Multifamily Executive Magazine

Shapiro Sher Partner David B. Applefeld provides strategies for owners and contractors to protect themselves and their projects.

While the impact of tariffs remains uncertain following the Trump administration’s Liberation Day, David B. Applefeld, a partner with Shapiro Sher Guinot & Sandler in Baltimore who concentrates his practice in the areas of construction law and commercial litigation, encourages multifamily owners and contractors to take steps to protect themselves and their projects in this changing environment.

He says a proactive and transparent approach is the best way for the stakeholders to navigate these issues, protect their new construction projects, and avoid future disputes.

“We know the tariff issue out there, and we know that, once implemented, tariffs have the potential to substantially affect the cost of certain construction materials—steel, lumber, electrical components, petroleum products,” he says. “Taking preemptive steps now gives the parties some control over how these issues will be addressed when they arise, so as to mitigate the potential for defaults or dispute, as opposed to doing nothing and hoping for the best.” 

A first good step, Applefeld says, is to conduct a thorough review of existing contracts and contract forms.

“I think the best practice recognizes that tariffs create uncertainty and risk, address how that risk will be allocated between the parties through their contracts, and create an escape valve. No owner wants to complete a project that is not financially viable, and no contractor wants to take on an unknown risk,” he notes.

Applefeld says it starts with having contracts reviewed and drafted in a manner that addresses tariff-related impacts on theconstruction process. This includes not only cost increases, which can be substantial, but also delays that affect the path of construction. “Not all form contracts are the same, and most do not adequately address these issues,” he explains.

Prudent parties—the developer or owner who is building the project and the contractor—should recognize these issues and work out an arrangement that both sides can live with during the contract negotiation phase. Part of that arrangement could be a mutual agreement to separate on agreed terms in the event the project becomes unfeasible.

“All contracts start as a blank piece of paper. The parties are not wedded to a specific formula and are free to include whatever terms they wish. Once an agreement is reached and the document is signed, it becomes enforceable and will control the relationship going forward,” he says.
This gives the parties the freedom to add provisions that specifically address tariffs and other unanticipated governmental actions that could impact the construction process. He notes, “A well-drafted contract will include clearly defined triggering events, such as a certain percentage cost increase that is attributable to a newly imposed tariff.”

Another proactive step he recommends is analyzing material sourcing for current and future projects.

“Owners and contractors need to have the foresight to recognize that material sourcing might also be an issue,” he says. “For example, when preparing contract specifications, owners and the design team should be cognizant of potential trade barriers and look for alternative products that might be more accessible, more affordable, and not involve international trade.”

He notes that bonding can be another tool available to owners to protect their projects.

“A performance bond is a three-party agreement whereby a surety guarantees that the contractor will complete the project in accordance with the terms of its contract. If the contractor defaults, the bonding company steps in and completes the contract or pays the owner for the cost to do so. Most public projects require that the contractor obtain a bond. Bonding is also an option available to private owners,” Applefeld says. “There is a cost benefit analysis for private owners, however, because the contractor’s cost to obtain a bond is typically passed on to the owner as part of the contract price. This increased contract price should be weighed against the owner’s comfort of knowing that the contractor’s performance is backed by a third-party that guarantees the project will be built on time and on budget.”

Applefeld also cautions that sitting at your desk hoping nothing happens is a dangerous risk.

“Now is the time to conduct a thorough review of existing projects, as well as those projects that are under consideration or in negotiation. Be proactive, get a handle on the potential impact of tariffs, and develop a plan that will allow you to address them when they arise,” he adds.

With ongoing changes in trade policy, businesses working in the construction industry need to be proactive when negotiating and drafting their contracts and evaluating their risks.

Construction services are typically delivered under either a fixed price or guaranteed maximum price (GMP) arrangement. Under a fixed price contract, the contractor agrees to perform a defined scope of work for a sum certain. Absent a change to the scope of the contractor’s work, the contract price is fixed, and the contractor bears the risk of unforeseen events impacting its cost to perform. Under a GMP contract, the contractor is paid for the cost of the work plus a stipulated fee, which in total cannot exceed an agreed maximum contract price. Absent a change to the work, the contractor similarly bears the risk of events impacting its cost to perform because there is a maximum contract price. The imposition of tariffs on imported construction materials can dramatically impact a contractor’s cost and ability to perform.

