Protecting Construction Contracts Against TARIFFS: Escalation Clauses and Other Strategies for Dealing with Material Cost increases

Cowie Law Group, P.C. – Maryland and Washington DC Construction Law Attorneys & Real Estate Lawyers

The construction industry is particularly vulnerable to market fluctuations, especially regarding material costs. One of the most unpredictable factors impacting construction projects in Maryland and Washington, DC, is the actual and threatened imposition of tariffs on essential building materials such as steel, aluminum, and lumber. These tariffs can drive up costs significantly, leading to budget overruns and financial strain for contractors, suppliers, and project owners.

Given the risks associated with potential tariff increases and broader economic instability, it is crucial for contractors, suppliers, and owners to implement strong contractual protections. One of the most effective tools available to Maryland and Washington DC construction law attorneys is the inclusion of escalation clauses in construction contracts. These provisions help mitigate the financial risks posed by unexpected material price increases.

What is a Construction Contract Escalation Clause?

An escalation clause is a contractual provision that adjusts the contract price based on changes in the cost of specified materials. It helps protect contractors and suppliers from unexpected price surges, ensuring that unforeseen tariff hikes do not jeopardize project profitability or completion timelines.

However, given the current political climate, tariff increases and material cost fluctuations are no longer "unforeseen" events. Therefore, construction law contracts in Maryland and Washington, DC, should be drafted accordingly to anticipate and address these risks as "foreseen" and/or "unforseen."

It is highly recommended that Maryland and Washington DC construction law attorneys review all construction contracts—whether for owners, general contractors, subcontractors, equipment and material suppliers, architects, engineers, or other professionals—to ensure that tariff-related risks are adequately addressed. A proactive legal review can prevent significant financial losses and contractual disputes.

Key Elements of an Effective Escalation Clause

A well-drafted escalation clause in a Maryland or Washington DC construction contract should include:

1. Triggering Events – Clearly define the conditions that activate the clause, such as a percentage increase in material costs or the imposition of new tariffs.
2. Covered Materials – Specify the materials subject to price adjustments, such as steel, aluminum, copper, petroleum-based products, and lumber.
3. Verification Methodology – Detail how cost increases will be measured and verified, using sources like the Producer Price Index (PPI) or supplier pricing data.
4. Adjustment Mechanism – Establish how cost increases will be allocated, whether through direct pass-through pricing, lump-sum adjustments, or a cost-sharing formula.
5. Notice and Documentation Requirements – Set clear guidelines for notifying parties of construction cost increases and documenting price fluctuations.
6. Dispute Resolution Mechanisms – Owners may require a process to verify construction cost increases, including an opportunity to investigate and, if necessary, challenge a notice of cost increase. This could include an owner’s opportunity to source materials from alternative suppliers or right to utilize alternative available construction materials as permitted by Maryland and Washington DC construction law.

Additional Strategies to Manage Tariff Risks

While escalation clauses are crucial, Maryland and Washington DC construction law attorneys recommend incorporating additional risk mitigation strategies, such as:

1. Material Substitution Provisions – Allowing for alternative, non-tariffed materials that meet development and construction project specifications.
2. Advance Procurement & Bulk Purchasing – Secure materials in advance or lock in prices with suppliers before tariffs take effect.
3. Expanded Force Majeure Clauses – Including tariff-related disruptions, whether or not deemed “unforseen,” to serve as legal justifications for contract modifications or extensions.
4. Contingency Budgeting – Allocating reserve funds to cover unexpected material cost increases as well as material cost associated the imposition of new tariffs, whether or not deemed “unexpected” or “unforeseen.”
5. Supplier Agreements – Negotiating long-term supplier contracts to stabilize prices.

Negotiating Escalation Clauses and Risk Allocation

Escalation clauses in Maryland and Washington DC construction contracts often require careful negotiation. While contractors seek cost protections, project owners generally prefer fixed-price contracts to maintain budget certainty. A balanced approach may involve cost-sharing arrangements, escalation caps, or limiting adjustments to high-volatility materials.

For public construction projects in Maryland and Washington, DC, additional regulatory compliance may apply, making it essential to consult with experienced Maryland and Washington DC construction law attorneys to ensure contractual alignment with government procurement regulations.

Conclusion

Tariffs on construction materials continue to pose significant risks to projects in Maryland and Washington, DC. However, by incorporating well-drafted escalation clauses and adopting proactive risk management strategies, construction professionals can mitigate these risks effectively. Given that tariffs are now a foreseeable economic factor, construction law contracts should be structured accordingly.

To ensure that your construction contracts comply with Maryland and Washington DC construction laws, consulting with experienced Maryland and Washington DC construction law attorneys is critical. Proper legal guidance can help prevent costly disputes and protect financial interests in an unpredictable economic landscape.

By implementing these strategies, construction firms, developers, and project owners can maintain financial stability and keep projects on schedule despite external economic pressures.

Tariffs and Escalation Clauses: How to Protect Construction Projects Against Sudden Material Cost increases Caused by Tariffs, by Cowie Law Group, P.C., Maryland and Washington DC Construction Law Attorneys and Real Estate Lawyers