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Mitigating Tariff Impacts Through Price Adjustment Clauses
Owners and contractors are looking for effective ways to address the rising costs of building materials and products.
The Trump administration enacted sweeping global tariffs in April 2025 under the International Emergency Economic Powers Act. Although subsequent trade agreements have been reached with several traditional allies of the Unites States (including the United Kingdom, Japan and South Korea), the legal uncertainty surrounding the application of the tariffs remains complicated.
The administration’s tariff policies have changed frequently since first being announced, and the unpredictability of their application can be more detrimental than the tariffs themselves. The tariffs especially impact the construction and development industries because increases in the costs of building materials and products only serve to delay projects and make them more expensive. Fortunately, there are contractual mechanisms that can be implemented to protect owners and contractors, helping to curb current levels of uncertainty and, in many cases, allowing projects to move forward.
Impacts on the Construction Industry
The impacts of the new tariffs have been significant for materials that are vital to construction projects, including steel, aluminum, lumber, copper, concrete, drywall, appliances and other electronic component parts. While the market initially absorbed some increases in material costs because of pauses in implementation and decreases in energy costs, the tariffs are expected to significantly increase the costs of new projects, which could significantly delay projects and decrease profit for contractors. According to the Producer Price Index (PPI) from the U.S. Bureau of Labor Statistics, various construction commodities reflected year-over-year price increases in August, including aluminum mill shapes (up 22.8%); construction sand, gravel and stone (up 7.3%); copper wire and cable (up 12.2%); plywood and lumber (up 4.8%); and steel mill products (up 13.1%).
As a result of the imposition of tariffs, contractors are increasingly insisting on cost-plus contracts at the negotiating table, and owners are insisting on guaranteed maximum price contracts. Neither of these contract types adequately addresses the increased material costs caused by tariffs; they simply shift those costs to one of the parties through change orders. Change orders are ineffective at addressing significantly increased costs because they require the agreement of both parties and do not provide a mechanism to terminate the project if agreement cannot be reached, resulting in disputes that delay projects and erode the trust between parties.
Likewise, contingency and allowance clauses are not particularly effective because the amounts typically budgeted into such clauses are not sufficient to cover significant cost increases. Substantially raising the amounts of contingencies and allowances is not feasible because lenders require certainty in project costs and are unwilling to issue debt for projects that have high variances.
Relying on force majeure clauses to address increased costs associated with tariffs is also an inadequate solution. Courts have been reluctant to apply force majeure clauses for economic conditions that may make a project less profitable, or unprofitable for one party, because losing money on a project does not prevent performance.
Addressing Substantial Cost Increases
Price adjustment clauses offer the most effective solution in construction contracts to equitably address price increases caused by tariffs. Parties negotiate these clauses, which include a specific process to address significant increases in material costs at the outset of a project. Parties are more likely to reach agreement on the parameters of how to manage increased costs before a project begins, unlike the change order process, where one party will have leverage over the other party. And unlike force majeure clauses, price adjustment clauses are enforced by the courts as long as they rely on objective standards and are allowed by the Federal Acquisition Regulation.
The primary challenge to inserting a price adjustment clause into an existing or a new contract is convincing the opposing party to agree to its terms. Both parties must compromise, and it is important for the party with the most leverage during the negotiations to recognize that their leverage could be diminished by economic factors beyond their control in the future.
Elements of Price Adjustment Clauses
The wording of price adjustment clauses is imperative to their effective applicability. The clauses need to include triggers, cost-sharing mechanisms, ceilings, and options for parties if the price increases are not sustainable after application of the price adjustment mechanisms.
Price Adjustment Triggers
- Effective triggering mechanisms relate to a specific percentage increase in the cost of a material measured from the time the contract is executed and tied to a reliable and accepted index such as the PPI, the Construction Cost Index or the Building Cost Index.
- Price adjustment mechanisms should not be triggered for nominal increases in material costs.
- Triggering mechanisms should include clear and detailed notice requirements.
- It is important to specify the materials that are subject to the price adjustment clause to avoid any doubts among the parties.
- Drafting price adjustment clauses that are focused on mutuality and fairness will reduce the risk of a court declining to enforce such a clause due to a lack of consideration or unconscionability.
Cost-sharing Mechanisms
- Price adjustment clauses should clarify that only the increased costs beyond the trigger price are subject to sharing rather than all of the underlying cost increases.
- Both parties should have the right to review and audit all documents used to justify the implementation of a cost-sharing mechanism once it has been triggered.
- It is customary to document cost-sharing through percentages (e.g., the owner pays 30% and the contractor pays 70%).
Ceilings and Options
- Price adjustment clauses should contain a ceiling that allows the parties to either suspend or terminate the project when reached. A ceiling is important because even with a cost-sharing mechanism, there is a point at which cost increases become so substantial that it is not economically feasible to continue.
- The ceiling should be negotiated up-front by the parties and should use the same mechanism as the trigger (i.e., a percentage above a certain price index).
- A project termination under these circumstances should allow the parties to recover their reasonable costs and not give rise to a default. This allows either party to move on from the project without having to incur an extremely prohibitive increase in costs or be subject to litigation.
Other Important Terms
- To avoid complications, any price adjustment clause should provide that it governs to the extent of any conflict between other clauses.
- Specific severability language should be strongly considered if any part of the clause is determined to be unenforceable.
- It is important to require other agreements for the same project with subcontractors, consultants or other parties to include reference or subordination to the price adjustment clause.
The inclusion of price adjustment clauses in construction contracts should be strongly considered as a solution to control and quantify rising material costs resulting from the current administration’s expansive tariff program. Care should be taken to ensure price adjustment clauses are fair to both parties and contain objective criteria for when they are triggered and how they are applied to ensure they are enforceable.
Richard F. Whiteley and Phillip L. Sampson are partners in the Houston office of the Bracewell law firm, where Whiteley chairs the firm’s construction litigation practice group.
