Worried About Tariffs—or Just Tired of Price Surprises?

The Problem: Price Increases After Bids Are Locked In
Contractors often find themselves trapped when supplier prices surge after they have already quoted a price to a customer. This situation is all too familiar to those who experienced the supply chain disruptions and price spikes of the recent pandemic. For many, the challenge is finding a way to pass along these increases without eroding their profit margins or alienating customers.

Common (But Risky) Approaches

1. Allowances for Critical Materials: While allowances are useful for items a customer can choose—like light fixtures or tile—they are a poor fit for essential materials where the customer has no choice—like framing lumber, drywall, or concrete. Customers cannot choose the type or quantity of these materials, which are dictated by structural design. Using allowances for such items creates confusion and disputes, with customers misunderstanding why they must pay extra for something they did not select.
2. Force Majeure Clauses: Initially, some contractors relied on force majeure clauses during the pandemic, arguing that price volatility was an unforeseen event. Early on, some courts accepted this view, but as price volatility became expected, courts increasingly rejected force majeure claims for price increases. Most force majeure clauses simply do not cover economic changes or cost increases.
3. Hope for the Best: In the absence of clear protections, some contractors simply hope prices remain stable. This strategy is a recipe for disaster, as it offers no protection against sudden cost increases.

The Importance of Price Transparency and Managing Customer Expectations

One of the most critical but often overlooked elements in managing price volatility is transparency. Contractors who clearly disclose which items are subject to price adjustment, under what conditions, and by how much, not only protect their margins but also build trust with customers. Transparent terms allow customers to make informed decisions—whether to proceed with the project, delay it, or explore alternatives.

Contractors who lack transparency, often due to fear of losing the project, may avoid clear language in their contracts. But this approach is a recipe for disputes, customer mistrust, and financial losses when costs rise. A customer who feels misled is far more likely to challenge an invoice or withhold payment. Proactively managing customer expectations by being honest about potential price adjustments reduces misunderstandings and maintains customer relationships.

Another consideration you need to be aware of is the consumer’s ability to pay for these unexpected cost increases. If a client is paying for the project with their own funds, you may want to inform them up front that the project cost may increase due to this volatility and confirm that they are prepared to cover this additional expense if necessary. If a client is financing a project with a construction or renovation loan, it is important to know that the lender cannot increase the loan amount after the loan is in place due to regulatory constraints. They should check with their lender to see if they will allow a contingency to be included in the available loan amount. Just keep in mind that most lenders will require documentation that the price increased after the initial budget was provided. If the contingency funds are not needed, they will not be disbursed by the lender and will not be included in the borrower’s loan balance upon completion of the project.

The Best Solution: A Well-Drafted Price Escalation Clause
Experience from the pandemic has shown that the best protection is a properly drafted price
escalation clause in your bid contracts. This clause should clearly state the conditions under
which a price adjustment may occur, how the adjustment will be calculated, and how it will be
communicated to the customer. A strong price escalation clause typically includes:

• Trigger Events: Defining specific circumstances (e.g., supplier price increases of more than 5%) that allow for a price adjustment.
• Calculation Method: Outlining how the price adjustment will be determined (e.g., based on supplier invoices or a percentage increase over the base cost).
• Customer Notification: Requiring prompt notice to the customer of any price changes.

By proactively including a price escalation clause in your contracts, you gain the flexibility to adapt to market fluctuations without absorbing the full cost yourself. Contractors who implemented such clauses during the pandemic were able to maintain their margins and preserve customer relationships.

How to Talk to Customers About Price Volatility
Having a solid contract is only half the battle—successfully presenting it to the customer is just as critical. The key is to be open, practical, and solutions oriented. Start the conversation by acknowledging that market volatility is outside of anyone’s control, but that your team has taken responsible steps to anticipate and manage that risk.

Explain that the price escalation clause is not a loophole or a way to shift risk to the customer, but rather a tool to keep the project moving forward without cutting corners or compromising quality. Emphasize that your approach is transparent and based on real supplier pricing, not guesswork. If you include a contingency amount in the budget, explain that it’s there to protect everyone—not just the contractor—and that unused contingency funds will not be charged.

The more your customers understand the rationale behind your process, the more confident they’ll feel in signing and proceeding. For customers who are financing, you might even offer to speak directly with their lender to clarify how your contract supports responsible budgeting.

Taking Action Now
Tariffs and supply disruptions may be out of your control, but how you prepare for them isn’t. If your contracts don’t include a price escalation clause—or if the one you’re using hasn’t been stress-tested—now is the time to fix that. Review the risks, update your contract language, talk to your customers, and equip them to make confident decisions. The key strategies are transparency, contingency planning, and contract terms that reflect today’s realities. Don’t wait for the next price spike to realize your contracts didn’t go far enough.

About the Authors
Bill Gschwind is a construction and business attorney and NARI member since 2012, and has helped owner-operated contractors protect their businesses and stay competitive through economic shifts – especially when the market isn’t on their side. He is the founding attorney of Minnesota Construction Law Services, PLLC, in Roseville, MN.

Kevin Nunn is a mortgage lender who has been assisting consumers and businesses with their financing needs for over 30 years. He has specialized in construction and renovation financing. His involvement with NARI has included 2 years as a Chapter President. He is a Residential & Commercial Lending Specialist at Empire Home Loans in Fair Oaks, CA.