Tariffs – which make headlines on a near weekly basis – can unsettle not only international relations but also the most carefully budgeted construction projects. Paid by importers and generally passed on to domestic customers, tariffs can drive up the cost of imported materials, equipment and tools. Tariffs can be particularly significant for the construction industry which often relies on overseas suppliers for lower-cost materials (for example, imported steel) or specialised equipment unavailable locally (such as turbines or tunnel boring machines).
For now, global uncertainty surrounding tariffs is unlikely to increase costs for the Australian construction industry and may even lead to savings as exporters that would have otherwise supplied their goods to the United States make their goods available in the Australian market. The one exception is goods that rely on a supply chain impacted by tariffs, such as where a US company sells goods manufactured elsewhere. In the long term, however, the reordering of global trade may lead to the imposition of tariffs by the federal government.
If tariffs apply, which party to a construction contract bears the extra cost? More specifically, should tariffs constitute a ‘change in law’ under construction contracts, thereby entitling the contractor to time and/or cost relief?
Change in law clauses
A change in law clause allocates the risk of legislative or regulatory changes occurring after the date of tender or contract execution. If a relevant change occurs, the contractor may claim the extra costs and time required to ensure that the works comply with the new or amended law. Unlike force majeure or suspension clauses, a change in law provision does not relieve the contractor of performance but compensates the contractor for changes to the scope of works caused by the change in law.
Tariffs and change in law clauses
Whether a change in law clause applies to a newly imposed tariff is a matter of drafting.
In Australia, tariffs are imposed by means of the Customs Tariff Act 1995 (Cth) under the ‘taxation power’ exclusively belonging to the federal government per section 51(ii) of the Australian Constitution and are therefore categorised as taxes (see Capital Duplicators Pty Ltd v Australian Capital Territory (No 2) (1993) 178 CLR 561 at 590, where customs duties (levied on imports and exports) were described as a ‘tax on the importation or exportation’ of goods).
This means that if the change in law provision applies to any new law, regulation or governmental order affecting the works without specifying the jurisdiction, tariffs will likely fall within its scope. Conversely, if the provision is limited to laws of the contract's jurisdiction or expressly excludes taxes, duties or charges on imports, then the contractor may have no recourse.
Option X2 of the NEC4 engineering and construction contract provides as follows:
“A change in the law of the country in which the Site is located is a compensation event if it occurs after the Contract Date. If the effect of a compensation event which is a change in the law is to reduce the total Defined Cost, the Prices are reduced.”
While this definition limits a change to the country in which the site is located, it does not limit the type of change in law to which it applies. As a result, tariffs imposed by the Australian Government after the contract date would most likely fall within the scope of this option, while changes imposed by a foreign government (even if they increase the price of goods), would not.
The AS4902 general conditions of contract for design and construct contain the following:
“Legislative requirement includes:
(a) Acts, Ordinances, regulations, by-laws, orders, awards and proclamations of the jurisdiction where WUC or the particular part thereof is being carried out;
(b) certificates, licences, consents, permits, approvals and requirements of organisations having jurisdiction in connection with the carrying out of WUC; and
(c) fees and charges payable in connection with the foregoing;
…
11.2 Changes
If a legislative requirement:
(a) necessitates a change:
(i) to the Principal’s project requirements;
(ii) to the Works;
(iii) to so much of WUC as is identified in Item 22(b);
(iv) being the provision of services by a municipal, public or other statutory authority in connection with WUC; or
(v) in a fee or charge or payment of a new fee or charge;
(b) comes into effect after the 14th day before the closing of tenders but could not reasonably then have been anticipated by a competent contractor; and
(c) causes the Contractor to incur more or less cost than otherwise would have been incurred,
the difference shall be assessed by the Superintendent and added to or deducted from the contract sum.”
A tariff is likely claimable under clause 11.2(a)(v) as a new fee or charge, even if payable by the importer, because clause 11.2(c) alone specifies the required impact to the contractor.
