Tariffs Are Creating Uncertainty in the Construction Industry

Since President Trump took office, tariffs have been a hot topic. The back-and-forth nature of tariff policies has created uncertainty in the construction industry, especially among contractors operating in Wisconsin.  Currently here in mid-March 2025, the news centers around 25% tariffs on steel and aluminum.

As most know by now, a tariff is a tax imposed by one country on goods imported from another country. Naturally, in the construction industry, there may be significant components of projects that are imported from other countries meaning these tariffs can have significant cost implications.

How Tariffs Affect Construction Contracts & Pricing

Who bears the cost of the tariffs? Are contractors able to pass along these tariff costs automatically? Aside from any obvious price escalation clause protections, it depends on the contract language and how such language is interpreted.

For example, Section 3.6 of the AIA General Conditions template states that “the Contractor shall pay all sales, consumer, use, and other similar taxes”.  The phrase “and other similar taxes” may be open to interpretation as to whether that includes tariffs. The phrase “and other similar taxes” may be open to interpretation—does it include tariffs? Your contract may explicitly define such taxes, refer specifically to tariffs, or omit them entirely. Ultimately, many disputes over tariff costs may be resolved in court.

Going forward, for new contracts signed, it’s crucial to clarify tariff-related terms upfront to avoid legal uncertainties.

Related Resource: Construction Contractors Methods of Accounting for Income Tax Purposes

Will Tariffs Slow Down the Wisconsin Construction Industry?

Tariffs on steel, aluminum, lumber, appliances, and other materials create concerns about project delays or cancellations due to rising costs. Time will tell if this (or other factors like immigration) create a slow-down in the construction industry.

One commonly used measure of the construction industry is the AIA/Deltek Architecture Billings Index (ABI).  The index for December 2024 and January 2025 were both hovering around 45, and, according to the index, a score under 50 indicates decreasing business conditions. The ABI suggests that reduced architecture billings often predict future slowdowns in construction activity.

Strategies to Protect Cash Flow Amid Tariff Uncertainty

In times of uncertainty, there are several things that contractors need to consider.

The most important thing is to protect and preserve cash flow. A common misconception is that contractors go out of business due to lack of profitability. However, most often, the real reason construction businesses fail is a sudden cash flow crisis. To monitor and improve your cash flow consider the following:

• Preserve or increase available lines of credit.
• Avoid using cash or short-term credit for purchasing long-lived equipment. Instead, finance long-term assets with long-term debt or leases.
• Monitor accounts receivable status closely and follow up on late receivables as soon as possible.
• Mind your metrics. Keep your current ratio (current assets divided by current liabilities) at least 1.5 to 1.
• Work to reduce your debt-to-equity ratio. A ratio of no more than 4 to 1 is best.

Tax Strategies for Contractors Navigating Tariff Costs

If you cannot pass along higher costs due to tariffs and anticipate lower taxable income in 2025 than in 2024, consider adjusting your quarterly estimated tax payments accordingly.

If cash flow is tight and enhanced Sec 179 or Bonus depreciation deductions are not needed for 2025, consider delaying vehicle and equipment purchases to the next year.  Alternatively, if you believe higher tariffs are on the horizon, consider purchasing tools and equipment subject to tariffs before the tariffs are imposed.

Related Resource: Back to Basics: The Percentage of Completion Method of Accounting for Contractors

How Delayed Construction Materials Impact Financial Statements

If construction materials and components get delayed due to changes in suppliers or items being held up in customs inspections, a late delivery date of the project could create a penalty for the contractor. Penalties that may impact a contractor’s final sale price for a contract fall under the variable consideration section of the Accounting Standards Codification (ASC) 606 Revenue Recognition Standard, so an adjustment may need to be made if a contract penalty is likely to be incurred.

The impact of tariffs on an individual contractor’s business, and on the industry itself, presents an uncertainty about continuing business operations and profitability. ASC 275 requires a business to disclose risks and uncertainties relating to the nature of its operations, its estimates, and vulnerability due to certain concentrations. Additional disclosures should be considered if such uncertainties and concentrations are present due to the tariffs.

Related Resource: Financial Statements for Construction Contractors

There’s an old saying “May you live in interesting times,” which is often attributed to an ancient Chinese curse.  We are certainly living in interesting times, for better or worse. Come to think of it, if this phrase originated in China, perhaps it would be fitting to attach a tariff to it?  Best to everyone navigating these times of uncertainty!

Need guidance on how tariffs may impact your construction business? Contact Wegner CPAs to discuss tax strategies and financial planning that will help you navigate this period of uncertainty with confidence.