As reported and analyzed in recent posts, the Trump administration has begun implementing a number of new tariffs, including three sets of country-based tariffs (China, Canada, and Mexico) and Section 232 tariffs on steel and aluminum. We expect further announcements of reciprocal tariffs on imports from China, Canada, and Mexico, and other tariffs on specific items including lumber, semiconductors, and agricultural products. These tariffs raise significant concerns for government contractors. We have outlined below five points government contractors should keep in mind when assessing the impact of these tariffs on their contracts.
At the outset, however, we note that each of the five points below trace back to the foundational rule of government contracting: always read the contract. This is a basic point but bears repeating because the first step in understanding the impact of the Trump administration’s new tariffs on a particular contract is to thoroughly review the specific contract at issue. Your contract might contain clauses that offer protections that apply to this circumstance. Most notably, contractors should examine clauses relating to requests for equitable adjustment and duty-free entry protections. As discussed further below, these clauses could provide a basis for a contractor to seek compensation for, or alleviation of, certain tariff-related cost increases under their contracts.
- Consider Whether FAR 52.229-3 Applies: FAR 52.229-3 is a standard clause included in most fixed-price contracts. It provides for an equitable adjustment to account for after-imposed federal taxes. FAR 52.229-3(c) may allow for an increase in contract price based upon a newly-imposed or increased “Federal excise tax or duty” on the subject of the contract which the contractor “is required to pay or bear.” As discussed further below, any newly-imposed tariffs would likely be considered a “Federal excise tax or duty.” It is important to note, however, that the federal tax at issue under this provision must have been imposed or increased after the contract date, and must not have previously been accounted for as a contingency in the initial contract price. In addition, to invoke this provision, the contractor is required to “promptly notify” their contracting officer of relevant developments that may reasonably result in an increase or decrease to their contract price. FAR 52.229-3(g).
- The Tariff v. Duty Distinction (Or Lack Thereof): Words matter, and it cannot be assumed that a tariff falls within contract provisions that refer to “excise taxes,” “duties,” or similar terms rather than “tariffs.” However, in various legal schemes, including the recent EOs, tariffs and duties are referred to interchangeably. See, e.g., EO 14193 (referring to imposition of “duties” and “tariffs” interchangeably); 19 U.S.C. § 2483 (describing the President’s authority to amend the United States Harmonized Tariff Schedule (“HTS”) as the ability to “embody in the [HTS] the . . . imposition of any rate of duty or other import restriction[]”) (emphasis added).
- Be Mindful of the Specific Nature of Your Cost Increase: While there may be some broadly-applicable rules, each cost increase presents a unique question and should be evaluated independently. For example, a prime contractor seeking to invoke FAR 52.229-3 should consider whether it can seek adjustment for after-imposed taxes applied to subcontractors. There may be a compelling argument that the reference in FAR 52.229-3(a) to a federal tax or duty “that the Contractor is required to pay or bear” broadly encompasses subcontractors. See, e.g., Hegeman-Harris & Co. v. United States, 440 F.2d 1009, 1017 (Ct. Cl. 1971) (finding contractor was permitted to recover the “increased State taxes imposed on its subcontractors when [the contractor] had to bear their burden, either by specific provisions of the subcontracts or by inclusion in the price of those subcontracts let after the [applicable] tax increase”). On the other hand, contractors should be aware that Courts and Boards may not permit the recovery of cost increases resulting indirectly from the imposition of tariffs, such as increased costs to domestic supplies as a market reaction to higher prices on tariffed imports. See, e.g., Appeals of – Pangea, Inc., ASBCA No. 62561, 22-1 B.C.A. (CCH) ¶ 38026 (Jan. 5, 2022) (disagreeing with the notion “that an increase in the price of domestic steel resulting from a tariff on foreign steel is a ‘Federal tax’ within the meaning of FAR 52.229-3”).
- Consider Whether Duty-Free Entry Clauses Offer Protections: FAR 52.225-8 and DFARS 252.225-7013 provide contracting officers with the discretion to award contractors with duty-free import certificates for items. How these FAR and DFARS clauses may apply to specific contracts is a fact-specific inquiry, but contractors should inspect existing contracts to determine whether the clauses are present. Additionally, contractors should determine what materials they are importing under current and future government contracts and whether those items may qualify for duty-free entry. Below are additional details on how each clause may apply if present in your contract.
- FAR 52.225-8 (Duty-Free Entry): Under this clause, supplies eligible for duty-free entry include: (i) items excluded from duty based upon Subchapters VIII and X of Chapter 98 of the HTS and (ii) supplies, but not equipment, for Government-operated vessels or aircraft pursuant to 19 U.S.C. § 1309. To obtain duty-free entry under the clause, supplies must either be identified in the contract as accorded duty-free entry or, if not listed in the contract, the contractor must provide the contracting officer written notice prior to the purchase of any foreign supplies in excess of $15,000. The contracting officer will then determine whether the identified supplies should be accorded duty-free status, and if so, the contract price will be reduced accordingly.
- DFARS 252.225-7013 (Duty-Free Entry): Under this clause, supplies eligible for duty-free entry include: (i) end products and components from certain “qualifying countries” as provided in DFARS 225.003, as a result of certain reciprocal defense procurement memoranda of agreement or intercontinental agreements, (ii) certain “eligible products” under the World Trade Organization Agreement on Government Procurement (“WTO GPA”) or other relevant free trade agreements, as defined in FAR 25.003, and (iii) other supplies for which the contractor estimates that duty will exceed $300 per shipment. This duty-free exception does not apply to otherwise eligible supplies if they are identical to supplies purchased by the contractor (or its subcontractors) in connection with commercial business, and it is not economical or feasible to account for such supplies separately. To make use of the exception, the contractor must claim duty-free entry for the supplies that satisfy the categories listed above and seek assistance from the Government in obtaining the applicable duty-free entry.
- Assess Other Potential Sources of Protection: Even where the above clauses are not available or do not offer protection for one reason or another, contractors should carefully scrutinize other contract terms to determine whether other paths to a remedy may be available. To take one example, the FAR’s Economic Price Adjustment clauses (FAR 52.216-2, 52.216-3, and 52.216-4) may offer another avenue for recovery. These clauses are eligible for inclusion in fixed-price solicitations and contracts for standard materials and labor, but only where the Contracting Officer concludes that the clause is “necessary either to protect the contractor and the Government against significant fluctuations in labor or material costs or to provide for contract price adjustment in the event of changes in the contractor’s established prices.” See FAR 16.303-3. If a contract includes an Economic Price Adjustment clause, then in the event of a change in price of materials or labor, a contractor may notify the government (within 60 days of the change) and then submit a proposal for a contract price adjustment. Thereafter, the contractor and the Contracting Officer can negotiate a price adjustment, though such adjustments are capped at 10% of the original contract price.
There remains a great deal of uncertainty surrounding the new administration’s imposition of tariffs, not the least of which is how these tariffs will impact federal contractors. In the face of that uncertainty, contractors should be proactively assessing their risk and potential recourse in the event tariffs result in cost impacts on existing contracts. The above guide should be a helpful tool to begin navigating through what are likely to be challenging times for the contracting community.