President Trump issued several executive orders addressing tariffs. American First Trade Policy dated January 20, 2025 and Modifying Reciprocal Tariff Rates to Reflect Trading Partner Retaliation and Alignment dated April 9, 2025. In addition, he has also issued a 90-day pause to some countries and is planning to reduce tariffs on certain industries such as US auto tariffs (see Amendments to Adjusting Imports of Automobiles and Automobile Parts into the United States dated April 29, 2025). It is clear that tariffs are impacting the supply chain and government contractors.
How Do We Recoup Tariffs That Were Not Estimated in our Proposals to the Government?
If you have a fixed price prime contract (including FAR Part 12) review your contract for the following two clauses:
- FAR 52.229-3 Federal, State, and Local Taxes
- FAR 52.216-4 Economic Price Adjustment-Labor and Material
All I need to do is have the clauses above in my contract or proposal and I am covered for the increased cost associated with tariffs that are imposed after my contract is negotiated? Not necessarily. Let’s discuss the two clauses and the requirements. By the way, if you are submitting a proposal make sure the solicitation and contract include these two clauses.
FAR 52.229-3 Federal, State and Local Taxes
This clause is included in solicitations and contracts if the contract:
- Is performed wholly or partly in the United States or outlying areas,
- Is fixed price, and
- Exceeds the simplified acquisition threshold.
This clause requires you to promptly notify the contracting officer of any tax or duty that will either increase or decrease the contract price. Of course, promptly is not defined but as soon as you are aware that tariffs will be assessed on your products or suppliers’ products, you should notify the contracting officer.
The contract price can be increased by the amount of any Federal taxes that are imposed after contract award, provided the Contractor states in writing the taxes were not included in the contract price or included as a contingency.
However, this clause also allows the contract price to be decreased by the amount of any Federal tax. If you proposed tariffs or a contingency for tariffs and they were not imposed, there was a waiver or a refund, then the contract price will be decreased.
What About Subcontracts?
This is not a required flowdown but subcontractors that are aware of parts or components that they purchase from countries where tariffs may be imposed, should request the prime contractor to include this clause in its subcontract. Subcontractors should clearly state in their quote if tariffs are estimated or are not included since they will need to certify this to the prime if tariffs are later greater or lesser than estimated. Subcontractors need to be aware that the subcontract price can be decreased if tariffs were proposed and were suspended, waived, or there was a refund.
FAR 52.216-4 Economic Price Adjustment-Labor and Material
This clause is included in solicitations and contracts when all of the following apply:
- Contract is fixed price,
- There is no major element of design engineering or development work involved,
- One or more labor or material cost factors are subject to change, and
- The contracting officer has made the determination that it is necessary to protect the contractor or Government against significant fluctuations in labor or material costs.
This clause is a lot more complicated. Prime contractors need to work with the Government on whether the adjustment is for material and/or labor and include a methodology of how it will be applied before award in a schedule or attachment in the contract. For material, the contract will need to include what material costs the tariffs will apply to and how tariffs will be applied (percentage, dollar amount, etc.).
This clause also includes limitations such as:
- Adjustment cannot exceed 3% of the total contract price,
- The aggregate of increases in a contract unit price shall not exceed 10 percent of the original unit price, and
- No limitation on the amount of decreases.
The kicker is that the clause allows the Contracting Officer to examine the contractor’s books, records, and other supporting data for 3 years after final payment (or as specified in FAR subpart 4.7). You will mostly likely have to open your books and provide actual costs or other support for the tariffs. This is why it is important to include a schedule of the support you will provide and how the adjustment will be calculated.
What About Subcontracts?
This clause is not a required flowdown to subcontracts, but if a prime does flow the clause down, subcontractors would need to include a similar schedule in the subcontract of how tariffs will be applied to material costs.
What if I Have Cost Reimbursable Contracts?
The two clauses above are not included in cost reimbursable contracts. However, FAR 52.216-7 Allowable cost and payment clause addresses reimbursement of allowable costs. Tariff costs are an allowable cost whether they were included or not included in the estimated costs of the contract. However, if the tariffs were unknown when a cost reimbursable contract was negotiated, the added cost may cause a funding issue on the contract/subcontract and your fixed fee will not be increased as a result of the tariff costs not estimated in the original contract. Contractors need to notify the government in writing before they exceed 75 percent of the estimated cost (FAR 52.232-20 Limitation of Cost) or estimating funding (FAR 52.232-22 Limitation of Funds).
Takeaways
It is important to know what clauses are in your contract and then notify the Government or the prime contractor as soon as you are aware that you will be charged tariffs materially different than you originally estimated on your products or services. Contractors and subcontractors should review their fixed price contracts to see what clauses are included to assist with contract price adjustments for tariffs. Remember the government can also decrease the contract price if a contingency or estimate of tariffs was included in the contract price but didn’t come to fruition, was waived or a refund was issued.
Our big recommendation is that you do not incur the tariffs in the first place. Read our previous article, “Protect Your Federal Contracts by Avoiding Tariff Risks from the Start” for more information.
Understanding the Impact Before You Sign
Navigating tariff implications requires more than awareness, it demands proactive contract management and a firm grasp of the applicable FAR clauses. Our team at Redstone Government Consulting works closely with government contractors to evaluate contract terms, develop compliant pricing strategies, and assist with proper clause inclusion during proposal development. Whether you're submitting a new proposal, managing subcontractor relationships, or addressing unanticipated cost fluctuations, we can help you assess your options and maintain compliance throughout the contract lifecycle.
