Mitigating Construction Risks Amid Economic Uncertainty

Republished with permission. This article, "Mitigating Construction Risks Amid Economic Uncertainty," was published by AGC Alabama in the Fall 2025 issue of Build South Magazine.

The construction industry has always included risks – but recent years have brought a new wave of economic uncertainty. Owners, contractors, subcontractors, and suppliers are faced with increased unpredictability related to costs and scheduling due to tariffs, trade disputes, and fluctuating material costs. Currently, imported materials like steel, aluminum, lumber, and major equipment are subject to tariffs that are being modified sometimes daily. These tariff changes occur with sometimes no warning, leaving the construction industry to resolve who will pay for the increased costs or keep the surplus when tariffs go down.

So, what are tariffs? Tariffs are taxes imposed by the government on goods and services imported from another country. The tariffs are typically paid at ports, usually as a percentage of the goods’ value. Tariffs can be imposed to protect domestic industries, to increase revenue for the government, or force the hand of another government.

In light of the current uncertainty related to tariffs, proactive risk mitigation has never been more important. One way to mitigate risks is to have a good contract at the outset. Some methods to mitigate risks are discussed below.

1. CONTRACTUAL PROTECTIONS

A few years ago, the construction industry began including "COVID-19" or "pandemic" language in force majeure clauses. Similarly, given the volatility with tariffs, contractors should include provisions in their agreements that govern changes in tariffs. A tariff clause could state that if a tariff changes after the effective date of the agreement, then the owner shall pay for any increase in costs and be refunded any decrease in costs. If an owner will not agree, the contractor can consider increasing its price to cover the tariff risk. A tariff clause may be a separate provision, or it may be included as a force majeure event.

Contractors may also use escalation clauses that allow for adjustments in the contract amount if material costs rise unexpectedly. These clauses should clearly define the triggers for price adjustments and the method for calculating increases. For example, a contractor could consider including a provision that the owner shall pay for a price escalation over 5% – with the contractor taking the risk up to 5%.

Additionally, contractors may use contingency allowances in project budgets to absorb unexpected cost increases. These contingencies can be negotiated with the owner at the beginning of the project. During the project, a contractor and owner may increase the contingency via change order as a method to fund rising tariffs or other change order requests.