Joe Natarelli of CBIZ discusses how tariffs challenge the construction industry  

The construction industry drives the global economy by supporting infrastructure development, residential and commercial projects, and overall economic growth. The introduction of tariffs on imported materials presents significant challenges for contractors. They essentially act as taxes on imports and stand to drastically alter the cost structure of construction projects by affecting everything from raw materials to finished products. Let’s take a closer look at the materials most affected by tariffs and the strategies that contractors can employ to mitigate their impact. 

Global Trade 101: tariffs and their effects  

Governments impose tariffs to protect domestic industries from foreign competition, generate revenue, or respond to trade imbalances. Whatever problem they are a response to, their immediate impact is the same: an increase in the cost of imported goods. Since the construction industry relies heavily on a global supply chain to source materials from around the world, this translates to higher project costs and tighter profit margins. 

Materials affected by tariffs 

Tariffs on the essential materials that the construction industry relies on will increase costs and cause project delays as contractors scramble to restructure their procurement processes. Among the most impacted materials are: 

1. Steel and aluminum

Steel and aluminum are to construction what flour and water are to baking: fundamental to a wide range of construction projects. The imposition of tariffs on these metals, which are commonly used for structural frameworks, roofing, and cladding, are now subject to significant price increases, particularly if they are coming from major exporters like China. That raises the overall cost of construction projects of all kinds, including commercial and residential properties and various forms of infrastructure. 

2. Lumber

The construction industry relies on lumber for framing, flooring, finishes, and more. Tariffs on softwood lumber, particularly those targeting imports from Canada, have increased costs for US contractors. Lumber is a primary material in residential construction, so these tariffs have a direct impact on housing affordability and residential project timelines. 

3. Ceramic tiles

   

Ceramic tiles, often used for flooring and finishes, are often imported from countries like China, Italy, and Spain. Tariffs on these imports means contractors and developers will likely pay higher prices, potentially limiting the design options available while simultaneously increasing overall project costs. 

4. Solar panels and renewable energy components

Solar panels and related renewable energy components have become integral to modern construction projects as sustainable and green building practices are more widely adopted. Tariffs on imported solar panels, primarily those sourced from China, a leading supplier, have increased costs for contractors that provide sustainable solutions. 

How to mitigate the impact of tariffs 

Contractors can adopt several strategies to help mitigate the challenges that tariffs introduce and protect the viability of affected projects. 

1. Diversify suppliers and sources

One potentially effective way to avoid the worst impact of tariffs is to diversify your supplier base. As things stand, countries are tariffed on a case-by-case basis, so relying on a single country for materials might expose your business to particularly high tariff-related risks. Establishing relationships with suppliers in different countries or regions can help you quickly source materials from countries that may not be subject to the highest tariffs. Taking this approach not only reduces your dependence on any single source, but it also offers greater flexibility in your efforts to manage costs. 

2. Utilize domestic suppliers

Sourcing materials from domestic suppliers whenever possible can help avoid the impact of tariffs. Domestic materials may be more expensive than imports but are exempt from tariffs and should be able to offer more predictable pricing. Working with local suppliers can also reduce shipping costs and lead times.   

3. Implement tariff clauses in contracts

Clauses in contracts with clients and suppliers can protect your business from unexpected cost increases, including those related to tariffs. Tariff-related clauses can allow for price adjustments if tariffs are imposed or increased after the contract is signed. Transparent communication with clients about the potential impact of tariffs and clear contract terms can prove helpful in managing expectations and avoiding disputes. 

4. Strategic purchasing and inventory management

Planning purchases strategically can minimize the impact of tariffs. If you anticipate tariffs on specific materials, consider bulk purchasing or increasing your inventory before applicable tariffs take effect. Doing so can lock in lower prices while ensuring a steady supply of materials. It’s important to carefully consider your future needs when pursuing this strategy. That will help you balance your inventory levels and storage costs with general cash flow considerations. 

5. Leverage tariff exemptions and trade programs

Stay informed about any tariff exemptions, trade programs, and agreements that may become available and which could benefit your business. Some materials might qualify for exemptions or reduced tariff rates under certain trade agreements. Programs like the Generalized System of Preferences (GSP) provide duty-free treatment for certain goods from eligible countries. Consult with a trade expert or customs broker who can help you identify opportunities for various forms of tariff relief. 

6. Innovate with alternative materials

Exploring the use of alternative materials not subject to tariffs can help mitigate the cost increases associated with conventional materials subject to tariffs. Innovations in the construction industry have led to the development of cost-effective and sustainable alternatives. For example, recycled materials, engineered wood products, and locally sourced materials may be able to replace imported goods entirely, helping businesses avoid tariffs without compromising project quality. 

7. Enhance cost efficiency

Enhancing cost efficiency in other areas of your business could prove helpful in mitigating the impact of tariffs. This might include efforts to optimize supply chains, improve project management practices, reduce waste, and enhance productivity. Investments in technology and automation can help you streamline operations and reduce costs, mitigating some of the financial burden that tariffs represent. 

Conclusion 

The tariffs on imported construction materials present significant challenges for the industry, driving up costs and challenging project timelines. By diversifying suppliers, sourcing materials from domestic producers, negotiating favorable contract terms, and exploring alternative materials, contractors can mitigate some of the negative impact of tariffs. Stay informed about trade programs and regulatory changes to implement cost-saving measures to further safeguard your business. Adapting to the dynamic trade environment and proactively managing risks will help to ensure the continued success and profitability of construction projects, even in the face of the price pressures and business disruptions that tariffs will introduce.   

www.cbiz.com 

Joe Natarelli is Managing Director at CBIZ. CBIZ helps businesses discover new ways to grow with applied industry knowledge, innovative technology, and data-driven insights that inspire greater possibilities. Unlock funding, empower projects, and reveal powerful tax incentives with CBIZ’s specialized solutions for the construction industry.