By Brandon Regan, Partner, and Amanda Z. Sin, Associate (McLean, VA)
Introduction
The imposition of new tariffs can create significant challenges for federal government contractors. Tariffs on imported goods such as steel, aluminum, and other materials may lead to higher procurement costs and disruption in supply chains. For contractors working under federal contracts, understanding how to navigate these new tariffs is essential to minimize financial strain and ensure compliance with contract terms. This article explores key considerations and strategies for contractors to effectively manage the impacts of newly imposed tariffs on federal contracts.
Understanding the Impact of Tariffs on Government Contracts
As a threshold matter, certain federal government purchases are exempt from tariffs. The Harmonized Tariff Schedule lists these exemptions and should be consulted first, as the FAR requires that agencies use these exemptions “where anticipated savings to appropriated funds will outweigh the administrative costs associated with processing required [exemption-related] documentation.” See FAR 25.901, 25.903.
Tariffs—taxes imposed on imported goods—can lead to increased costs for materials, labor, and manufacturing processes, particularly for contractors who rely on foreign suppliers or international trade. The federal government, which often relies on defense contractors, infrastructure builders, and technology firms, may be affected by rising prices for critical materials such as steel, aluminum, and electronic components. This can lead to the following challenges:
- Increased Material Costs: Contractors relying on imported goods for federal projects may face higher procurement costs if tariffs are applied to materials or components critical to their work.
- Supply Chain Disruptions: Tariffs may cause delays in obtaining materials, leading to cost and schedule impacts.
- Uncertainty in Contract Pricing: Contractors may struggle to estimate future costs or adjust existing contract bids to account for tariff-related price increases.
Key Strategies for Navigating Tariffs in Federal Government Contracts
To effectively navigate the challenges presented by newly imposed tariffs, contractors must consider various strategic approaches. The following steps outline key actions that contractors should take:
1. Review Contract Terms for Price Adjustment Clauses or Other Remedy Granting Provisions
One of the first steps for contractors dealing with tariff-induced cost increases is to review the specific terms and conditions of their contracts. Many government contracts, particularly those that involve substantial material costs, may contain clauses that allow for price adjustments under certain conditions, such as:
- Economic Price Adjustment (EPA) Clauses: These clauses provide a mechanism for contractors to adjust contract prices in response to external factors like rising material costs or inflation. Contractors should verify whether their contracts contain EPA clauses, such as those identified below, and determine if the newly imposed tariffs trigger an adjustment.
- FAR 16.203, 16.203-2, 16.203-3; FAR 52.216-2, 52.216-3, 52.216-4 – Economic Price adjustments for firm, fixed-price contracts.
- FAR 29.401-3, 52.229-3 – Permitting firm, fixed-price contractor to include in contract price after-imposed Federal taxes, including increases to an excise tax or duty rate.
- DFARS 216.203-4 – Permitting Defense Acquisition Regulations System (“DFARS”) contractors to obtain economic price adjustments pursuant to FAR 52.216-2, et seq.
- FAR 52.249-10 – Subsection (b) of this clause protects a fixed-price construction contractor that has experienced delays caused by unforeseeable causes beyond its control and without the contractor’s fault or negligence, including “acts of the Government in either its sovereign or contractual capacity.”
Contractors must also analyze whether tariff-induced cost increases relate to increases in the cost to procure foreign materials, as opposed to increases in the price of domestic materials that result from tariffs on foreign goods, as contractor recovery for increases in domestic prices is exceedingly difficult. See Appeals of Pangea, Inc., ASBCA No. 62561, 22-1 BCA ¶ 38,026 (January 5, 2022).
- Non-FAR Contract Clauses
- Change order provisions that address upwards adjustments in cost, e.g., due to scarcity of material, acts of Government, etc.
- Change in law provisions that may help the contractor account for any increases in cost that result from the change in U.S. laws, including the introduction of new laws or the repeal or modification of existing laws. Key issues may include what constitutes a “law,” i.e., whether executive orders are included in this definition, and other fact-specific questions such as the time for which the compensable change occurred.
- Force majeure provisions that generally excuse contractual performance when deviations are not due to the contractor’s own fault or negligence. An example of force majeure language is contained in FAR 52.249-10.
- Risk-allocation clauses that: (a) outline cost-sharing or cost-shifting between the contractor and the government; (b) establish a tariff-specific contingency; and/or (c) permit the contractor to use substitute materials or subcontractors of comparable quality and performance.
- Force Majeure Clauses: Although less commonly used for tariff-related increases, some contracts may include force majeure provisions that allow contractors to claim relief for events beyond their control, such as tariffs or trade wars. During contract negotiations it is imperative that the language included in a force majeure provision specifically identifies government tariffs as a triggering event. Broadly phrased force majeure provisions often face heavy scrutiny by the courts and various Boards of Contract Appeals. An example of force majeure language is contained in FAR 52.249-10.
