Construction Tariff Resource

At various levels of government in Canada, officials have publicly raised plans, or the possibility of plans, to impose procurement bans or restrictions on American companies. Such plans give rise to a number of uncertainties and new complexities for procurement in Canada. For example, how these initiatives will tackle defining an “American company” will be challenging and require careful attention to the nuance in corporate structures As another example, Canadian-incorporated subsidiaries of American companies may find themselves on the wrong side of those definitions and be subject to procurement restrictions. Similarly, consortiums including one (or more) American company could be captured by those restrictions.

In this time of evolving tariffs and other restrictions, imposed or proposed, by the U.S. and Canadian governments, it is critical that governments, owners, and companies looking to do business in Canada consider and prepare for the changing landscape for procurement risks and opportunities in Canada. In particular, industry stakeholders should be considering:

• the existing domestic and international framework within which procuring authorities must operate and what flexibility is, or is not, permitted when designing a competitive procurement process;
• the inclusion, and enforceability, of limitations of liability in procurement and possibilities for challenges to decision-making and outcomes; and,
• what alternative sourcing strategies may be available and how to design opportunities in anticipation of a turbulent period in the industry.

Flow-down of prime contract obligations: Ensuring alignment and accountability

Tariff escalation is intensifying the importance of well-structured flow-down provisions. These clauses typically ensure that key obligations in the prime contract—such as pricing terms, performance deadlines, and force majeure definitions—are consistently passed down to subcontractors and suppliers. Proper alignment through equivalent project relief protects both owners and prime contractors from inconsistencies that can lead to disputes or unrecoverable cost increases.

The traditional thinking is that without clear and consistent flow-down provisions, prime contractors may struggle to enforce the same performance and pricing standards at the subcontractor level. A misalignment could, for instance, leave the prime contractor exposed to unanticipated tariff-related losses, with no contractual recourse.

However, in the context of high uncertainty, it is more likely that subcontractors will push back on this typical risk allocation. This is a discussion worth having early-on between owners and prime contractors: all stakeholders have an interest in ensuring that projects are procured on the most competitive basis without jeopardizing the supply chain by transferring undue and unmanageable risk.

Where attention should be focused:

• Innovation and flexibility: All stakeholders should consider the risk-specific items of a project to determine whether there is ground to deviate from standard risk allocation. While owners already have plenty of tools in their toolkits (e.g. cash allowances, price adjustment (escalation) clauses, risk-share on key items, etc.), they should consider the using these to address tariff risks on key items for which the risk was typically transferred to private parties (e.g. alternatives to steel components, specialised equipment procured abroad, etc.).
• Contractual consistency: Owners should ensure that prime contracts contain clear and enforceable flow-down requirements to maintain consistency across the supply chain. Similarly, prime contractors should verify that their subcontracts reflect the same tariff-related protections and remedies contained under their Prime Contracts.
• Pricing in the risk: All links on the contractual chain should have candid frank discussions around the impact on cost that assigning risks associated with tariffs will have. Open dialogue on these risk contingencies can often provide a measurable framework within which to navigate finding alternatives and solutions.

Impact on long-lead items: Managing procurement risks proactively

Tariff volatility is significantly affecting many long-lead items—materials or equipment with extended procurement and delivery timelines. These items, often ordered months or years in advance, are now subject to unpredictable price swings. Without contractual safeguards, both owners and prime contractors risk being locked into unfavourable pricing terms that do not account for subsequent tariff increases.

Inadequate planning and protections for long-lead items can result in substantial financial exposure or delays. For example, if the prime contract requires fixed pricing for specified materials, but tariffs drive costs higher, prime contractors may be forced to absorb the difference unless there is a price escalation mechanism in place.

Where attention should be focused:

• Proactive procurement strategies: Owners should collaborate with prime contractors early in the procurement process to plan for tariff volatility and the associated allocation of that risk between them. This may include using early purchase agreements or price-indexed procurement models to reduce exposure to future tariff increases.
• Flexible pricing mechanisms: Both parties should consider incorporating flexible pricing provisions for long-lead items (e.g. adjustments based on published tariff rates).

Price adjustment (escalation) clauses: A critical risk mitigation tool

Price adjustment clauses could become an essential tool for managing the evolving financial impact of tariff fluctuations. Traditionally used to address inflation, we can expect that clauses will be refined to specifically address tariff-related cost changes.

A well-drafted price adjustment clause should provide a clear mechanism for adjusting contract prices when the changes to tariffs or material costs exceed predefined thresholds. This protects owners from disproportionate contingencies from proponents, as well as prime contractors and subcontractors from absorbing unrecoverable cost increases. In addition, these mechanisms also provide owners with transparency and predictability regarding potential price adjustments.

