Tariff – a tax on imports or exports, typically between two countries. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or safeguard the domestic industry.
In recent years, governments have used tariffs as a form of protectionism. In 2018, the United States government began imposing tariffs on steel, aluminum and lumber from a number of countries. These tariffs were imposed in order to try to protect the United States manufacturing industry. However, these tariffs may lead to negative effects for industries, such as construction, because it relies heavily on these products. Construction businesses need to be:
• aware of these tariffs
• the challenges they could bring
• have strategies in place to address these challenges
Impact of Tariffs on Construction Businesses
• Increases in material costs.
As tariffs are an additional tax on the imported materials, the cost of these materials will increase, leading to increased job costs for your construction business. If they cannot be passed to the customer, they will go directly to the bottom line.
• Volatility in pricing.
As the government is in control of the tariff policies, at any time there may be changes to the rate or it may be removed completely. Being unable to accurately predict this pricing, may have a negative impact on contracts and budgets, which were completed under different scenarios.
• Delays in receipt of materials and project completion.
Tariffs often lead to delays in receipt of materials as processing times at ports of entry typically become longer. Large projects, which had their scheduling completed prior to the tariffs, may face difficulties in reaching completion.
• Changes in supply chain or lack of materials.
Tariffs may lead to your vendor’s prices increasing to where you cannot afford. You may need to shop around for the best price. This could lead to difficulties working with a new vendor, decreased reliability in receiving materials or having to settle for the increased costs. Tariffs may also affect the number or type of choices for material specifications for a project, as there may only be a few types of materials in the desired price range.
4 Strategies to Mitigate Challenges
- Escalation Clauses
An escalation clause is a provision in a contract calling for adjustments in fees, wages, or other payments to account for fluctuations in the costs of raw materials or labor. As it relates to tariffs, an escalation clause may be included in a contract to shift the burden of increased material costs from the contractor to the customer.
- Supply Bonds
Supply bonds are used to provide a guarantee that a supplier will deliver the promised materials on time. Securing supply bonds upfront, will mitigate the risk of materials not being delivered if a large tariff is imposed on the vendor in between the time of the signing of the contract and the time of delivery.
- Subcontractor Default Insurance
Subcontractor Default Insurance may be used to recoup costs incurred from a default in performance by a subcontractor. If tariffs affect a subcontractor to a point where they are unable to fulfil their performance requirements, this will help to protect the contractor.
- Stay Up-to-Date
Keep track of current and future proposed tariffs. This will help your construction businesses improve planning and allow you to get in front of the challenges discussed above.
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