While on the campaign trail, President-elect Trump spoke of implementing tariffs. How will government contractors be affected if the upcoming Trump administration enacts its proposed tariffs in 2025? Contractors offering goods to the government should (1) be alert to the possibility that proposed tariffs could increase their cost of performance, (2) factor increased cost and performance risks into their bids and proposals, and (3) ensure appropriate communications with subcontractors to lock-in particular quotes and scheduling to the extent necessary.
Most commercial manufacturers and suppliers of goods are able to pass increased material costs along to the consumer; however, government contractors, especially those with firm fixed-price contracts and options in place, cannot. To protect themselves, contractors should first consider whether the tariffs could affect their contracts under which they are currently performing. If so, they should evaluate the terms of their contracts to determine whether they contain clauses that will allow them to recover. If the tariffs lead to shortages, contractors may also need to seek appropriate schedule relief.
Federal Acquisition Regulation (FAR) 52.229-3: Federal, State, and Local Taxes
The ability to recover tariff-related costs depends on the terms of the contract. FAR 52.229-3 provides the most straightforward mechanism to recover tariffs imposed after contract award. That FAR provision provides: “The contract price shall be increased by the amount of any after-imposed Federal tax, provided the Contractor warrants in writing that no amount for such newly imposed Federal excise tax or duty or rate increase was included in the contract price, as a contingency reserve or otherwise.”[1] It is well-established that this clause unambiguously places responsibility squarely on potential bidders to include all applicable taxes in their bids.[2] The Armed Services Board of Contract Appeals (ASBCA) and Civilian Board of Contract Appeals (CBCA) have both held that it is incumbent upon potential bidders to conduct a sufficient investigation to ascertain the existence or nonexistence of such taxes since they are charged with knowledge of all applicable laws and regulations.[3] For a tariff to be considered a newly imposed tax, it must be implemented after the date set for bid opening or, for a negotiated contract or modification, after the effective date of the contract or modification.[4] Contractors should be mindful of this timeline when submitting bids as tariffs imposed after bid submission, but before contract award, will not be considered newly imposed under FAR 52.229-3.[5]
Contractors should also keep in mind that FAR 52.229-3(g) requires contractors to “promptly notify the Contracting Officer of all matters relating to any Federal excise tax or duty that reasonably may be expected to result in either an increase or decrease in the contract price and shall take appropriate action as the Contracting Officer directs.” Thus, if FAR 52.229-3 is in your contract and you provide prompt notice to the Contracting Officer that the new tariffs “reasonably may” affect pricing, you may be entitled to an adjustment to account for the increased costs.
Economic Price Adjustment (EPA) Clauses
If FAR 52.229-3 was not included in your contract, you may have other options. For example, an economic price adjustment clause, such as FAR 52.216-4 – “Economic Price Adjustment-Labor and Material”, calls for the Contracting Officer to negotiate a price adjustment after receiving notice of a price change. Increased prices that occur as a result of a tariff arguably fall within the scope of an economic price adjustment provision. Contractors should be mindful that this provision requires the contractor to provide notice within 60 days of an increase. Contractors should also be mindful that the aggregate of increases is usually limited to 10% of the original unit price.
Although EPA clauses may offer a solution for some contractors, not all contracts contain them. Contractors should carefully review their contracts for EPA clauses that may allow a price increase to account for escalating material costs. If a tariff is causing issues in performance and the contract includes an economic price adjustment clause, there may be a basis for an REA or claim. However, if your firm fixed-price contract does not include an EPA clause, the possibility always exists to negotiate a modification with the Contracting Officer to include one given the uncertainty in the market with potential tariffs. However, it is important to mention that this approach was largely unsuccessful during the COVID-19 pandemic as Contracting Officers were quick to note that the risk of supply cost increases on a firm-fixed price contract sits with the contractor. Thus, such cost risk should be built into pricing at the time of bid, and no modification was warranted post-award.
Other Effects: Shortages and Schedule Delays
In addition to the financial burden, another potential side effect is shortages and resulting schedule delays. In other words, contractors may face schedule delays due to an inability to obtain necessary materials, but those delays may be excusable.
FAR 52.249-8(c) applies to fixed-price supply and service contracts and states that “the Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-8(c)(2) provides a list of examples under which a contractor is entitled to an excusable delay, which includes “acts of Government in either its sovereign or contractual capacity.” Excusable delays in fixed‑price construction contracts are similarly dealt with in FAR 52.249-10(b), which states that “[t]he Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause if – (1) the delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor.” Such clauses may include “acts of the Government in either its sovereign or contractual capacity.”[6]
The courts and boards have also long recognized that contractors should be granted schedule extensions if experiencing supply shortages beyond their control.[7]
Takeaways
The possible imposition of tariffs leads to a number of uncertainties for a government contractor, especially in a firm fixed-price contract. In bid proposals, contractors should consider the price and performance risks posed by the possibility of tariffs and structure upcoming bids and subcontracts to account for this risk. Additionally, contractors should closely examine their existing contracts for any remedy-granting clauses and pay special attention to the timelines and notice requirements associated with such clauses.
If you need assistance with issues that could arise with the imposition of tariffs during the lifecycle of your contracts, please contact Lauren Brier, Abigail Finan, or another member of PilieroMazza’s REAs, Claims, and Appeals or Government Contracts practice groups.
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[1] 48 C.F.R. 52.229-3(c).
[2] Hunt Construction Corp. v. United States, 281 F.3d 1369, 1372-3 (Fed. Cir. 2002).
[3] GarCom, Inc., ASBCA No. 55034; B&M Cillessen Construction Co., Inc., CBCA No. 1110.
[4] FAR 52.229-3.
[5] B&M Cillessen Construction Co., Inc., CBCA No. 1110.
[6] FAR 52.249-10(b)(1)(ii).
[7] J.D. Hedin Construction Co. v. United States, 408 F.2d 424 (Ct. Cl. 1969); Maverick Diversified, Inc., ASBCA No. 19454.