By carefully examining the contract’s language, contractors can determine whether they are eligible to request price adjustments or contract modifications due to the tariff impact.
2. Explore Equitable Adjustments Under the FAR
The Federal Acquisition Regulations (FAR) include provisions that may allow contractors to request equitable adjustments to their contract terms when unforeseen circumstances arise—such as the imposition of new tariffs. Under FAR 52.243-1 (Changes—Fixed-Price) and FAR 52.243-2 (Changes—Cost-Reimbursement), contractors can request an equitable adjustment if the government’s actions (or inactions) result in increased costs.
An equitable adjustment is a negotiated modification to the contract price that reflects the additional costs a contractor incurs due to unforeseen changes, including tariffs. For contractors facing tariff-related cost increases, submitting a well-documented request for an equitable adjustment could help secure additional funding to cover these new expenses.
A contractor’s ability to recover under the changes clause may be limited if the contract does not include an economic price adjustment clause, or other material escalation provision, and increased costs may not provide a defense against a breach of contract claim. See TPL, Inc. v. U.S., 118 Fed.Cl. 434, 441-42 (2014) (“because [the contractor] assumed the risk that changes in market conditions might occur and make its performance more expensive, it cannot rely upon ‘impractability’ as a defense to its liability for breach of contracts.”). It is for this reason that contractors would be well served to take a firm position on the negotiation of remedy-granting contract provisions in future contracts that mitigate the risk of cost increases or other instability in the commodity market due to newly imposed foreign tariffs. Contractors must also be mindful that other risk-shifting provisions, such as assumption of risk or no damage for delay clauses, may prevent contractor recovery under the changes clause.
3. Utilize Cost-Reimbursement Contracts When Applicable
If your contract is a cost-reimbursement contract, the government may cover costs incurred due to tariffs, provided those costs are allowable, allocable, and reasonable under the terms of the contract. Under a cost-reimbursement contract, contractors are generally reimbursed for the actual costs incurred in fulfilling the contract, which may include the increased costs caused by tariffs on imported goods.
• Contractors must submit accurate documentation of the increased costs, including
invoices, purchase orders, and evidence of tariff imposition.
• The Contracting Officer will review the submitted claim to determine whether the costs
are eligible for reimbursement.
Cost-reimbursement contracts are more flexible than fixed-price contracts in terms of handling unexpected cost increases, making them a better fit for contractors facing tariff-related challenges.
4. Work Closely with the Contracting Officer
Effective communication with the Contracting Officer is critical when dealing with tariff impacts on a federal contract. If the imposed tariffs significantly affect the contractor’s ability to perform the contract or lead to increased costs, contractors should engage with the contracting officer early on to discuss potential solutions. In some cases, contracting officers may grant contract modifications, price adjustments, or even extensions to allow contractors time to adapt to new economic conditions.
Regularly keeping the Contracting Officer informed of any issues caused by tariffs can help mitigate the risk of misunderstandings and ensure that the contractor complies with federal regulations. Additionally, the Contracting Officer can help guide contractors through the formal process of requesting an equitable adjustment or modifying contract terms.
5. Mitigate Future Risk by Diversifying Suppliers
While the immediate focus may be on managing the impact of newly imposed tariffs, contractors should also take steps to mitigate future risk. Tariffs can create long-term volatility in pricing and availability, making it essential for contractors to diversify their suppliers. This may involve:
• Identifying domestic sources of key materials or components.
• Exploring alternative international suppliers that are not subject to tariffs.
• Engaging in longer-term contracts with suppliers to lock in favorable prices before
tariffs escalate further.
Diversifying the supply chain can help contractors maintain cost predictability and minimize the impact of any future tariff increases.
6. Understand Retaliatory Tariffs and Global Trade Dynamics
As the U.S. imposes tariffs, other countries may retaliate by imposing tariffs on U.S. exports. Contractors should stay informed about potential retaliatory measures that could impact their supply chain or the market for U.S. goods abroad. Understanding the global trade dynamics and how they affect the cost structure of government contracts is essential to remain competitive and ensuring project success.
Conclusion
Navigating federal government contracts under newly imposed tariffs requires contractors to take proactive measures to manage cost increases, supply chain disruptions, and regulatory compliance challenges. By reviewing and/or negotiating key contract terms, exploring price adjustments, and engaging with the contracting officer, contractors can better position themselves to recover costs and maintain project performance. Additionally, diversifying suppliers and staying informed about global trade dynamics can help minimize future risks. Ultimately, federal contractors must remain agile and prepared to adjust to the evolving landscape of international trade to succeed in a complex contracting environment. Contact Watt Tieder for a more detailed analysis of your contract and solutions to potential issues raised by tariffs.