Your Contracts Need To Address Risk Issues Like Tariffs, Escalation, Supply Chain and More

The world is changing fast, but your contract may be the same version you have been using for twenty years.  Tariffs, escalation and supply chain issues can reduce your profit or create losses.  Your contract may not protect you from any number of changing situations, some of which are listed below.  Trying to argue about the contract later may lead to a costly dispute.  Dealing with these current issues head on NOW is strongly recommended.  NOW is the time to address these issues that may not have existed when you first had a contract prepared.  Tomorrow may be too late to update your contract.

A 25% tariff on Chinese steel or Canadian lumber is only the tip of the iceberg.  Delays in shipping steel to your tractor supplier may slow by weeks or months delivery of the tractor you need now.  Companies which are not directly impacted by a steel tariff, may raise their prices to take advantage of price increases by the impacted company, expecting a huge increase in profit and a more competitive position.  These situations will impact most suppliers, subcontractors, contractors and owners.  Only thoughtful contract clauses can fairly allocate the risk of these events.

One can address these types of issues in the price portion of the contract.  In addition, these issues also affect delay and force majeure contract clauses.  Just because you have a force majeure clause that seems to protect you from issues not under your control, does not mean it will protect you. Calling out and addressing specific issues is far better.

Here are some of the issues that you should consider and address in your contract:

1. Pandemics:  What will be the impact of the next pandemic illness such as avian bird flu and outbreaks of the measles?  Update the applicable clause before you are impacted by a pandemic.
2. Supply chain issues:  What happens when the owner tells the contractor and subcontractors you have eight months to finish, even though delayed steel deliveries already have you eight weeks behind.  Government officials on both sides of the Pacific are refusing to sign off on documents needed to move the steel.  How can this risk be addressed and allocated?
3. Escalation:  The tariff may be 25%, but the cost of critical materials has gone up by 35%. You have a purchase order for the “old” price, but your supplier informs you, pay 35% or forget getting the steel.  I read recently that the January escalation rate for construction material and labor was .8%.  Extrapolated to a year, that would be 9.6%.  What does your one page purchase order say?
4. Tariffs:  While your contract may allow for increases for steel directly impacted by tariffs, your contract says nothing about duties which have driven up fabricated steel assemblies.
5. Unions and PLAs:  You signed a contract requiring a PLA, but a recent court order held that PLAs are no longer enforceable for Federal construction projects.  Under your contract, are you still subject to a PLA?   What does your one-page purchase order say about these issues?
6. Terminations for Convenience:  Will your contract’s termination clause really make you whole?  Does the other party have a right to warranty claims?

Again, is your contract ready to deal with change?  You should check.

Laurence P. Lubka is Senior Counsel at Hunt Ortmann Palffy Nieves Darling & Mah, Inc.  Mr. Lubka represents California clients throughout the world, ranging from local payment disputes to drafting contracts for projects overseas.  He represents public entities, engineering firms, general contractors, major subcontractors, and suppliers.  Mr. Lubka’s over forty years of representing clients on a wide variety of projects has allowed him to provide a complete range of support to clients of the Firm.