Another typical approach in the market to change in law provisions is to set out a list of inclusions and exclusions. For example:
"Change in law means:
(a) a change of any law or any legal requirement, including:
(i) any common law in force or applicable from time to time in Australia or any final determination of a court or legal tribunal within Australia;
(ii) any statute, regulation or by-law enacted or made by any legislative body or other subordinate instrument of any Government Authority;
(iii) any direction, order or ruling of a Minister of the Crown, or other authorised government representative pursuant to statute, within Australia;
(iv) the Constitution of the Commonwealth of Australia;
(v) any local law, any directive, any approval, consent or licence (including its terms) with which compliance is required (including in respect of any Approval); and
(vi) any decision, directive, guidance, guideline, policy or requirement of any Government Authority that is lawful and binding upon the applicable Party, to the extent applicable to the Supplier’s obligations under this Contract; or
which:
(vii) comes into effect after the Execution Date and had not been tabled as a bill in the parliament in which it was passed, prior to the Execution Date;
(viii) a Party is required by Law to comply with,
but does not include a change or introduction of:
(ix) taxes, levies or other similar imposts;
(x) any suspension, revocation, amendment of any Approval; or
(xi) a new Standard comes into effect and/or there is any suspension, revocation or amendment of any Standard.”
Subparagraph (ix) excludes ‘taxes, levies or other imposts’ and therefore tariffs. This reflects risk allocation where the contractor absorbs price changes. If, however, trade tensions increase or persist, parties may wish to reconsider the above drafting, including by specifically carving out tariffs from the exclusions.
Alternative avenues to recover increased costs
Where a change in law clause does not provide relief for the time or cost incurred as a result of the imposition of tariffs, contractors may look to other contractual mechanisms such as:
1. Force majeure clauses
While offering relief for events beyond a party's control, force majeure clauses rarely extend to economic hardship caused by the imposition of new taxes unless expressly stated. Nonetheless, in the same way that force majeure clauses now routinely refer to pandemics and epidemics following COVID-19, the imposition of tariffs may also come to constitute force majeure so that the parties can re-assess the impact of the higher costs on the project and remodel the supply chain and/or goods and equipment to be used in the works.
2. Escalation clauses
Escalation clauses allow for adjustments to the contract sum in response to changes in input costs, which changes will typically include the imposition of tariffs. Although the popularity of escalation clauses has decreased following the waning of inflation, they remain a relevant vehicle for allocating risk for specific and unpredictable cost rises beyond the reasonable control of the contractor.
3. Hardship or material adverse change clauses
These clauses may provide the contractor with grounds for relief, particularly where the imposition of tariffs fundamentally alters the commercial balance of the contract. We note that these clauses are often (and should continue to be) subject to quantified triggers and careful drafting to avoid over-reliance by the contractor.
Negotiating the impact of tariffs in a construction contract
Mindful of the potential impact of tariffs, parties negotiating a construction contract may wish to consider:
Principal considerations | Contractor considerations | |
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The above considerations may be informed by the following commercial and practical issues for each party:
1. Protecting a profit margin
Unexpected tariff costs can significantly impact margins and, in some cases, cause substantial losses. Contractors unable to secure adequate protections in the contracts may need to factor tariff risk into pricing.
2. Flexibility in the supply chain
Contractors should assess their ability to source from alternative suppliers or jurisdictions. If developers will not allow relief for tariffs, investment in a more flexible supply chain may be required.
3. Managing subcontractor and supplier costs
Any head contract relief should be mirrored in subcontracts and supply agreements. Contractors should also weigh the impact to supply chains of withholding relief from subcontractors and suppliers.
4. Delay risks
Reconfiguring supply chains may lead to delays during project delivery, particularly if goods become unavailable in the local market. Contractors should consider their entitlement to extensions of time through standard or force majeure provisions.
1. Time and cost
Principals may reduce tariff impact by frontloading orders of key materials and maintaining flexible sourcing and substitution strategies, provided contractors address issues proactively.
2. Avoiding contractor insolvency
If tariffs threaten contractor viability, principals must balance the cost and delay of replacing the contractor against supporting the contractor. Where tariffs were priced into bids, parties may rebalance the contract by first removing the tariff premiums and then passing through tariff without margin.