Once More Unto the Breach: Navigating Supply Chain Disruption Amid the Trade Wars – a Construction Contract Checklist

Contractual Provisions Checklist

Change in Law

• Change in law (“CIL”) clauses provide that certain contract terms (such as price and/or schedule) may be adjusted upwards or downwards to take account of cost fluctuations as a result of changes in legislation or regulations that affect performance of the contract.

• If your contract includes such a provision, check what, if any, relief it might provide. For example, is it conditional on the changes in law being “unforeseeable”? If so, would a contractor that entered into a project during the U.S. presidential campaign (when tariffs were mentioned²) be afforded the same treatment as one that signed the contract before any mention of tariffs. Similarly, does the provision require the CIL to have occurred in the jurisdiction of the site country or might it transcend national borders, capturing a project’s global supply chain?

Force Majeure

• Force majeure (“FM”) clauses are designed to relieve parties from their contractual obligations when an extraordinary event or circumstance beyond their control prevents one or both of them from fulfilling those obligations. Typically, unlike CIL, FM provisions provide schedule relief but not financial compensation. However, like CIL, FM provisions are rarely sufficiently nuanced to allow for changes in subcontractors (see below).

• Notably, presumably inspired by the uptick in supply chain disruptions in recent years, owners are increasingly seeking to exclude supply chain issues as a FM event. Accordingly, review the FM clause in your contract to check whether you might bring your situation within the list of FM events (e.g. acts of government, trade restrictions or economic sanctions). If not, it still may not be fatal — check whether the wording is exhaustive or exemplary.

Price Escalation and Provisional Sums

• Price escalation clauses allow for adjustments to the contract price based on changes in the cost of materials, labour, or fuel. Typically, they are linked to movements within a specific index or a basket of published price data, which generally do not account for tariffs or other costs associated with transporting materials to the site.

• However, if your contract is broad enough to allow it, check whether it prescribes a pre-determined date or contract year when the price can be re-opened. If so, given the current uncertainty as to how the latest threat of trade wars might play out, whether to try to bring forward the price review date — for example, by allowing the employer an additional window when the price can be corrected downwards again at a later date if tariffs ease. It is important to note that items purchased at the ‘high’ price will remain locked in at that high price.

• Another potential candidate is the provisional sum, whereby the contract includes a ‘best guess’ price at the time the contract is executed, which is then adjusted to reflect the actual costs incurred during execution. If the contractor is responsible for bearing the cost of tariffs, a provisional sum clause is more likely to offer protection to the contractor.

Nominated Suppliers / Subcontractors

• Contracts may include a list of pre-approved suppliers or subcontractors, specifying particular companies or sources for equipment, materials, and services.

• Recent experience of disruption within the global market has forced parties to diversify their supply chains and generated discussion as to whether these provisions remain viable. Accordingly, it has become more common to see wording that allows the approved subcontractor list to be re-opened, albeit typically this is only by mutual consent.

• In practical terms, however, changing subcontractors can be particularly complex. For example, while raw construction materials might not pose much of a problem, manufactured equipment is likely to be integrated into a design that would need to be revised if the equipment manufacturer is changed. If so, it is more likely that any adjustments would need to be made through the variation provisions.

Notices

• With the increasing introduction of conditions precedent to claims, check whether there is an obligation to notify or be notified of any new or increased tariffs at the earliest opportunity and then follow up with periodic updates as to the ongoing impacts and how they (and any mitigation steps) are being captured and recorded.

Looking Forwards:  Procurement and drafting tips for Future Contracts

Long Lead Item Procurement

• Consider a flexible approach to procuring long lead items and making advance payments to secure critical materials and equipment.

• While early procurement of critical items can help ensure availability and mitigate the risk of delays, sometimes it is more beneficial to preserve flexibility (e.g. where design is still evolving materially), accepting that items may be ‘late but not in delay’. The combination of advance payments with advanced payment bonds provides a balance: it enables contractors to manage their cash flow effectively, initiate orders early, and still maintain the necessary flexibility to adapt to changing circumstances, but it also provides employer’s with security for their upfront payments.

Back-Up Suppliers

• If a project is financed by export credit agencies, the owner may be locked in to certain suppliers of material such that it is harder for these costs to be moved to a new supplier if a supply chain issue arose. Where a contractor has free reign to import from any jurisdiction, it is in a better position to manage the risk — for example, by identifying and establishing relationships with back-up suppliers / alternative sources for critical materials and equipment.

• Consider ‘local content’ requirements, where local laws in the site country may mandate sourcing materials locally. In such cases, it might be necessary to seek exemptions or adjustments to these requirements to maintain supply chain flexibility.

Financial Due Diligence

• Conduct thorough financial due diligence at every link in the supply chain to assess the financial stability and ability to withstand disruption. Consider including provisions in your contracts requiring suppliers and subcontractors to provide financial information and undergo regular financial assessments throughout the life of the project.

Owner Supplied Materials

• Rather than paying a significant ‘risk premium’ or agreeing to reimburse contractors for the actual cost of critical equipment and materials, owners may prefer to supply the materials and equipment themself (“owner deliverables”) to help mitigate the risk of supply chain disruptions.

• Such an approach has the additional benefit of allowing the owner to control the quality of the materials used at the same time as maintaining flexibility to change suppliers and protecting against the risk of subsequent claims in the event that tariffs are imposed.

What are you experiencing? Would you consider adopting risk shared price increases? We’d like to hear the industry’s views. Please email: constructionforum@velaw.com.

¹ See the following announcement: https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/.

² https://www.cbsnews.com/chicago/news/donald-trump-economic-club-chicago-interview/.