As the Trump administration’s trade policy unfolds, commercial real estate developers, investors, and lenders are expressing concern over the impact of tariffs on the cost of construction projects. While the media tends to offer dire predictions, negotiations with targeted countries are not final. New tariffs seem to be proposed, levied, suspended, and/or reciprocated almost daily. It’s impossible to predict the outcome and effect of the trade war at this stage, but there are several factors we can examine to bring perspective to the discussion, including the current regional construction market, the specifics of each project, and risk mitigation strategies.
The Upside of a Softening Market
Tariffs are just one of many factors affecting material prices. In the early 2000s, George W. Bush imposed steel tariffs of up to 30% to protect domestic producers. Obama continued selective tariffs, including duties on Chinese-made steel pipes. Trump significantly escalated trade protectionism during his first term, notably with a 25% tariff on steel and a 10% tariff on aluminum in 2018. Biden maintained many of those tariffs during his term. These tariffs all impacted material costs to varying degrees, depending on how they were moderated by other economic policies, how the international community responded, and market conditions of the time. As it happens, today’s market conditions may help mitigate the impact of new tariffs.
First, construction slowed somewhat at the end of 2024, as the overzealous post-COVID rebound market wound down. Overbuilding after COVID caused significant inflation along with supply issues. Now, inflation is returning to normal levels, and fewer projects mean reduced demand and better contractor capacity, potentially tamping down prices. (While tariffs apply only to imported materials, they tend to drive up the price of domestic materials as demand for domestic materials increases and competition from foreign goods decreases.)
Second, COVID changed the way contractors and project owners procured materials. Supply chain disruption caused procurement to shift away from China. Now, many contractors and developers favor domestic sources, or, when importing lower cost items is necessary, more friendly foreign sources, such as Vietnam and South Korea.
One Piece of the Bigger Picture
When you hear about, say, a 25% tariff on steel and aluminum, it’s easy to imagine your construction budget jumping significantly. Of course, the math doesn’t work like that. So many variables—type of project, location, design, specifications—affect project budgets. Accordingly, the impact of tariffs on the bottom line of a construction project will vary drastically.
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Depending on the type of project, materials account for roughly 40-60% of total construction cost. However, tariffs only apply to imported materials, and over 80% of materials for U.S. construction projects are domestically sourced. Depending on the materials specified and where the project is located, 0-30% of materials on any given project may be imported. Then, the rate of tariff on imported materials will vary based on where they are sourced. Considering the tariffs in the context of the overall project budget, the impact may be closer to 3-5%, even lower in many cases. While this can be meaningful, owners may find it more manageable than fear might initially indicate.
Furthermore, project owners can mitigate some of this impact by employing strategic risk management measures.
Risk Mitigation Matters
Uncertainty is the greatest challenge for construction project owners facing these tariffs. Between the ongoing trade negotiations and all the market and project variables in play, we cannot determine what the ultimate impact will be. Unfortunately, ongoing projects are probably at the highest risk of impact; risk management options will be limited for construction deals closed in late 2024 if they only budgeted for inflation and require imported materials. Those working on deals now should seek to understand their potential exposure.
Identify which materials will be imported and think about the likely impact of tariffs based on what we know today. Establishing a budget based on the worst-case scenario would probably be tough to pencil and could kill deals. Instead, think about where materials are coming from, and how much from each country. Make a backup plan for sourcing alternative materials or suppliers.
Large projects, with better capitalized project owners and stronger contractors, will have an advantage as they have resources to source from different markets and the purchasing power to lock-in materials sooner. Many purchasers are accelerating shipping to get materials here before tariffs take effect. In this case, storage costs should be considered. Note that advance purchasing does not necessarily mean avoiding tariffs, as tariffs are applied in customs. Even if you paid in advance, you may wind up paying tariffs to get materials out of customs.
Contracts must address who’s responsible for escalated costs due to tariffs. If it’s not clear, disputes may cause project delays. Standard AIA construction contracts do not specifically discuss tariffs but do specify that contractors are responsible for sales, use and similar taxes that are legally enacted when the bids are received or negotiations concluded, whether or not yet effective. Project owners with fixed price contracts may argue that increased costs are the contractor’s problem, but that may not be the case, and owners may have to absorb some of it. Consider higher contingencies to accommodate increased costs.
Managing Uncertainty in Construction Deals
If the prospective impact of tariffs is threatening your construction deal or your peace of mind, consider engaging an experienced construction risk management consultant like Partner. Using well-established tools like Project Budget Reviews or Document and Cost Reviews, we can help assess risk exposure and implement mitigation strategies to keep construction projects on track. For lenders concerned about tariff-related price escalations, Surebuild project completion insurance covers increased costs once the policy is triggered. Surety bonds, project completion insurance, and increased contingencies are the three tools we are seeing most often.
Ultimately, the tariffs introduce another level of uncertainty into construction deals--but anyone who’s been in the construction industry for a while knows that uncertainty is par for the course. As always, you can still have successful construction deals, provided you have a solid risk management strategy in place.
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Robert W. Barone
Robert W. Barone, R.A., LEED AP is Director of Construction Services at Partner Engineering and Science, Inc. With almost 40 years CRE experience, Barone has managed and provided consulting on billions of dollars in real estate transactions and development projects. He has consulted on a wide range commercial and residential projects, with a strong concentration in complex mixed-use and high-rise projects. Barone is a pioneer in the establishment of sound due diligence and construction risk management practices.
