Case Study: Managing Trumps Tariff Policy as a Small/Medium Sized Contractor - Strategy for Contractors

For a business like a contracting company, navigating the complexities of tariffs requires a proactive and multi-faceted defensive strategy. Here’s how a contractor should start thinking and executing such a strategy for contractors plan:

Thinking Strategically:

• Identify Vulnerabilities: The first step is to meticulously analyze the business's supply chain. What materials are imported and potentially subject to tariffs? This could include steel, aluminum, certain types of lumber, specialized tools, or even components in HVAC or electrical systems. Understanding the origin of these materials and their tariff status is crucial.   

• Assess Financial Exposure: Quantify the potential financial impact of increased material costs. How much would project budgets be affected by a 10%, 25%, or even higher tariff? This analysis helps prioritize which materials pose the greatest risk and require immediate attention.

• Evaluate Alternatives: Begin exploring potential alternative suppliers, both domestic and international, in countries with more stable trade relations. Research the quality, cost, and reliability of these alternatives. Consider whether substituting materials is feasible without compromising project specifications or quality standards.   

• Review Contract Language: Scrutinize existing and future contracts. Are there clauses that allow for price adjustments due to unforeseen increases in material costs, such as tariffs? If not, this needs to be a critical consideration for future contract negotiations.   

• Understand Market Dynamics: Keep abreast of current trade policy developments and industry trends. Tariffs can change, and understanding the broader economic landscape can help anticipate future challenges and opportunities.   

  

Executing the Defensive Strategy:

• Diversify Suppliers: Actively cultivate relationships with multiple suppliers, including domestic sources. Reducing reliance on a single or a few import-heavy suppliers can mitigate the impact of tariffs on specific materials.   

• Negotiate Price Protection: When signing contracts with suppliers, attempt to negotiate clauses that offer some protection against tariff-related price increases, such as fixed pricing for a longer duration or mechanisms for sharing the cost burden.   

• Stockpile Strategically (with Caution): If financially feasible and storage allows, consider strategically stockpiling essential imported materials before anticipated tariff increases take effect. However, this needs careful planning to avoid tying up excessive capital and considering potential storage costs and material degradation.   

• Communicate Transparently with Clients: Proactively discuss potential cost fluctuations due to tariffs with clients during the bidding and contract negotiation phases. Transparency builds trust and avoids surprises down the line. Explore including clauses in contracts that address potential material cost increases beyond the contractor's control.   

• Explore Value Engineering: Work with clients and design teams to explore value engineering options. Can alternative, domestically sourced materials be used without compromising the project's integrity or functionality? This can be a collaborative way to mitigate tariff impacts.   

• Invest in Efficiency: Focus on improving operational efficiency to offset potential cost increases. This could involve optimizing material usage, reducing waste, and streamlining project management processes.

• Seek Legal and Financial Counsel: Consult with legal and financial professionals who specialize in international trade and contract law. They can provide tailored advice on navigating tariff regulations and drafting protective contract language.   

• Stay Informed and Adapt: Continuously monitor trade policy changes and be prepared to adapt the defensive strategy as needed. Flexibility and staying informed are crucial in a dynamic trade environment.   

By proactively thinking through these strategic points and diligently executing these defensive measures, a contracting business can better navigate the challenges posed by tariffs and work towards maintaining profitability and project viability.