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Acornerstone of Canada’s economy economy, the construction sector, contributes nearly 7.5 per cent to Canada’s gross domestic product (GDP) and, together with the real estate industry, accounts for over 20 per cent of the nation’s economic output, according to 2023 Statistics Canada Data. However, escalating trade tensions between the United States and Canada are creating uncertainty for the industry. The two countries share one of the world’s most significant trading relationships, with total trade in goods and services estimated at $968 billion annually in 2023. The imposition of tariffs by the United States and countermeasures by Canada have raised concerns about cost escalations, material delays, and supply chain disruptions, all of which could ripple through the construction industry. The Trump Administration’s “America First Trade Policy” proposes new tariffs on steel and aluminum imports to boost U.S. domestic production. These measures could significantly impact Canadian exporters. Additional tariffs on key construction materials such as lumber and cement further heighten challenges for Canada’s construction industry, which heavily depends on cross-border trade. In response, Canadian officials have implemented retaliatory tariffs targeting U.S. construction equipment, manufactured goods, and energy products, echoing strategies used in prior trade disputes. These developments highlight the volatility of the Canada–U.S. trade relationship and its significance to industries on both sides of the border. In 2023, Canada’s exports to the United States accounted for approximately 77 per cent of its total exports, while imports from the United States represented over 50 per cent of its total imports, according to Statistics Canada. This interdependence amplifies the potential consequences of trade disputes on the construction sector, which relies on cross-border supply chains. This article explores the potential impact of tariffs on the construction industry, highlighting how key materials such as steel, aluminum, and lumber could result in supply chain disruptions, cost overruns, and project delays and, in turn, exacerbate market uncertainty and rising costs of the disputes. To help the industry navigate these challenges, the article provides strategies to manage costs, mitigate risks, and maintain project timelines. With potential disruptions on the horizon, understanding and preparing for the effects of U.S.–Canada trade disputes is essential for construction stakeholders in an increasingly complex economic landscape. The construction industry’s dependence on Canada–U.S. trade Given the extensive trade between the two countries, it is not surprising that the construction sector on both sides of the border is heavily dependent on the trade of raw materials and manufactured products. Comparatively, Canada’s trade relationships with other regions and countries, such as the European Union and China, pale in scale when contrasted with the United States, underscoring the bilateral dependency. The U.S. and Canadian construction sectors are deeply intertwined through the supply chain across the border, which includes expertise, labour, and materials. Key components of the construction supply chain include: Softwood lumber Steel and aluminum Cement and concrete products Machinery and equipment Appliances, tools, and fixtures Specifically, in 2023, the United States imported approximately 28.1 million cubic meters of softwood lumber from Canada, which is approximately 30 per cent of the softwood lumber consumed in the United States each year. It is also widely reported that Canada is the largest foreign supplier of steel and aluminum to the United States. Moreover, the trade of machinery and equipment such as cranes, excavators, and loaders, which are pivotal to any infrastructure project, is very substantial. Labour, equipment, and materials are the driving elements to the success of any construction project, and the application of tariffs on these basic construction commodities could result in significant repercussions for the construction industry on both sides of the border. It is anticipated that residential, commercial, and infrastructure projects will likely be impacted in both the short and long terms in key regions across Canada, specifically Ontario, British Columbia, and Quebec, and in the United States, including New York and California. Potential impacts on construction With a long trade history and extensive reliance on cross-border trade, the imposition of tariffs poses a significant risk to the construction industry. The tariffs may have short- and long-term impacts on not only ongoing projects but also projects that are in their infancy, such as those in the early stages of approvals, regulatory compliance, planning, and feasibility studies. In general, the application of tariffs poses a sentiment of general uncertainty within the construction industry, particularly related to planning, budgeting, and executing any project, and may result in project cancellations and strained client relationships. Changes – With increased costs, disruptions, and potential delays as the immediate and direct risks posed by the tariffs, project stakeholders may devise alternative strategies and supply chain solutions that necessitate a change in scope, design, or specifications. According to HKA’s CRUX Insight report, which draws findings from more than 2,000 projects globally, change in scope was the single biggest contributor to claims and disputes for 36.9 per cent of the total projects assessed globally. Specifically, HKA’s research reviewed 662 projects in 20 countries in the Americas with an average capital expenditure (CapEx) value of $638 million, revealing that change in scope was the single biggest contributor among causes of claims and disputes for 26.7 per cent of total projects assessed in this region. Additionally, the CRUX data revealed that 42.7 per cent of the projects in the Americas were affected by design challenges. It is, therefore, imminent that the stated application of tariffs will cause a major disruption to the region’s construction sector and will be a significant contributor to claims and disputes. Project Delays – Higher costs and potential supply chain disruptions due to tariffs may lead to delays in receiving materials, which in turn may delay project completion. According to CRUX, about 12.2 per cent of the projects in the Americas were impacted by delayed deliveries of materials and products. In the likely event of a tariff application, the supply of materials and equipment for ongoing projects will be severely impacted and may delay project completion and handover. Parties may devise alternative procurement strategies to circumvent project delays; however, this solution may come at increased costs. Sourcing for alternatives and the required approvals may contribute to the delays. In fact, CRUX data revealed that delayed approvals were the second largest contributor to claims and disputes in the