Tariffs and the Force Majeure

TariffRemember that first-year economics class on tariffs?  For many companies in the US, that lesson is no longer academic. Tariffs on steel imports went into effect in March of this year, creating a shock to many industries, including construction, on which we focus this week.  A trade war is now in full swing, and businesses are having to adjust on the fly.

In particular, some are invoking the force majeure clause in their contracts.  What’s that? According to BusinessDictionary.com, it’s a “standard clause found in construction and supply contracts, it exempts the contracting parties from fulfilling their contractual obligations for causes that could not be anticipated and/or are beyond their control.” Tariffs certainly do count as an event beyond any business’ control.  Bummer.

On this week’s show, we have the opportunity to discuss the real-world impact of these tariffs on an operating construction firm.  We welcome Scott Griffin, CEO and Founder of Griffco Design/Build, Inc., and his Senior Vice President of Commercial, Steve Ponsell.  They tell us first hand what it’s like to walk into their office with an unanticipated half million-dollar liability sitting on their desks.

Revisit the Fine Print

Steve and Scott shared with us that the first thing they had to do was dig out their contracts and start reading (with the help of a good lawyer).  Steve explains, “We were immediately affected in Fine Printour industry, specifically on the steel side. Our buildings or most all of our buildings are structural steel components. And, we immediately saw subcontractors contacting us and letting us know of what they called a force majeure event or an act that’s out of their control… You didn’t know about it, but hopefully you had it negotiated in your contract. And in some cases, we did; and, in some cases, we didn’t.”

Norton Fullbright, a firm that specializes in construction and engineering law breaks it down, “The Trump tariffs have already resulted in claims and notices of claims for our firm’s clients. Most importantly, the legal teams and project professionals charged with analyzing and determining the entitlement to these claims need to know what to do first and next.

  • First, we recommend a full analysis of all applicable contract provisions, whether included in our summary above or otherwise. Parties often overlook exculpatory provisions or other acknowledgements modified into unsuspecting but somewhat related provisions.
  • Next, we recommend gathering all key project documents related to the claims. For cost claims, our construction lawyers have prepared a Cost Claims Checklist and would be happy to share it with our client.
  • Lastly, we highly recommend concurrent documentation as close to the time of the notice, even if the documentation of the dispute does not include final resolution.”

In this way, Griffco figured out the lay of the land and identified their biggest areas of risk.  Once they developed a reasonable course of action, the next thing they did was…

Start Talking to Stakeholders

talk to stakeholdersGriffco, like many companies, was simply no longer able to honor the terms of their original agreements.  Although this situation was caused by trade tariffs, which are unusual and generate lots of fireworks, the solution is simple–a contract renegotiation.  Challenging, annoying, and very normal. They happen in business all day, every day.

Renegotiations are always stressful because they create uncertainty. In the article, When Good Deals Go Bad, INC Magazine discusses the risks of changing terms in the middle of an agreement. “Renegotiating a contract before its legal end is usually unpleasant and fraught with hurdles. Entrepreneurs risk their reputations when they try to back out of contracts and generally have little leverage to negotiate a change.”

In the present situation, companies in the steel industry do have the added complication of having to renegotiate many contracts at one time. In Griffco’s case, Scott describes the domino effect created by the price shock of the tariffs. “The main thing you have to do is, if you see it coming, you have to work it out in your contracts. It’s a whole chain of people involved, from designers of the steel, to the different parts of it coming in. And, then, we put it all together, when we get to the site.”  Certainly, one mitigating factor is that everyone is facing the same problem. Scott says later, “Everybody reads the paper and listens to TV. They know there’s volatility right now.” After an intense period of flux, people are finding their footing and adjusting to the new normal.

As Always, it’s About Communication

To abstract even further from the immediacy of the trade war and the steel tariffs, Griffco’s ability to weather this uncertainty will be determined by the quality of their relationships and their communicationability to communicate.  Scott observes, “The number one thing is: You have to manage your own clients. Everything goes from the bottom up. It keeps going upstream, and we’re [Griffco] right next to the owner. The main thing is communication. You have to let them know what’s going on, and you have to cover yourself legally.”

The conversations around these steel contracts are bound to be fraught with emotion. Describing a real-life client situation, Scott says, “If they’re doing a 30 million-dollar project, it may be a 2 or 300,000, maybe 400,000 dollar problem.”  These problems were unanticipated, and they don’t add value to the project or the services that Griffco provides.  But, difficult conversations are table stakes for any CEO.  They come with the job.

Entrepreneur Magazine gives us 7 Ways to Have a Difficult Conversation Without Losing Your Client. It comes down to being totally honest, showing empathy, and using data to help with objective decision making.  With steel tariffs, data is abundant and empathy should be straightforward.  Everyone is in the same boat. So, on the scale of bad conversations, this probably isn’t so tough after all.  It beats telling a big customer the project is running late.  In this case, just blame the government.

As the Griffco team incorporates the tariffs into their operations, they’ve taken a long-term view. Scott’s done a masterful job of managing his relationships over his multiple decades in the construction industry. He brought Steve into Griffco after they had known each other for over ten years. And, they’ve moved on to build a business that’s grossing over $150 million per year. They’re going to be around long after the shock of the tariffs has passed.  In the end, this is just another problem to solve.  And, CEOs are problem solvers, after all.

By | 2018-07-12T09:36:29+00:00 June 21st, 2018|0 Comments

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