A tariff is a tax that is imposed by one country on goods imported from another country. Tariffs are paid to the country of destination by the party importing the foreign goods. Tariffs are often assessed at a percentage of the value of the imported product. For example, if a shipment of imported lumber is valued at $10 million dollars and a 25% tariff is imposed, the importer must pay a $2.5 million tariff on the imported goods. Because this increased cost is passed down through the supply chain, tariffs can significantly increase the cost of imported products used by the construction industry such as lumber, steel, aluminum and electrical components. In addition to increasing construction material costs, shifting tariff policies and associated supply chain disruption also lead to uncertainty when setting the contract pricing.  Contractors and project owners facing these challenges can take immediate steps to protect themselves by reviewing their existing contracts and contract form templates. It is noteworthy that the standard American Institute of Architects (AIA) form contract documents do not specifically address tariffs, but do include provisions concerning taxes and potential force majeure events that may be relevant to analyzing the impact and allocation of risk associated with tariffs.

Because tariff policies can change rapidly and create uncertainty for business in the construction industry, a well drafted contract that anticipates and addresses the impact of tariffs is essential. The following contract provisions are among those that should be considered:

• Price Escalation Clause: A price escalation clause is a contractual provision which transfers the risk of price fluctuations from the contractor to the owner, by allowing the contractor to increase its agreed contract price upon the happening of certain events such as material cost increases, changes in labor rates or other market conditions. Price escalation clauses are designed to protect the contractor from unexpected and unanticipated increases in costs that might otherwise lead to financial hardship or project delays. Price escalation clauses should be negotiated at the contract drafting phase. A well drafted price escalation clause will clearly identify the triggering event and the adjustment mechanism, and will document the existing conditions at the time the contract is signed.

• Change-in-Law Clause: A change-in-law clause is a contractual provision that specifies how unforeseen legal changes will be addressed by the contracting parties. These clauses set forth the terms on which a party supplying goods or services can recover its increased cost to perform due to a change in the law. Absent such a clause, the cost of complying with both current and unforeseen legislation that is enacted after the contract is signed is deemed to be built into the contractor’s price, and the risk falls on the contractor.

• Force Majeure Clause: Taken from French law, the term force majeure literally translates to mean “superior force”. It refers to a contractual risk allocation provision which excuses performance when circumstances beyond the contracting parties’ control make performance commercially impracticable, illegal, or impossible. Such clauses have been successfully invoked to excuse performance, obtain time extensions, and justify changes to the contract price following natural disasters, acts of terrorism and changes to governmental regulations. By definition, a force majeure event must include three characteristics. First, the triggering event must have been unforeseeable. Second, the event must arise from an external cause outside the control of the party seeking relief. Finally, the event must be unavoidable such that the party seeking relief could not have avoided the adverse consequence by exercising due diligence.

Shapiro Sher’s construction law team has more than 30 years of experience counseling contractors, owners, design professionals and suppliers in all phases of the construction process. If you have questions about how tariffs may impact your business or navigating other construction law matters, contact David B. Applefeld at dba@shapirosher.com or (410) 385-4267.

An agreement to buy or sell real property in Maryland must be in writing, and Buyers and Sellers of residential real estate typically use standardized form contracts to document the transaction. The Maryland Association of Realtors Residential Contract of Sale (the “Contract”) is the most used form contract. The provisions of this Contract are legally binding on the parties and are often required by law, but many are not negotiable. It is therefore important for Buyers and Sellers to understand what they agree to before signing the Contract.

· With limited exceptions, the Seller of a single-family home must provide a property condition disclosure statement or a property condition disclaimer statement to the Buyer before the sale. In the disclosure statement, the seller must identify known defects and other information regarding the condition of the property. These disclosures must be accurate, as they may create liability for the Seller if all known defects are not disclosed. Alternatively, many Sellers choose to provide a disclaimer statement. A Seller who elects to provide a disclaimer statement sells the property “as is” and is only required to identity “latent” or hidden defects, which cannot be discovered by a prudent Buyer who chooses to inspect the property.

· If negotiated and agreed to by the parties, the Buyer can condition their purchase upon an inspection of the property. These inspections often include the structural and mechanical elements of the property, mold, lead paint, radon, and termites. The contingencies and the terms thereof will be formalized in an addendum to the main Contract.

· The Contract also contains default provisions and remedies. In the event the Buyer fails to make full settlement or otherwise defaults, the Buyer may forfeit their Deposit and be liable to the Seller for damages caused by the default. If the Seller fails to make full settlement or otherwise defaults, the Buyer may have the legal right to enforce the contract and require the Seller to transfer the property, or alternatively to recover damages.

· If any disputes arise before, during, or within one (1) year after settlement, the parties are required to participate in a mediation session sponsored by the Maryland Association of Realtors before filing a lawsuit in court.

· If a lawsuit is filed, the prevailing party is entitled to recover their costs and attorney fees in addition to any damages or other relief they receive.

If you have questions about the subject of this post, Maryland real estate law, or have encountered any issues when buying or selling residential real property in Maryland, please reach out to Patrick J. L. Dillon, Esquire, pjld@shapirosher.com, (410) 385-4270.