On June 1, President Donald Trump and his economic advisers imposed a 25 percent tariff on steel and a 10 percent tariff on aluminum imports from major producers in Canada, Mexico and the European Union.
As a result, significant price increases have affected the construction industry, which relies heavily on steel and aluminum products. Manufacturers of heavy equipment also anticipate a dent in fiscal 2019 earnings by 6 to 9 percent.
“Over the past five years, the construction industry has experienced exponential growth on an annual basis because of strong investment in infrastructure and competitive prices on materials from suppliers outside of the United States,” says Charlie Salazar, area vice president at Gallagher. “These tariffs could alter a contractor’s investment, supply chain and risk strategy.”
Smart Business spoke with Salazar about steel and aluminum tariffs and what they mean for the U.S construction industry.
How are contractors facing challenges from tariffs, either directly or indirectly? What are some specific examples?
Contractors are being forced to face these challenges head on. There have already been signs of some economic headwinds that might impact construction volume. Some of the potential concerns are:
- Increases in material costs.
- Volatility in pricing.
- Delay in receipt of materials and project completion.
- Increased risk for contractor default.
- Budget uncertainties and tighter margins.
- Lower investment in other areas of business.
- Changes in supply chain and a lack of materials.
A great example of how these tariffs are affecting the construction industry is in the renovation of Seattle’s historic KeyArena. The agreement between the developer and the city stated that the project would be entirely privately financed using no public money. The original budget was $600 million, according to Arena Digest. Since the tariffs were enforced, that budget has skyrocketed to $700 million, representing a $100 million increase. The city is not liable for the additional costs as its agreement called for the developer to cover any increases or overruns. This means the developer will have to pay for the additional $100 million dollars.
What are some strategies construction companies are using to mitigate these risks?
To avoid being responsible for additional costs like in the example above, contractors should implement risk management strategies, such as:
- Escalation clauses — An escalation clause is a provision in a contract that calls for adjustments in fees, wages or other payments to account for fluctuations in the costs of raw materials or labor. This clause shifts the burdens for increasing materials and labor costs from the contractor to the client.
- Value engineering — Value engineering is an organized effort directed at analyzing designed building features, systems, equipment and material selections for the purpose of achieving essential functions at the lowest life cycle cost consistent with required performance, quality, reliability and safety.
- Supply bonds — Supply bonds are a type of contract bond that provide a guarantee that a supplier will deliver the promised materials.
- Captive insurance — Either a group or single parent captive to fund exposure.
- Subcontractor default insurance (SDI) — SDI will reimburse the contractor for costs incurred as a result of a default in performance by one of its subcontractors, subject to the terms and conditions of the policy.
What else do employers need to know?
Contractors need to be proactive more than ever before, especially when entering into a new contract, to avoid being liable for additional costs in a construction project. Luckily, there are ways to help mitigate the financial risks associated with tariff implementation.
It is imperative contractors have a construction-specific risk management partner to help them navigate through tariff laws and contract reviews, and implement solutions, in order to continue growth and protect their bottom line.
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