Troubleshooting tariffs
While the scale may be different, tariffs are not exactly a new challenge. Nor are their potential consequences of resurgent escalation, growing uncertainty and increased volatility.
Canada’s construction industry has tackled these issues before and will do so again through mutual success.
Effective collaboration, with pooled resources and key data/information shared, can boost efficiency, foster innovation and push the industry forward.
Above all, being proactive will allow the best opportunity to mitigate cost increases alongside tariff impacts. The 30-day lull in tariff implementation is a chance to do exactly that.
Whether your project is at feasibility stage, design stage or in construction, great delivery starts with getting the ‘brilliant basics’ right.
No matter what stage your project is at, and regardless of whether you're dealing with tariffs, there are numerous mitigation measures available to effectively manage risks.
Figure 19:
Tariff implementation considerations – feasibility, design and construction stages
Tariff implementation is likely to increase the cost of construction. Speculation, market volatility and uncertainty may even soften demand. Both factors can make investment decisions more finely balanced.
Robust cost planning, estimating and value management is the key to making informed decisions.
During design, pre-contract or project planning stages, clients should give due consideration to how tariffs, escalation exposure or commercial risk can be managed and mitigated.
This starts with a robust understanding of the materials and commodities required and their exposure to US supply chains.
Clients can still manage inflation risks where contracts are already in place and live. Clients should proactively review contract conditions, understand the committed position and determine next steps.
Underpinned by brilliant basics – Design management, project management, cost management, planning/scheduling, risk management, project controls and management information, commercial management. Integration of functional capabilities is crucial to support decision-making.
Feasibility
- Review all budgets and plan accordingly with adequate contingency. Scenario planning may also help to evaluate the opportunity cost of alternative options and locations. Costs typically increase over time and schedule gains can compromise rates of return should a project pause.
- Even if project viability is compromised – review the overall business case. There may be options that mitigate budgeted cost vs future construction costs.
- Discuss your pipeline with the market. As market volatility and uncertainty increases, open lines of communication about future workloads, specific project risks and opportunities allow contractors to schedule tenders, which can improve collaboration.
- Early engagement with the supply chain can also help warm contractors up to alternative, more suitable, commercial models. Listen to their views on procurement routes, unacceptable risk transfer, and unrealistic deadlines and take this back to project teams.
- Explore structured and scaled procurement programs to help maintain high-quality standards and supplier engagement. This may also help widen the pool of contractors and other industry operatives to potentially work with.
Design
- Evaluate alternative design options to assess whether the current design is still the most cost efficient following the shift in market conditions and consider local/domestic material where practical in terms of time and cost.
- Place early orders/pre-purchase materials where possible and try to negotiate stable pricing agreements with pre-negotiated terms of future cost, particularly for materials that are unlikely to change but could be impacted. However, be mindful of space requirements when storing materials and inflationary bubbles.
- Consider alternative or open specifications to avoid having to use certain manufacturers who may be only in one location. Do consider risks when procuring substitutes though, as alternative materials and equipment may be less expensive, but changes could impact quality and timelines.
- Reduce onerous terms and improve contract conditions. Complex bid qualification criteria and passing more risk and liability to the contractor can deter collaboration and delay project approval. They may also generate confusion/contention once a project is underway.
- Fixed price contracts may represent a ‘lose-lose’ deal for both parties in the current climate. Alternative forms of procurement and contracts could be explored, which apportion risk fairly and incentivize suppliers to maximize value, rather than hit target costs.
Construction
- Check your contract: For lump sum or stipulated contracts - liaise closely with your supply chain to ensure there is an understanding of risk and pain and gain mechanisms as contractors and sub-contractors will likely have already committed to pricing. For cost plus contracts - review current budgets and re-baseline these where applicable based on the likely impact of tariffs on material costs. This will vary by project and depend on several nuances - including project stage and scope.
- Engage with contractors and collaborate on risk management strategies around the potential impact on cost of materials and machinery and equipment not already ordered and potential cost impacts.
- Review change orders for contractual viability. A 25 percent tariff doesn’t always mean a 25 percent cost increase.
- Monitor staffing trends and discuss labor pipelines with contractors. Schedule may be affected by changes to labor availability should personnel be downsized to mitigate material cost increases and/or balance sheets become strained.
- It is also prudent to stay close to the supply chain to understand financial health, stability and insolvency risks to help avoid disruption and delays.
