By Mike Geraghty and Emily Yoshiwara
In March 2018, President Donald Trump ordered tariffs to be imposed upon imported steel and aluminum. Although Canada, Mexico and the European Union were originally exempt, the tariffs were extended to these countries in June. Prior to these tariffs, the U.S. was the largest importer of steel, importing over 35 million metric tons in 2017, 25 percent of which originated from Canada and Mexico.
These tariffs have had a significant impact on the construction industry, which is responsible for 40 percent of the steel used in the U.S. Not only has the price of imported steel risen since the tariffs were enacted, but domestic steel prices have also increased as producers incorporate increased operation and labor costs.
Now that these tariffs have been in place for more than six months, their impact on the construction industry is clear. However, it remains uncertain if contractors will be able to find relief for these increased costs. Unless otherwise specified, a contractor on a public project must generally assume the costs of providing materials for a project. The normal risk of a fixed-price contract is that the market price may fluctuate, and courts do not usually allow contractors to recover solely because performance of their contract has become more expensive than expected. However, because the tariffs have caused the price of steel to jump, many contractors are left with growing costs that were not accounted for during bidding and contract negotiations.
There may be some relief for Alaska contractors on federal projects. Federal Acquisition Regulation (FAR) 52.229-3 may provide an avenue for a contract adjustment to those working on federal projects. This clause, which is included in some federal contracts, provides that the contract price shall be increased to include any amount the contractor had to pay due to a federal tax or duty that did not take effect until after the contract date.
The contractor’s position would be that the tariffs are a “duty.” In order to take advantage of this clause, a contractor must warrant in writing that no part of the costs attributable to the new tax or duty were included in the contract, as a contingency or otherwise. To recover the additional costs, the contractor must submit sufficient evidence to show that the contractor was actually required to “pay or bear” the tax.
A contractor can demonstrate this by submitting evidence showing that either: 1) the increased costs due to the steel tariff were paid directly by the contractor, or 2) the contractor purchased the steel at a higher cost from another entity that paid the tariff cost directly. Without this evidence, a government entity may not compensate a contractor for unanticipated
costs due to the new tariffs.
Unfortunately, this provision is not likely to cover increased costs due to the higher price of domestic steel. As the tariffs have led to less competition for domestic steel producers, U.S. steel prices have continued to rise. Although these rising costs are indirectly caused by the steel tariffs, the high prices are due to market forces rather than the add-on of new tariff costs. Thus, contractors using domestic steel cannot rely on this FAR provision to recover increased costs, as this increase is due to market forces.
Although FAR 52.229-3 may provide some relief for contractors, it is only available in specific circumstances. Contractors should look for this provision, or one similar to it, in their contracts if seeking to recover costs associated with the increased steel tariffs. However, as it is uncertain how the current administration will handle these tariffs and related trade issues going forward, the fate of the tariffs remains unclear. In the meantime, contractors can increase bid prices to include the costs of these tariffs or in some circumstances negotiate specific contract provisions to account for any future costs associated with these tariffs.
A former appointed Attorney General for the state of Alaska (2012-2014), Mike Geraghty has been providing legal counsel to organizations impacting Alaska’s growth and history for more than 35 years.
Emily Yoshiwara of Oles, Morrison, Rinker & Baker LLP, works with clients in the construction and real estate industries to solve their most complex legal challenges.
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