Tips to Manage Risk and Mitigate Impact to your Bottom Line.
Despite recently reaching agreement on a renegotiated trade deal (the United States Mexico-Canada Agreement or USMCA), the US Government has made clear its intentions to continue to impose tariffs on steel and aluminum imported from Canada and Mexico. Here are some ways to manage the associated risks and mitigate the impact to your bottom line.
Put the Risk in Perspective
When planning future developments step back and assess the potential magnitude of tariff related cost impacts. For some building types like high-rise structural steel office towers, the susceptibility to cost increases will be a significant risk to the bottom line. Analyzing how tariffs may affect your project deserves time, effort and attention. For other projects like most high-rise residential buildings the potential cost impacts will be quite small. For example, for most high-rise residential buildings, estimated average cost increases attributable to tariffs should be no more than 2% and likely below 1% of project costs. To put that in perspective, construction cost escalation for high-rise residential projects in the very busy Vancouver and Toronto markets has been at least 7% and as high as 12% over the past 12 months; so, tariffs should likely not be at the top of your list of concerns.
When procuring construction contracts, the best defense against incurring increased costs due to tariff confusion is to generate as much competition as possible. There is no better antidote to unnecessary cost increases than the light of a truly competitive, market-driven bid. Be wary of the “you need to act now, or the price goes up 25% tomorrow” mentality. It may be true in some situations but, in many cases, it is mostly false.
For projects that are already underway, claims for additional costs due to tariffs implemented after contract award may arise. In these cases, the obvious first step is to review your contract to determine the validity of the claim. If the contract allows for compensation due to the introduction of new tariffs, more investigation is warranted. It is important to understand what is being claimed and if the material is one of the tariff items covered in the Surtax Order. If it is a valid claim, somewhere in the supply chain there should be documentation demonstrating payment of the additional tariff. Insist on being provided this documentation.
Seek Professional Input
In instances where the claim is substantive, it may be well worth the time and fees to engage professionals such as a lawyer knowledgeable in trade agreements or a knowledgeable cost consultant to assist with your due diligence. The introduction of the Surtax Order serves as a reminder that it is important to be fully aware of the ways new policy does and does not affect us. The steel and aluminum tariffs are a prime example of how time invested in understanding an issue can deliver significant savings. To mitigate the risk of unnecessary cost increases, one should always put the risk into perspective, generate competition along the supply chain, perform their due diligence to become informed and, if necessary, seek professional assistance from someone who is versed in trade agreements and dispute resolution.
For more background into how tariffs work, read: Tariffs & Real Estate Development: Cutting Through the Confusion
Want more insight on how disruption and rapidly changing market forces like cross-border trade policy are impacting the property development industry? Read Altus Group’s Real Estate Development Trends Report.