Navigating Tariffs: How Contractors are Protecting Projects and Margins

When it comes to construction, project owners, general contractors and specialty trade subcontractors all have one common goal: to safely complete the project on time and on or under budget. Tariffs, however, continue to introduce uncertainty in the building process.

Pricing mechanisms are one way to help mitigate tariffs while providing stability in projects. In some cases, contractors and specialty trades opt to increase their bids with large contingencies to absorb potential financial impacts from price volatility or supply chain disruptions caused by tariffs. For example, a contractor who would typically bid a project with a 20% gross profit—say, $10 million on $8 million in costs—might instead bid $10.5 million to account for potential material price fluctuations or delays, effectively reducing their expected profit margin to safeguard against unforeseen cost increases.

Cost-Plus Contracts

Another option is a “cost-plus contract.” The cost-plus pricing strategy is a contract that requires reimbursement for actual costs, as well as a specified mark-up that covers overhead and profit (typically a 10-25% agreed upon markup). Cost-plus contracts represent less risk to general contractors with guaranteed profit and may even include incentives to encourage better work at lower cost, especially if additional bonuses are awarded for meeting specific targets like cost savings or project completion dates.

As part of the building process, specialty subcontractors may also benefit from the cost-plus contract. For instance, if a contractor’s project costs increase by $500,000 due to tariff-related price escalations, those additional expenses can be passed on to the project owner under a cost-plus arrangement. However, the contractor must maintain thorough documentation to substantiate these added costs.

Cost-plus contracts are advantageous because they tend to be flexible during uncertain times, including the current tariff situation. They often include a price escalation clause to prevent project delays. These contracts also tend to be transparent in details of all costs. However, by their very nature, cost-plus contracts are risky because of cost uncertainty and the potential for higher costs that could exceed a fixed price contract.

Pre-Purchase of Materials and Equipment

Some contractors and specialty trade subcontractors have the ability to buy materials and equipment in bulk before pricing increases, resulting in lower cost estimates. These lower costs may help them get the bid or increase profit margins on the job. For example, plumbers may invest in purchasing large amounts of PVC piping, or electricians invest in electrical wiring, conduits and breakers.

But the practicality of stockpiling purchases is countered by the space available for storage. For example, mechanical HVAC contractors may limit their purchases of large commercial grade galvanized steel and aluminum pipes simply because they don’t have the storage capacity.

Price Locks on Materials

Some specialty trades may try to “lock in” prices with their suppliers. When they do this, they are essentially capping the price with their supplier when they create a construction pre-bid budget. Locking in prices may help mitigate skyrocketing tariffs, and some suppliers may even offer discounts for earlier ordering. On the other hand, if an anticipated tariff of 100% suddenly falls to 15%, the locked-in pricing may reflect the larger tariff, and the contractor is stuck paying the higher price even if tariffs end up being lower than expected.

Price locks often result in a lack of flexibility. It can become more difficult to secure materials at favorable prices, and project timelines may become affected if the budgets can’t be adjusted for market changes. There’s also a chance the supplier may fulfill other orders first if they can command a steeper price than the locked one. And, as shown in the past year, tariffs are also prone to change.

Supplier Diversification

Supplier diversification is another strategy to deal with tariffs while increasing operational flexibility and reducing dependency on sole source providers. If specialty contractors can source their materials from multiple suppliers, they may find lower prices as opposed to issuing a purchase order to one supplier they’ve used in the past. Diversification also helps address the risk of supply chain disruptions, as many businesses found out during the pandemic.

Some contractors rely on just one supplier because they know what to expect and find it efficient. These contractual relationships are built on past purchases and trust, and the contractors are often able to get their pricing quickly to itemize in their estimates. However, fluctuating tariffs may impact the sole contractor’s pricing. For example, the contractor may purchase the first tranche of materials at a lower price, and then the second tranche might be higher if the supplier anticipates an increase in tariffs in the near future.

Contractors can expand their pricing options with supplier diversification, but initially they will lack long-term relationships with the new suppliers, and it could affect the timeliness of them receiving their estimates. A diversified supply chain is more complex for contractors because it involves managing multiple suppliers, multiple contracts and the need to ensure quality control with each individual supplier. In addition, if contractors are moving toward supplier diversification and they are developing a new relationship with a new supplier, they may be lower priority compared to existing customers.

Strategic Communication and Collaboration

While contractors may leverage many different tactics to mitigate the ongoing whiplash of tariffs, the most important strategy remains communication and collaboration between specialty trade contractors and project owners. This means clear upstream communication between the general contractor and project owner, and clear downstream communication between the general contractor and specialty contractors. Supply shortfalls could easily have a domino effect on the project, so it is critical that specialty contractors have a conversation with the general contractor.

As the construction industry focuses on mitigating tariffs, the contracts themselves can make or break a business. Specialty trades need to ensure contracts clearly define what materials and equipment are subject to price adjustments. They may also include a material escalation clause that identifies a price increase threshold that triggers renegotiation of the contract. In many cases, AI and other technologies can be implemented to create efficiencies in the contracting process.

While tariffs have introduced unexpected twists and turns in the specialty trades, some truths remain the same: all parties want the project safely completed on time, under budget, and specialty contractors have many tools to consider in an environment characterized by uncertainty.