In 2018 President Trump and lawmakers imposed sweeping changes to trade agreements and imposed tariffs on numerous products. These developments have directly affected supply and labor in the U.S. market, resulting in higher cost materials and increased labor cost, which ultimately drives up the price on the final product. These changes impact several sectors, but especially the construction sector.
On the supply side, to help increase the sale of American steel and aluminum, President Trump imposed tariffs on steel and aluminum imported to the United States. According to the United States International Trade Commission database, the new laws have imposed a ten percent (10%) tariff on aluminum and twenty-five percent (25%) tariff on steel purchased outside of the United States.Similarly, lumber purchased from Canada increased by twenty-five (25%) in 2018.
These changes directly affect the price of logistics and shipping. Increased supply costs have two significant impacts on construction projects: price volatility and schedule delays. These impacts can have significant monetary consequences for general contractors, materialmen, and subcontractors. According to the U.S. Bureau of Labor Statistics’ Producer Price Index (“PPI”), inputs for the construction industries, which includes all goods and services used in construction rose between September and October 2018.Specifically, the PPI climbed 0.6 percent in October 2018 following a 0.2 percent rise in September and a 0.1 percent decline in August.This increase demonstrates the underlying rise in construction materials and labor costs.
While the tariffs do not directly affect the cost of labor, there is an indirect impact on the funds owners and general contractors have available to allocate towards labor cost. With much of their construction budget spent on supplies, owners and general contractors could find themselves on a shoestring budget and unable to find top-tier laborers. Essentially, the tariffs lead to a trickle-down effect that has implications on all sides of the business.
Other changes in the law such as the United States-Mexico-Canada Agreement (“USMCA”) and imposing e-verify on construction projects play a role in the shifting construction landscape. According to the Associated General Contractors of America, construction jobs have increased in thirty-eight (38) states between March 2018 and March 2019.
The USMCA provides stronger workers’ rights, including collective bargaining rights, to workers in Mexico, which will likely result in higher wages for laborers. The potential for an increase in labor costs should be a consideration for any new construction projects. The E-Verify System Act of 2018 requires employers to use a government website to check the immigration status of job applicants. Current law prohibits any U.S. employer from knowingly hiring and continuing to employ unauthorized foreign nationals. This mandatory screening of potential workers through the government’s E-Verify database could contribute to the shrinking of the labor market. Owners and general contractors need to properly allocate enough resources to comply with the new market conditions.
How do owners and general contractors deal with these shifting costs and laws?
It is crucial to draft your contract carefully. Pay close attention to the terms relating to liquidated damages for schedule delays, quality of supplies, change order procedures, and labor requirements. Check with your suppliers during the bid phase to confirm any recent price volatility or delivery delays, and account for these in your proposal and final contract.
If you are already engaged in a project and find you are running into these issues, you may consider negotiating addendums to the contract to allow for modification to the schedule or materials list. You may even consider revising the materials list to substitute more expensive products for alternative materials of similar or higher quality to help offset the increase of steel, aluminum, and lumber cost.
See Tariffs database.
U.S. Bureau of Labor Statistic, Producer Price Index News Release November 9, 2018 (USDL 18-1789) available at https://www.bls.gov/news.release/archives/ppi_11092018.htm.
Associated General Contractors of America, Construction Employment Increase in 38 States From March 2018 to March 2019 While 29 States Add Construction Jobs between February and March.April 19, 2019, https://www.agc.org/news/2019/04/19/construction-employment-increases-38-states-march-2018-march-2019-while-29-states