New Tariffs Certain To Tax The Construction Industry – Construction & Planning

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Key Takeaway

With the imposition of tit-for-tat tariffs by the American and
Canadian governments, construction industry participants should
consider how their current contracts deal with these unanticipated
cost increases and what steps they might take to address the
imposition or removal of tariffs in future contracts.

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Overview

Effective March 4, 2025, the American Government has imposed a
25% tariff on nearly all Canadian products exported to the United
States (the “American Tariffs”). The Canadian Government
subsequently announced 25% retaliatory tariffs to be imposed on
certain goods coming into Canada from the United States effective
March 5, 2025 (the “Retaliatory Tariffs”). The
Retaliatory Tariffs arise out of the Customs Tariff
statute that allows the Canadian government to impose tariffs in
response to another countries’ imposition of tariffs that
negatively affect the trade of Canadian goods and services.

The Retaliatory Tariffs and the American Tariffs will have
serious effects on several industries, and the construction
industry is no exception. Project owners, contractors,
subcontractors, and suppliers should all equally be aware of the
potential impacts and how their contracts may prescribe the
treatment of this risk.

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What Does This Mean for Construction Projects in Canada?

The impact of the American Tariffs on the construction industry
will mainly be on suppliers who export products into the United
States (US) construction industry. However, there is also the
potential for indirect impact on the Canadian construction industry
when, for example, Canadian raw materials are sent to the US for
manufacturing and then the manufactured product is sent back to
Canada for inclusion in a project. And, yes, there is the potential
for both the American Tariffs and the Retaliatory Tariffs to be
assessed before the product makes it to the project site.

Otherwise, the main impacts on the Canadian construction
industry will be due to the Retaliatory Tariffs. For ongoing
construction projects, the initially budgeted construction cost
could now skyrocket when considering the many materials and
products affected by the Retaliatory Tariffs. For contractors, this
cost will significantly impact their cash flow potential on their
projects due to the upfront cost of purchasing materials at a rate
that is 25% higher than initially accounted for.

Of the extensive list of items affected by the Retaliatory
Tariffs, here are several examples of products that will likely
contribute to a price increase on many construction projects:

• plastic floor coverings;




• hand tools;




• various types of wood;




• sanitary fixtures; and




• metal fixings.

To help mitigate the effects of both the American Tariffs and
Retaliatory Tariffs, there are various concepts dealt with in both
standard form and bespoke contracts that should be examined by all
parties. These concepts should also be considered when preparing
future contracts, so that the parties can quickly and efficiently
deal with any future changes to the tariff percentages or any
adjustment to the list of affected products. These concepts
include:

• Pricing StructureOwners and contractors alike should consider what pricing
  structure is most suitable for their project in light of the
  tariffs. For fixed-price or stipulated sum contracts that are
  currently in place, the parties should determine how the risk of
  changes to custom duties and tariffs have been addressed in their
  contracts. For future stipulated price or fixed price contracts,
  the parties might consider carving out tariffs from the contract
  price, such that it becomes a flow-through cost that can be easily
  added/adjusted/removed as the tariffs are adjusted. For projects
  proceeding on a cost-plus basis with no guaranteed maximum price,
  the tariffs will significantly increase the owners cost with
  potentially no mechanism to limit the additional price of materials
  due to the tariffs. For projects with a target price mechanism
  (e.g., IPD or Alliance), the parties will have to discuss
  if the tariffs fall within the risk-register contingency or are a
  condition that warrants a contract amendment and adjustment to the
  target price.

• Taxes, Custom Duties, and TariffsConstruction contracts often already contain clauses that
  address post-contract execution adjustments to “taxes”,
  “custom duties”, “import duties”, and/or
  “tariffs” and their impact on the contactor’s
  compensation, if any. These clauses may also be valuable to project
  owners in the event that the American Tariffs or the Retaliatory
  Tariffs (or both) are withdrawn. Once removed, the clause dealing
  with taxes and duties may prescribe a decrease in the contract
  price to account for the lifting of the applicable tariff(s).

• Price EscalationThe use of price escalation clauses surged following the
  COVID-19 pandemic as the market became unpredictable following the
  (hopefully) once-in-a-lifetime event. Many contracts now, as a
  boilerplate provision, include price escalation rights. Parties
  should carefully scrutinize their price escalation provisions to
  see if those provisions either intentionally, or by chance, account
  for price escalation as a result of tariff imposition.

• Change in Law / Change of LawSimilar to the taxes and duties clause, parties
  should also consider whether the terms of the change in law clause
  in their construction contracts are broad enough to determine which
  party bears the risk of new tariffs following contract formation.
  Typically, we anticipate that a change in law provision will be a
  “backstop” provision that the parties will rely upon
  where there is no express taxes and duties provision.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.