On March 1, the President announced his intention to impose tariffs of 25% on all imported steel and 10% on all imported aluminum. A more formal announcement of the tariffs is expected in the coming week and, while many might have been surprised by the timing of the President’s initial statement, it came after a 10-month process of investigation by the U.S. Department of Commerce, culminating with its January 2018 recommendation for tariffs or quotas to protect U.S. producers. The Commerce Department reports are available here and here.
When finalized, these tariffs could have significant impacts on contractors across a range of industries, increasing costs of performance and restricting available supply. Domestic prices are expected to rise, and foreign suppliers may turn their focus to other markets. Supply disruptions are possible, particularly in the short term. To protect themselves, federal contractors who manufacture or use products with steel or aluminum should examine existing contracts, re-evaluate bids being developed, and consider revisions to standard contract terms.
Price Adjustments and Recovery
Some contracts may include provisions allowing contractors to seek price adjustments and recover for increased costs of steel and aluminum caused by these tariffs. For example, under Federal Acquisition Regulation (FAR) clause 52.229-3 – “Federal, State and Local Taxes” the contractor is entitled to a price increase for after-imposed federal excise taxes or duties that it pays or bears. Contracts also may contain economic price adjustment (EPA) clauses, allowing contractors to obtain price increases when material costs rise. Contractors should evaluate the particular terms and restrictions in their affected contracts.
Managing Schedule Impacts
Buyers also could experience disruptions to supply as a result of the new tariffs. Contractors will need to evaluate whether they are entitled to schedule extensions if they are impacted by supply disruptions. Force majeure and excusable delay clauses as well as other specifically negotiated contract terms could prove useful to contractors needing relief. However, to the extent that contractors face a choice between significant schedule and cost impacts, they should carefully manage customer communications and operate with a coordinated understanding whenever possible.
Bids in Development and Downstream Contract Terms
Recognizing the importance of provisions addressing the cost and schedule impacts from new federal tariffs, contractors should closely evaluate bids and proposals being developed, to determine the degree of price risk. Similarly, buyers must evaluate the risks and protections in the terms and conditions of downstream contracts, and consider updates to their standard terms and conditions.