The Impact of Steel and Aluminum Tariffs on Construction Industry Participants

September 17, 2018

Tim Sportschuetz

In March and April 2018, proclamations were announced increasing United States import taxes on foreign steel and aluminum, adding 25% on steel imports and 10% on aluminum imports. These tariffs are levied based on the country of origin of the imported goods, not the country of export.  In other words, whichever country manufactured the steel or aluminum is responsible for paying the tariffs.  As of September 2017, roughly 25% of United States steel imports originated from Canada and Mexico.  Effective June 1, 2018, temporary exemptions expired for Mexico, Canada and some European countries, and the tariffs are now applicable to almost all countries of origin.  The tariffs cast a wide net. They not only include raw steel and aluminum, but also manufactured goods that include steel or aluminum.[1]

On July 1, 2018, Canada retaliated with matching tariffs on steel imported from the United States.  Anoop Khosla, president of Surrey-based Midvalley Rebar Ltd. and regional chairman of the Canadian Coalition for Construction Steel, estimated that the latest steel price increases have added roughly 6% to the cost of constructing a 25-storey office tower or industrial warehouse:

Due to new U.S. tariffs, the price of steel rebar, a key building component in concrete construction, had increased 58 per cent as of August [2018] compared with a year earlier.[2]

Potential Consequences for the Construction Industry

Construction industry participants who incorporate into their works steel or aluminum imported from non-exempt countries should consider the monetary impacts on their bids and costing figures. Of course, profit margins may also be severely curtailed. These tariffs have created an environment rife with uncertainty. In particular, industry players may no longer have reliable numbers with respect to supply availability and escalation costs.

It is widely reported that steel and aluminum prices increased steeply during the previous few months. The new tariffs severely impact contractors involved in fixed-price contracts who may now face significantly increased material costs. Of course, parties who have entered into unit-price contracts may also be impacted, since contractors calculate unit rates using the then-current cost of materials. Unit-price contracts tend to be adjusted on quantity over- and under-runs, not changes to material costs. In any event, suppliers, project owners and contractors may be faced with severe changes to their respective bottom lines. It may also be difficult for parties to existing agreements to negotiate amendments because future supply constraints and concomitant price impacts cannot be predicted with reasonable accuracy.

Fixed-Price Contracts (CCDC2 or CCA1)

Parties to fixed-price construction contracts should consider all applicable provisions to determine exposure and provide ways to mitigate, shift or share increased material costs.

In Canada, the two most commonly used fixed-price or stipulated price agreements are those published by the Canadian Construction Documents Committee (CCDC) and the Canadian Construction Association (CCA). The CCDC2 2008 Stipulated Price Contract is a standard prime contract between an owner and general contractor that establishes a pre-determined fixed price, irrespective of the general contractor’s actual costs.[3]  The CCA1 2008 Stipulated Price Subcontract is a standard subcontract agreement between a contractor or subcontractor or a subcontractor and sub-subcontractor, which also establishes a pre-determined fixed price, irrespective of actual costs.[4]

Provisions for a “change-in-law”, “change-in-taxes-and-duties”, “force majeure” or a change in on-site conditions or material escalation may provide relief. It is critical for parties to be aware of defined terms applicable to such provisions and potential conditions precedent or notice requirement provisions which may or must be satisfied in order to rely on them.

CCA1 Stipulated Price Subcontract

CCA1 Stipulated Price Subcontracts contain a few provisions that may help to insulate industry participants against tariff price shocks. While keeping in mind that it may be challenging to establish that an increased tariff resulting in higher material prices is unanticipated or unforeseeable, there may be ways to find recourse in CCA1 agreements. The discussion that follows should be read in light of strict notice-in-writing provisions[5] which are included in almost every standard construction agreement, requiring contractors to provide timely notice with respect to potential price increases or changes in the work.

Subcontract Condition 6.5 – Delays

CCA1 Subcontract Condition (SCC) 6.5 deals with project delays. Of particular interest is SCC 6.5.3, which states that a delay caused by an issue outside the control of a subcontractor may enable a subcontractor to obtain an extension to the project timeline:

SCC 6.5 DELAYS

6.5.1 If the Subcontractor is delayed in the performance of the Subcontract Work by an action or omission of the Owner, Consultant, Contractor, or anyone employed or engaged by them directly or indirectly, contrary to the provisions of the Subcontract Documents, then the Subcontract Time shall be extended for such reasonable time as the Contractor and Subcontractor shall agree that the Subcontract Work was delayed. The Subcontractor shall be reimbursed by the Contractor for reasonable costs incurred by the Subcontractor as a result of such delay.

