Navigating Tariffs: Challenges, Risks, and Strategies for Stability

The construction industry will need to grapple with significant challenges if newly imposed tariffs are implemented on key building materials. The result could create ripple effects across many projects. Recent proposals include tariffs on all goods imported from Mexico, Canada, and China. These proposals have added an additional layer of complexity for contractors and developers by introducing supply side and pricing uncertainty into an already challenging market.

The Tariff Impact on Construction Materials

Tariffs on essential construction materials could reshape procurement strategies. Materials such as steel, aluminum, and lumber are particularly vulnerable to price hikes due to the potential tariffs. These tariffs could lead to supply shortages and higher costs, directly affecting construction budgets and planning timelines.

Electrical components, another key input, could also see price increases. These items, critical for data centers, manufacturing facilities and technological upgrades, are subject to the same economic pressures, forcing contractors to rethink sourcing and/or timelines as well.

Proactive Strategies for Managing Tariff-Driven Challenges

In response to the evolving landscape, contractors will need to adopt new strategies to mitigate risks associated with tariff-driven price escalation:

• Advanced Procurement: By purchasing materials early and securing inventory, contractors can lock in prices and reduce exposure to future increases. While this tactic could be helpful for avoiding the price escalation of essential materials, this requires additional storage solutions and expenses. A cost-benefit analysis would need to be made to ensure reduced cost outlay is achieved.
• Diversified Sourcing: Exploring alternative suppliers, including some domestic options, can help to reduce dependency on imports subject to looming tariffs. This diversification strengthens the contractors supply chains and reduces exposure to the geopolitical risks of solely relying on imported materials. It is important to note that with less supply in the marketplace, domestic suppliers may be enticed to increase pricing.
• Contract Management: A main area of concern where the introduction of these new tariffs requires careful consideration is in contracts. Fixed-price contracts, in particular, place significant financial risk on contractors when material prices escalate. There are certain provisions that could serve to protect contractors in situations like this. It is recommended that businesses consult with their attorneys to review their major contracts that are in place and obtain suggestions for future contract language. These potential issues should be clearly addressed in the contract.
• Cash Flow Management: It will be even more important for contractors to do cash flow forecasts and budgets with various scenarios for the potential impact of tariffs in the face of uncertain federal legislation. As the risk of tariffs loom, it’s important to update forecasts, monitor budgets to mitigate/minimize this risk. and capitalize on potential opportunities to optimize overall cash flow. Companies should also evaluate their financing sources to determine if they are sufficient. In addition, there may be tax strategies that companies could leverage to also improve cash flow.

While contractors should be focused on these important strategies for their own business, they should be equally confident that their suppliers and subcontractors are also addressing these proactive business practices to reduce the impact and level of disruption potential tariffs will have on all involved.

The Broader Economic Context

This administration’s increased focus on tariffs as a tool to protect domestic industries has sparked debate across sectors. The construction industry’s ability to navigate these challenges hinges on its preparedness to address tariff-driven impacts on costs and new contracts as well as on its communication with all parties involved for existing contracts. Contractors can stay ahead of the curve by planning effectively, diversifying supply chains, and maintaining clear communication with clients and other stakeholders, which will help to mitigate risks and sustain operations. Contractors that have already tried to address these challenges will be the least affected.

While the risk of new tariffs has the potential to reshape the economic outlook, the industry must stay focused on adapting pricing, sourcing, and contract management approaches to ensure projects remain viable and profitable. For more information or to discuss how these tariffs might affect your business, please contact Chris Kelly, Phillip Ross or your Anchin Relationship Partner.