With the looming possibility of tariffs causing sudden and significant increases in the prices of building materials within the construction industry, contractors, subcontractors and others who contract to perform construction work can suffer significant losses. This is particularly true when the prices they must pay for materials rise significantly between the time they sign a contract to provide materials and actually purchase the materials necessary to meet contractual obligations. The general rule is that, unless there exists a contract clause allowing contractors or subcontractors to pass significant price increases for materials on to others, contractors and subcontractors are stuck with the price they stated in the contract or subcontract. When prices rise, the contractor or subcontractor must eat the difference when they purchase materials at a much higher price than anticipated. Rising prices can convert a profitable venture into a catastrophic financial failure. How are contractors and subcontractors to protect themselves?

Once a contract is executed, there is usually little that can be done to change the contract to address rising prices. Effort must therefore turn to establishing protection before a contract is signed. The best technique for dealing with increasing future prices for building materials is by adding a price escalation clause to contracts and subcontracts. While this will not help for past contracts or subcontracts, it can certainly offer significant protection going forward.