Earlier this year, I wrote about how procurement professionals could navigate the impact of proposed tariffs on existing contracts and planned procurements. Now, several months later, the initially imposed tariffs are in place and additional reciprocal tariffs are in effect. As of May 12, the United States and China reduced their reciprocal tariffs for ninety days.
Continued uncertainty around tariffs means that local governments are navigating possible changes in contract costs. Several solutions are available to allocate the risks of increased contract costs due to tariffs: risk-sharing clauses, indemnity clauses, or price adjustment clauses. Given the vital nature of government operations and challenges in public procurement, price adjustment clauses are likely the best solution for local governments. This blog post suggests key considerations and sample language for price adjustment clauses. As with any contract language, local governments should always consult their legal counsel before including language in legally binding agreements.
Background on Importing Procedures
As a reminder, tariffs are taxes levied on imported goods and services. Let’s take a step back, though, and examine how importers calculate and document tariffs. Understanding the importing process and associated documentation is critical for drafting successful and comprehensive price adjustment clauses.
First, an importer must determine the tariff rate. Tariffs are based on the product codes assigned to goods through a classification system known as the Harmonized System (HS). The United States has its own classification system, the Harmonized Tariff Schedule of the United States (HTSUS), which is administered by the United States International Trade Commission.
Second, the importer must also know the cost of freight and insurance for the goods. Freight is the amount being paid to the freight company for shipping the goods, and insurance refers to cargo insurance that protects the goods as they travel from the exporter to the destination. Tariffs apply not only to the value of the goods, but also to freight and insurance for imported products. These costs are added together to generate the CIF (Cost, Insurance, Freight) value. Then, tariffs are applied to the CIF. For a more detailed explanation of this calculation, visit the International Trade Administration’s page “Determine the Total Export Price.”
Finally, upon arrival of the goods at the foreign port, an importer must document the goods and pay all duties and taxes due. As explained by the International Trade Administration, tariffs, along with the other assessments, are collected at the time of customs clearance in the foreign port. When importers make entry into the United States, they are required to file an Entry Summary, CBP Form 7501. See also 19 C.F.R. 142. The Entry Summary lists the HTSUS rate for the goods, along with other rates, such antidumping and countervailing duty rates. Additionally, with the imposition of the additional tariffs, importers must list additional HTSUS classifications to indicate reciprocal tariffs, as applicable. A list of these codes can be found in this CBP guidance from April 8, 2025 and these codes will appear on completed Entry Summaries so long as the reciprocal tariffs are in effect. Below is an example of a completed Entry Summary, with an additional 10% HTSUS Rate:
Image Source: Trade Risk Guaranty
According to United States Custom and Border Protection (CBP), the importer must pay the estimated duties on the imported goods within 10 days of the release of the cargo. CBP collects payment from importers at designated ports of entry and timestamps the Entry Summary indicating payment.
Now that we have a basic appreciation of the entry process for imported goods, let’s look next at the basics of drafting an effective price adjustment clause.
General Approaches to Price Adjustments Based on Tariffs
The National League of Cities predicts that local governments may be affected by reciprocal tariffs, because of both increased costs in goods that local governments need for projects or services and decreased sales tax revenue due to less consumer spending.1 In Maryland, the Town of Berlin expedited its purchase of a new vacuum truck to avoid increased tariffs. While the precise impacts of tariffs are unpredictable, procurement professionals can plan for these impacts if (or more likely, when) they arrive. Within the procurement and contracting process, there are two points where communication about price adjustments is important: in solicitations and in contracts. As discussed in my previous blog post, local governments generally do not have authority to modify contract costs for firm-fixed price contracts. However, if a local government anticipates the need for price adjustments, it can include a price adjustment clause in its solicitation documents so that bidders are aware of the potential for adjustments.
When drafting price adjustment clauses, local governments need to account for the following:
- Definition of tariff. This might seem obvious, but it’s important to be specific about terminology, especially in clauses that affect pricing.