6.5.2 If the Subcontractor is delayed in the performance of the Subcontract Work by a stop work order issued by a court or other public authority and providing that such order was not issued as the result of an act or fault of the Subcontractor or any person employed or engaged by the Subcontractor directly or indirectly, then the Subcontract Time shall be extended for such reasonable time as the Contractor and Subcontractor shall agree that the Subcontract Work was delayed. The Subcontractor shall be reimbursed by the Contractor for reasonable costs incurred by the Subcontractor as a result of such delay.

6.5.3 If the Subcontractor is delayed in the performance of the Subcontract Work by:

.1 labour disputes, strikes, lock-outs (including lock-outs decreed or recommended for its members by a recognized contractors’ association, of which the Subcontractor is a member or to which the Subcontractor is otherwise bound),

.2 fire, unusual delay by common carriers or unavoidable casualties,

.3 abnormally adverse weather conditions, or

.4 any cause beyond the Subcontractor’s control other than one resulting from a default or breach of Subcontract by the Subcontractor,

then the Subcontract Time shall be extended for such reasonable time as the Contractor and Subcontractor shall agree that the Subcontract Work was delayed. The extension of time shall not be less than the time lost as the result of the event causing the delay, unless the Subcontractor agrees to a shorter extension. The Subcontractor shall not be entitled to payment for costs incurred by such delays unless such delays result from actions by the Owner, Consultant, Contractor, or anyone employed or engaged by them directly or indirectly.

6.5.4 No extension shall be made for delay unless Notice in Writing of the cause of delay is given to the Contractor not later than 7 Working Days after commencement of delay. In the case of a continuing cause of delay only one Notice in Writing shall be necessary.

6.5.5 If no schedule is made under SCC 2.1 – SUPPLEMENTAL INSTRUCTIONS, then no request for extension shall be made because of failure of the Contractor to furnish instructions until 14 Working Days after demand for such instructions has been made.

As is the case with the majority of the delay or price-increase provisions in standard construction agreements, the provision of proper notice in writing is a pre-requisite to making a delay claim (CCA1 SCC 6.5.4).

SCC 6.6 – Claims for a Change in Subcontract Price

SCC 6.6 sets out the requirements for making a claim for a change in the subcontract price. Again, SCC 6.6.1 requires that proper and timely notice in writing of a party’s intent to claim for an increase in price be given:

SCC 6.6 CLAIMS FOR A CHANGE IN SUBCONTRACT PRICE

6.6.1 If the Subcontractor intends to make a claim for an increase to the Subcontract Price, or if the Contractor intends to make a claim against the Subcontractor for a credit to the Subcontract Price, the party that intends to make the claim shall give timely Notice in Writing of intent to claim to the other party.

SCCs 6.6.2 and 6.6.3 canvass mitigation and recordkeeping requirements:

6.6.2 Upon commencement of the event or series of events giving rise to the claim, the party intending to make a claim shall:

.1 take all reasonable measures to mitigate any loss or expense which may be incurred as a result of such event or series of events, and

.2 keep such records as may be necessary to support the claim.

6.6.3 The party making the claim shall submit within a reasonable time to the other party a detailed account of the amount claimed and the grounds upon which the claim is based.

6.6.4 Where the event or series of events giving rise to the claim has a continuing effect, the detailed account submitted under paragraph 6.6.3 shall be considered to be an interim account and the party making the claim shall, at such intervals as the other party may reasonably require, submit further interim accounts giving the accumulated amount of the claim and any further grounds upon which it is based. The party making the claim shall submit a final account after the end of the effects resulting from the event or series of events.

6.6.5 The responding party shall reply by Notice in Writing within 10 Working Days after receipt of the claim, or within such other time period as may be agreed by the parties.

