Can Tariffs on Construction Materials Upend Your Contracts?

For as long as there have been construction projects, builders and those who hire them have tussled over the difference between today’s material prices and tomorrow’s. But the current administration’s sweeping and still-evolving tariff policies could prompt price spikes for a raft of construction materials—and send contractors and project owners to court.

Some contractors may try to nix existing contracts, claiming that the tariffs make those agreements “impracticable” or are so big and unexpected that they are akin to a natural disaster. We don’t expect those arguments to succeed, at least not often, but we do expect they will be litigated. We also expect that new contracts will take tariffs into account and put the risk of price increases on project owners’ shoulders.

Impracticability

Contractors on the hook to buy materials may try to cancel contracts using two different arguments. The first, and somewhat likelier to succeed, is impracticability. California law recognizes that contractors can forgo “impracticable” obligations—a defense that could apply when price increases, tariffs or other factors make a project more expensive than anticipated. But parties can’t scrap a deal over just any cost increase: Impracticability applies only when the cost of performance becomes “excessive and unreasonable.” 

So what’s “excessive and unreasonable”?  It’s based on the size of the cost increase relative to total cost.  An “excessive” cost increase does more than induce sticker shock—it balloons a project’s budget many times over. For example, California courts accepted the impracticability defense in a case where the price of construction materials shot up by 10 times or more but rejected the same defense in a case where costs rose by 40 percent. 

Whether tariffs will raise prices depends on the extent to which importers absorb those costs. But assuming importers pass on at least some tariff costs to their U.S. customers, whether that could trigger an impracticability defense from general contractors obligated to buy materials depends on how much tariff-impacted material the project requires and the applicable tariff rate. For example, if a project’s only imported components are Italian marble countertops, tariffed at 15 percent, even if that entire tariff gets passed on to the general contractor, it wouldn’t have much effect on the project’s total cost. But if a project needs thousands of tons of Chinese steel—which has been subject to tariffs as high as 145 percent over the last six months—import duties could conceivably lead to an “unreasonable or excessive” increase in a general contractor’s overall costs.

The scope of the contract, too, could be a factor. Aside from those sky-high steel tariffs and other special circumstances, it’s unlikely that a general contractor could use any one tariffed item to claim impracticability—most items are small pieces of a big budget. But contracts between the general contractor and a subcontractor are another story. There, because the subcontract’s scope is narrower, tariffs on even just one item could mean a big increase in cost and thus give subcontractors a somewhat better claim for impracticability. 

“Force majeure”

Less likely to succeed will be arguments that the tariffs should trigger contractual “force majeure” provisions. These provisions, common in all kinds of contracts, excuse parties from their obligations in the face of “acts of God” and other unforeseen events. This defense was tested extensively during the COVID-19 pandemic, with commercial tenants trying to avoid lease obligations by arguing the virus or resulting shutdown orders were force-majeure events—an argument that nearly always failed.

While we expect tariff-stung contractors and subcontractors to try similar arguments, we don’t expect them to succeed.  Tariffs simply don’t fit into the typical definition of a force majeure and, unlike a true “act of God,” were arguably foreseeable.

Force-majeure provisions typically enumerate the specific types of events they apply to—for instance, natural disasters, war, and “acts of God.”  So unless parties had the foresight to include specific terms such as “excessive tariffs” or “restraints on trade” as qualifying events, their standard force-majeure provisions likely would not apply here. Even somewhat broader language about “regulation” or “governmental action” may not cover tariffs because of how exactingly courts interpret these provisions.  Indeed, in one federal case, a court found that the term “regulatory, governmental…action” in a force-majeure provision was too vague to cover the FDA’s shutdown of a laboratory. 

And even if a contract cleared that hurdle, a party claiming force majeure would also have to show that they could not have foreseen the tariffs when they entered into the contract. That will be hard to show here except for older contracts because President Trump has been proposing tariffs since his first presidential campaign. During his first term, Trump called himself “a Tariff Man,” and during his 2024 campaign, he reiterated his plans to impose large tariffs on foreign imports—a promise he made good on early in his second term. So parties that recently entered construction contracts likely have no grounds to argue that any claimed impacts of these tariffs were unforeseeable.

Post-tariff contracts

Going forward, parties can avoid or share some of this new tariff risk by bargaining for material-escalation provisions in new construction contracts. These provisions transfer the risk of major price fluctuations to project owners, putting owners on the hook if tariffs or other factors lead to sudden increases in material costs.

Parties can specify the events that will trigger one of these clauses. For instance, they might specify that the clause applies only to raw steel and is triggered only if prices cross a certain threshold. In that case, if imported steel prices rose above the negotiated threshold, the material-escalation clause would increase the total contract sum accordingly.

While owners may be wary of taking on these risks, they stand to benefit from lower initial costs as contractors may submit more competitive bids if they are protected against later price increases. And because material-escalation clauses can go both ways, owners also stand to reap savings if material prices fall.

Andrew Weisberg is counsel and Marcus Pipitone is an associate at O’Melveny & Myers LLP.