By: Anthony B. Fioravanti, Esq. and Samantha C. Corcoran, Esq.

As we head into the second month of 2025, businesses should proactively implement risk management measures to reduce risks posed by supply chain disruptions and price increases.

As President Trump’s administration has announced new tariffs on imported goods and materials from Canada, Mexico and China, many business owners are wondering what strategies they can use to address potential increases in lead times and costs for imported raw materials and other construction materials. Proposed tariffs, which range from 10% to 25% based on the country of origin, are likely to increase steel, iron, lumber, concrete, imported building materials and finished good costs. While the effects of tariffs are largely unknown, general contractors and subcontractors would be well advised to implement risk management tools to limit the potentials risks tariffs and other potential supply chain disruptions may cause to their bottom line.

You do not need to look too far back for the challenges sudden supply chain disruptions present for construction businesses. During the COVID-19 pandemic, supply shocks led to long lead times and increased prices for certain products and materials. Similarly, a single ship getting stuck in the Suez Canal, a dockworker strike, and the closing of shipping lanes to Baltimore disrupted the availability of construction materials. These supply shocks, in varying degrees, resulted in long lead times and increased prices for scarce materials.

Contractors that do not include risk management measures in their contracts or bids to address material unavailability or price increases are often left to shoulder the costs alone rather than sharing the costs or passing them on to others. To mitigate the risks of potential supply shocks and the resultant delays and price increases, there are several proactive steps contractors can take to protect their interests.   

As an initial matter, contractors are well advised to include cost escalation clauses in any bids or potential contracts under consideration. A cost escalation clause is a contractual provision that calls for adjustments in fees, wages, or other payments to account for fluctuations in material or labor costs to complete a project. A well-drafted cost escalation clause shifts the risk of increased costs from the time of bid or contracting to the time for performance of the work from the contractor to the tier above, whether general contractor or project owner.

Additionally, to mitigate the risk of unexpectedly long lead times for materials, contractors can include clauses entitling them to damages for delays resulting from material unavailability. Alternatively, contractors can specify in their contracts that, at the very least, they are entitled to additional time to complete their contract work. When carefully crafted, these clauses can provide financial compensation or allow contractors or subcontractors to avoid financial penalties if there is a delay in receipt of materials necessary to complete their project work beyond the agreed-upon completion deadline.

Beyond the recommended legal steps explained above, there are other ways to avoid supply chain disruptions or cost increases resulting from tariffs, such as stockpiling materials or seeking out U.S.-based suppliers.

Whether or not tariffs result in price increases or material unavailability, these proactive steps are good business practices for any supply chain disruptions or cost increases that may result from unforeseen events and will help contractors to mitigate financial risks.

We will continue to monitor these developments, and if you have questions, please contact an attorney at Kenney & Sams.

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This alert is for informational purposes only and may be considered advertising.  It does not constitute the rendering of legal, tax or professional advice or services.  You should seek specific detailed legal advice prior to taking any definitive actions.