{"id":1004778784,"date":"2025-11-19T11:06:05","date_gmt":"2025-11-19T19:06:05","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004778784"},"modified":"2025-11-20T04:04:26","modified_gmt":"2025-11-20T12:04:26","slug":"terrified-of-tariff-impacts-read-this","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/terrified-of-tariff-impacts-read-this\/","title":{"rendered":"Can Tariffs on Construction Materials Upend Your Contracts?"},"content":{"rendered":"
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Andrew Weisberg and Marcus Pipitone<\/figcaption><\/figure><\/div>\n\n\n

For as long as there have been construction projects, builders and those who hire them have tussled over the difference between today\u2019s material prices and tomorrow\u2019s. But the current administration\u2019s sweeping and still-evolving tariff policies could prompt price spikes for a raft of construction materials\u2014and send contractors and project owners to court.<\/p>\n\n\n\n

Some contractors may try to nix existing contracts, claiming that the tariffs make those agreements \u201cimpracticable\u201d or are so big and unexpected that they are akin to a natural disaster. We don\u2019t 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\u2019 shoulders.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Impracticability<\/strong><\/h2>\n\n\n\n

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 \u201cimpracticable\u201d obligations\u2014a defense that could apply when price increases, tariffs or other factors make a project more expensive than anticipated. But parties can\u2019t scrap a deal over just any cost increase: Impracticability applies only when the cost of performance becomes \u201cexcessive and unreasonable.\u201d <\/p>\n\n\n\n

So what\u2019s \u201cexcessive and unreasonable\u201d?  It\u2019s based on the size of the cost increase relative to total cost.  An \u201cexcessive\u201d cost increase does more than induce sticker shock\u2014it balloons a project\u2019s 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. <\/p>\n\n\n\n

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\u2019s 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\u2019t have much effect on the project\u2019s total cost. But if a project needs thousands of tons of Chinese steel\u2014which has been subject to tariffs as high as 145 percent over the last six months\u2014import duties could conceivably lead to an \u201cunreasonable or excessive\u201d increase in a general contractor\u2019s overall costs.<\/p>\n\n\n\n

The scope of the contract, too, could be a factor. Aside from those sky-high steel tariffs and other special circumstances, it\u2019s unlikely that a general contractor could use any one tariffed item to claim impracticability\u2014most items are small pieces of a big budget. But contracts between the general contractor and a subcontractor are another story. There, because the subcontract\u2019s 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. <\/p>\n\n\n\n

\u201cForce majeure\u201d<\/strong><\/h2>\n\n\n\n

Less likely to succeed will be arguments that the tariffs should trigger contractual \u201cforce majeure\u201d provisions. These provisions, common in all kinds of contracts, excuse parties from their obligations in the face of \u201cacts of God\u201d 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\u2014an argument that nearly always failed.<\/p>\n\n\n\n

While we expect tariff-stung contractors and subcontractors to try similar arguments, we don\u2019t expect them to succeed.  Tariffs simply don\u2019t fit into the typical definition of a force majeure and, unlike a true \u201cact of God,\u201d were arguably foreseeable.<\/p>\n\n\n\n

Force-majeure provisions typically enumerate the specific types of events they apply to\u2014for instance, natural disasters, war, and \u201cacts of God.\u201d  So unless parties had the foresight to include specific terms such as \u201cexcessive tariffs\u201d or \u201crestraints on trade\u201d as qualifying events, their standard force-majeure provisions likely would not apply here. Even somewhat broader language about \u201cregulation\u201d or \u201cgovernmental action\u201d may not cover tariffs because of how exactingly courts interpret these provisions.  Indeed, in one federal case, a court found that the term \u201cregulatory, governmental\u2026action\u201d in a force-majeure provision was too vague to cover the FDA\u2019s shutdown of a laboratory. <\/p>\n\n\n\n

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 \u201ca Tariff Man,\u201d and during his 2024 campaign, he reiterated his plans to impose large tariffs on foreign imports\u2014a 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.<\/p>\n\n\n\n

Post-tariff contracts<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Andrew Weisberg is counsel and Marcus Pipitone is an associate at O’Melveny & Myers LLP<\/a><\/em>.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

The potential legal impacts of higher costs.<\/p>\n","protected":false},"author":3890,"featured_media":1004778793,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21782,21684],"tags":[52741],"class_list":["post-1004778784","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-development","category-viewpoint","tag-omelveny-myers-llp"],"acf":[],"yoast_head":"\nCan Tariffs on Construction Materials Upend Your Contracts? - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/terrified-of-tariff-impacts-read-this\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Can Tariffs on Construction Materials Upend Your Contracts?\" \/>\n<meta property=\"og:description\" content=\"The potential legal impacts of higher costs.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/terrified-of-tariff-impacts-read-this\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2025-11-19T19:06:05+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-11-20T12:04:26+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2025\/11\/Weisberg-Pipitone-copy.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"620\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Andrew Weisberg and Marcus Pipitone\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/terrified-of-tariff-impacts-read-this\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/terrified-of-tariff-impacts-read-this\/\",\"name\":\"Can Tariffs on Construction Materials Upend Your Contracts? 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