templates like the American Institute of Architects (AIA) A201 contract might contain provisions that help, despite not explicitly mentioning tariffs.

Section 3.6 of the A201 states:

“The Contractor shall pay sales, consumer, use and similar taxes for the Work provided by the Contractor that are legally enacted when bids are received or negotiations concluded…”

According to Hester and Moorman, this gives contractors a potential argument: that tariffs are a type of tax, and that they are only responsible for those in effect when the bid was submitted.

“That could be a huge out right there,” they said. “This language provides a basis for contractors to argue a tariff is a type of tax and the contractor is only responsible for taxes in existence at the time the bid was finalized, not those arising later.”

The A201’s force majeure clause may also be a possible route to relief. While ideally “tariffs” would be explicitly mentioned, contractors might argue they fall under broader language such as “labor disputes,” “fire,” or “other causes beyond the Contractor’s control.”

“We’re not saying it will be a layup, but it is a possibility,” Hester and Moorman said. “The answer will depend on the words surrounding the FM clause, depending on the facts of each case and whether tariffs are within the same type of damages envisioned by the clause.”

Negotiation Tactics and Final Tips

If your contract doesn’t include helpful provisions, the legal team advises starting with a conversation: ask the owner about a change order. If the owner resists, contractors may still be able to request relief via Department of Commerce guidelines.

Documentation will also play a crucial role.

“Contractors need to provide detailed documentation relating to the price increases to support their argument,” they said. “That could include statements from suppliers relating to the increased costs caused by tariffs, as well as evidence the contractor took all possible steps to minimize costs.”

For those still negotiating contracts, the message is clear: add the right language now.

“Make sure your force majeure and price escalation clauses include the word ‘tariffs,’” they said. “Even broader language such as ‘any other actions by governmental authorities’ should also be considered.”

And don’t forget about flow-down provisions. Any protections added at the prime contract level should be passed on to subcontractors, clearly stating that subs can only recover for tariffs if the owner allows it.

Final Thought

“This situation is rapidly changing and is still a relatively new, evolving area of the law,” the attorneys noted. “The above is only meant to provide a quick summary. But when these issues arise for you and your company, if you at least know what to look for, you’ll be one step ahead for the inevitable call with your attorney.”

Originally reported by Mason Hester and Austin Moorman in Construction Dive.