Where attention should be focused:

• Clear triggers: Price adjustment clauses should include clear triggers for price adjustments, such as percentage increases in specified material costs or government-published tariff rates. This promotes consistency and reduces ambiguity in the application of price adjustments. For longer-term contracts, both owners and prime contractors should consider linking price adjustments to recognized market indices, where they are appropriate, such as the Statistics Canada Construction Price Index.
• Mitigation measures: Owners should consider including enhanced mitigation measures in their contracts, including collaborative processes between owners and contractors to identify and reduce the consequences of tariffs on the project.

Conclusion: Strengthening contractual resilience in a volatile market

To safeguard procurement stability, all stakeholders must work collaboratively to ensure that contracts reflect a balanced and transparent distribution of risk. This notably means clearly defining triggers for compensation and time extensions, maintaining consistency across all contract tiers, and considering flexible pricing mechanisms that protect against external cost shocks.

By promoting fair and consistent risk allocation, owners, prime contractors, and subcontractors can strengthen the resilience of their projects, reduce the potential for costly disputes, and preserve the financial stability of the entire supply chain.

Key considerations include:

• Whether advancing or responding to a claim on a construction project, the terms of the contract and the surrounding circumstances should be carefully reviewed to evaluate the feasibility of making or objecting to a claim. Anticipating and preparing for such disputes, including by committing a reasonable analysis to the strength of the claim at the outset, will permit parties to potentially resolve disagreements early and often.
• Reviewing other project agreements, including those other agreements which may apply by reference, is vital. Often times construction contracts include dozens of interrelated agreements, flowing down from the top to the bottom of the contractual pyramid. Understanding what agreements, if any, apply to your particular dispute can be critical in ensuring the correct path to resolution is selected.
• As noted in the section on contract administration, there will likely be specific notice requirements and steps that need to be taken to ensure rights are preserved. Generally speaking, Canadian courts will enforce notice requirements and contractual dispute resolution clauses. Failing to provide notice or failing to commence a claim in the proper forum within the time permitted may result in a waiver of claims and preclude the claiming party from seeking a determination of the matter.
• Some provincial statutes may impose specific dispute resolution processes or prevent modification of limitation periods. As such, the applicable statutory regime should be considered when evaluating the correct path to address a dispute.
• Overall, enforcement of dispute resolution processes and notice requirements within a contract will depend on the specific terms of the contract and the context in which the requirements are applied.

The usual suspects

As a result of the anticipated tariff turbulence, claims and disputes are likely to arise pursuant to the following common contractual clauses and legal principles:

1. Tax provisions: The contract may contain a clause allocating responsibility for cost adjustments due to increased taxes and duties. For example, GC 10.1.2 of the standard form CCDC 2 2020 Stipulated Price Contract provides for an increase or decrease to the Contract Price if taxes and duties change after bid closing. The specific language of the clause should be reviewed to determine whether the increase (or decrease) in tariffs falls under this clause, and whether a claim for an adjustment to the Contract Price can be made.
2. Change in law provisions: The contract may allow for an increase to the contract price, or an extension of time based on a “change of law” that affects the contractor’s ability to complete the contract. A “change in law” is usually a defined term within the contract, and the definition should be carefully reviewed to consider whether a claim can be made pursuant to this provision.
3. Force majeure provision: The contract may contain a provision permitting a schedule extension for any supervening event beyond the control of either party. Force majeure clauses typically contain a general catchall for supervening events followed by a defined list of events included in the definition (and potentially those expressly excluded). Unless “tariffs” or “duties” are expressly contemplated as supervening events under this clause, and particularly in light of the common inclusion of change in law provisions, it may be difficult to establish a claim under this type of provision.
4. Frustration: A party may argue that the contract is wholly frustrated. Frustration occurs when a supervening event occurs, without fault of either party, for which the parties made no provision in the contract, and which makes performance of the contract impossible or radically different from that which was undertaken in the contract. However, the supervening event that occurs must be so unexpected and beyond the contemplation of the parties that neither party can be said to have accepted the risk of the event taking place at the time of contracting. Frustration is a high bar and it could, depending on the circumstances, be challenging to assert that tariffs have frustrated the contract, particularly given that, as tariffs were previously imposed by the U.S. in 2018, they may reasonably be said to have been expected and within the contemplation of the parties.

Evaluating claims and potential disputes in light of the complex web of underlying statutes and common law can be challenging, but early investment in this evaluation can ultimately result in better long-term outcomes.