Americas. In the event delays due to the application of tariffs are realized, the ripple effects may result in further disputes related to liquidated damages and other consequential damages sought by the aggrieved parties. Increased Costs – An immediate consequence of a trade dispute would be the rise in construction material costs and price volatility because tariffs can lead to unpredictable material costs, complicating budgeting and project planning. As discussed, both nations are key suppliers of essential raw materials and finished goods for construction. In addition to the basic construction commodities, energy products notably made up one-third of Canada’s exports to the United States in 2022. An increase in tariffs on energy products will indirectly act as a major disrupting factor, driving up material and operation costs, impacting the supply chain, and raising overall construction expenses. Projects budgeted before tariffs were imposed may encounter financial difficulties and result in contractors and project owners renegotiating contracts to accommodate the unforeseen cost increases. It is prudent to note that existing contracts may not have provisions for cost adjustments due to tariffs, which may lead to disputes and the need for legal adjustments to accommodate the new costs. This uncertainty is likely to increase claims as contracting parties would not have reasonably contemplated the additional costs of tariffs and would want to recover their costs through claims and dispute resolution mechanisms. Manpower Disruption – It is reported that about 1.4 million American jobs are tied to Canadian exports, and about 2.3 million Canadian jobs are tied to U.S. exports. Tariffs application may create manpower disruption and pose a risk of unemployment crisis in the construction sector through a combination of disrupted supply chain, increased costs, labour mobility challenges and shifts in workforce dynamics. CRUX assessed the direct contribution made to claims and disputes by both shortcomings of project teams and skilled and nonskilled workers. Out of 662 projects assessed in the Americas, it was revealed that 51.5 per cent of projects were affected by manpower and skills issues. Preparing for potential tariffs: Practical strategies for construction stakeholders Navigating the challenges posed by potential tariffs requires a proactive and multifaceted approach. To mitigate risks and prepare effectively, stakeholders in the construction industry must focus on comprehensive risk management strategies. Managing Risks and Reviewing Contracts – A key step is to conduct a thorough review of all contracts. Businesses should work closely with legal counsel to identify notification provisions and assess whether they can recover additional costs stemming from tariffs. Contracts for projects at various stages—bidding, newly initiated, or ongoing—should be examined to ensure a clear understanding of risk allocation. Expert advice is essential in determining whether tariff-related cost increases can be passed on to clients or absorbed within project budgets. Adjust Bid Pricing – Businesses should include a contingency for tariff-related cost increases for projects in the bidding stage and will likely benefit from clearly explaining this adjustment to clients as part of the proposal. Bidders should also explicitly state that any unforeseen tariff impacts beyond the contingency are excluded from their risk and reserve the right to adjust pricing. Reassessment of Project Schedules – All involved parties should evaluate project timelines to anticipate delays caused by supply chain disruptions and adjust schedules to allow for potential material procurement challenges. Tracking Costs and Establishing Baselines – Before tariffs take effect, businesses need to establish a detailed baseline of material costs. This allows them to track cost impacts accurately and support data-driven claims for cost recovery. The lessons learned from managing COVID-19-related claims highlight the importance of maintaining clear records and robust tracking systems to substantiate cost increases. By continuously monitoring market trends and material price fluctuations, businesses can strengthen their position in negotiations and make well-informed decisions to mitigate financial risks. Triage Procedures and Supply Chain Diversification – To address the immediate impact of tariffs, businesses should develop a triage procedure that prioritizes critical materials, evaluates alternative suppliers, and adjusts procurement strategies as needed. Diversifying supply chains to include both domestic and international sources reduces reliance on tariff-affected goods and enhances overall flexibility. Additionally, businesses should create contingency plans to manage potential shortages or delays with current suppliers. Building stronger relationships with suppliers through open communication and collaborative planning, including negotiating flexible delivery terms or bulk purchase agreements, can help mitigate disruptions and maintain a steady supply of critical materials. Legal and Strategic Counsel – Engaging legal counsel, consultants, and industry experts equips businesses to mitigate disputes and prepare for tariffs. Stakeholders should evaluate project-specific risks and renegotiate terms as necessary. For ongoing projects, maintaining clear communication with clients about potential delays and cost escalations can foster transparency and cooperation. Expert guidance can also help businesses identify creative solutions to minimize disruption. It is noteworthy to point out that the Canadian Construction Association (CCA) has also emphasized the importance of preparedness, offering actionable guidance for businesses to weather the uncertainties of trade disputes. By implementing these strategies, construction stakeholders can position themselves to better navigate the complexities of U.S.–Canada trade disputes. Proactive preparation and a focus on adaptability will be critical for maintaining project continuity and mitigating financial and operational risks. In conclusion, the possibility of U.S.–Canada tariffs creates significant uncertainty for the construction industry, which relies heavily on cross-border trade for essential materials such as steel, aluminum, lumber, and machinery. Stakeholders should be proactive by reviewing contracts, adjusting bids, diversifying supply chains, and tracking material costs to prepare for potential disruptions. Early planning and readiness can help manage challenges such as higher costs, delays, and labour shortages. Open communication with clients and suppliers, along with expert advice, will be essential to adapt to this evolving situation. While it is unclear which goods might face tariffs or restrictions, this article highlights the potential impacts and offers practical steps for businesses to manage risks and stay ahead as trade tensions develop. The full impact and timing of these disputes will become clearer as events unfold, but proactive preparation remains crucial. |