SCC 10 – Governing Regulations

Part 10 deals specifically with governing regulations. SCC 10.1 specifically canvasses taxes and duties applicable to the agreement. SCC 10.1.2 potentially provides relief to a subcontractor facing price increases caused by the steel and aluminum tariffs. Based on this, a subcontractor can make a reasonable claim for increased costs if the tariffs caused material prices to increase after the time of the bid closing:

PART 10 GOVERNING REGULATIONS

SCC 10.1 TAXES AND DUTIES

10.1.1 The Subcontract Price shall include all taxes and customs duties in effect at the time of the bid closing except for Value Added Taxes payable by the Contractor to the Subcontractor as stipulated in Article 5 of the Subcontract Agreement – SUBCONTRACT PRICE.

10.1.2 Any increase or decrease in costs to the Subcontractor due to changes in such included taxes and duties after the time of the bid closing shall increase or decrease the Subcontract Price accordingly.

A subcontractor may also rely on SCC 10.2.7, which states that, if subsequent to the time of bid closing, changes are made to “applicable laws, ordinances, rules, regulations, or codes of authorities having jurisdiction” which affect the contract price, then a subcontractor can make a claim pursuant to SCC 6.6 for an increase in price:

10.2.5 The Subcontractor shall not be responsible for verifying that the Subcontract Documents are in compliance with the applicable laws, ordinances, rules, regulations, or codes relating to the Subcontract Work. If the Subcontract Documents are at variance therewith, or if, subsequent to the time of bid closing, changes are made to the applicable laws, ordinances, rules, regulations, or codes which require modification to the Subcontract Documents, the Subcontractor shall advise the Contractor in writing requesting direction immediately upon such variance or change becoming known. The Contractor will make the changes required to the Subcontract Documents as provided in SCC 6.1 – CONTRACTOR’S RIGHT TO MAKE CHANGES, SCC 6.2 – CHANGE ORDER, and SCC 6.3 – CHANGE DIRECTIVE.

10.2.6 If the Subcontractor fails to advise the Contractor in writing; and fails to obtain direction as required in paragraph 10.2.5; and performs work knowing it to be contrary to any laws, ordinances, rules, regulations, or codes; the Subcontractor shall be responsible for and shall correct the violations thereof; and shall bear the costs, expenses, and damages attributable to the failure to comply with the provisions of such laws, ordinances, rules, regulations, or codes.

10.2.7 If, subsequent to the time of bid closing, changes are made to applicable laws, ordinances, rules, regulations, or codes of authorities having jurisdiction which affect the cost of the Subcontract Work, either party may submit a claim in accordance with the requirements of SCC 6.6 – CLAIMS FOR A CHANGE IN SUBCONTRACT PRICE.

Again, the requirement to give timely notice in writing is of high importance and subcontractors are cautioned to always keep notice provisions in mind during pre-construction, active construction and post-construction periods.

It remains to be seen whether the steel and aluminum tariffs would be caught by SCC 10.2.7, although a strong argument may be made that tariffs fall within the broad categories of “applicable laws, ordinances, rules, regulations, or codes of authorities having jurisdiction”.

Other Consequences

Industry experts estimate that steel and aluminum prices will continue to escalate. It may therefore be prudent to purchase the material allotment required for a project sooner, rather than to wait for unpredictable and uncertain price changes. Of course, such decisions bring with them various other challenges. For example, contractors would have to contemplate the logistics with respect to material storage prior to project commencement, who will pay for storage, and who bears the risk if such stored material were damaged or lost.

Besides price shock, material supply may become a problem, thereby leading to project delays. Contractors, consultants, contract administrators and owners-side entities should be familiar with the specific contractual requirements for requesting additional time due to factors outside of the builder’s control. It may also be advisable to include special provisions in standard construction agreements that deal with material supply constraints, tariffs, their potential impacts on material prices and notice provisions with respect to tariffs.

We encourage construction industry participants to seek timely advice from legal counsel regarding existing or potential construction agreements that could be impacted by these newly-announced tariffs.

 

[1] US Customs and Border Protection website: https://www.cbp.gov/trade/programs-administration/entry-summary/232-tariffs-aluminum-and-steel.

[2] Western Investor article: https://www.westerninvestor.com/news/british-columbia/price-spikes-slam-commercial-construction-1.23416446

[3] Canadian Construction Documents Committee website: http://www.ccdc.org/document/ccdc2/.

[4] Canadian Construction Association website: http://www.cca-acc.com/wp-content/uploads/2016/10/PreviewCCA1.pdf

[5] See, for example, Article 7 of the CCA1 Stipulated Price Subcontract entitled Receipt of and Addresses for Notice in Writing

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