- Basis date for evaluating adjustments. In a price adjustment clause, the basis date is a benchmark for calculating the adjustment. It’s usually a specific date, such as the date of the contract, the date of shipment, or a predetermined date in the agreement from which market changes are measured and an adjustment is calculated.
- Adjustment trigger, thresholds, and caps. The clause should define the trigger for an adjustment, such as a tariff that is newly imposed or changed. The clause could also include an amount at which the adjustment can be considered. For example, increases in the cost of the contract of 5% or less are not subject to price adjustment. Moreover, the adjustment clause should be clear that the adjustment only applies to affected items, not the entire contract. In other words, a tariff that increases the cost of materials by 25% does not mean that the entire cost of the contract will be increased by 25%. Lastly, the clause may impose a limit on the number of adjustments requested or granted, such as once a quarter.
- Notice and form of the request. Requests from the contractor for a price adjustment should be made in writing and within a specified period, such as 10 business days or 30 days following a specified event. As an example, regulations for federal agency procurement require a contractor to notify the contracting officer “promptly” after becoming aware of the change in duty or tax.
- Sufficient documentation. Increased tariffs do not necessarily mean increased costs. Vendors and contractors will need to demonstrate to the local government’s satisfaction that any increased costs are attributable to tariffs. One of the ways they can do this is by providing the timestamped Entry Summary, discussed earlier in the Background section of this blog post. Depending on its location in the supply chain, a business may not have access to the Entry Summary. In this scenario, consult your attorney and other appropriate officials within your local government to determine what documentation you will require.
- Adjustment formula. The clause should include a price adjustment formula. There are numerous ways to draft an adjustment formula, such as basing it on the Consumer Price Index (CPI). However, given the fluctuations due to tariffs, the author’s sample clause uses a threshold trigger, which is probably the most dynamic option.
- Discretion for adjustment. The adjustment clause should reserve discretion for the local government to allow the adjustment. Vendors and contractors will likely resist this language, but a local government should be able to explore its options rather than face an automatic price increase.
- Provide exit ramps. Clauses should allow termination of the contract if tariffs make performance impractical or force substantial deviation from the original scope. Moreover, President Trump has already adjusted some tariffs and there are indications that more changes are ahead. And so, the clause should allow for downward adjustments to the contract costs when applicable.
With these general approaches in mind, let’s examine examples of price escalation clauses to understand how they address market volatility and attempt to protect the buyer and seller.
Finding the Right Balance with Price Adjustment Clauses
As with any contract clause, the complexity of the clause is a matter of strategy, skill, and preference of the drafter. There is no one-size-fits-all approach to contract clauses. This section briefly considers the features of several price adjustment clauses to highlight their benefits and potential drawbacks. Ultimately, the appropriate clause will depend on the item being procured and your organization’s risk tolerance.
Let’s start by examining a simple price adjustment clause in the context of construction building materials. Due to supply chain disruptions during COVID-19, many form contracts for construction already include material cost escalation clauses that identify volatile materials and allow for change orders. In an example drafted by attorney James D. Fullerton2, the owner is responsible for any price increase in component materials:
Material Price Escalation – The Contract price has been calculated based on the current prices for the component materials. However, the market for the materials that are hereafter specified is considered to be volatile, and sudden price increases could occur. Seller agrees to use its best efforts to obtain the lowest possible prices from available building material suppliers. However, if there are increases in the prices of these materials that are purchased after execution of this Contract for use in this Project, Owner agrees to pay that cost increase to the Seller. Any claim by the Seller for payment of a cost increase shall require written notice delivered by the Seller to the Owner stating the increased cost, the materials in question, and the source of supply, supported by invoices or bills of sale.
As noted, this clause places the burden of increased costs solely on the owner. As Fullerton acknowledges, another approach includes a threshold above which the escalation clause applies, which places the burden on the seller below the threshold and then shifts it the owner or buyer above the threshold. Additionally, the clause above does not give the owner any discretion to approve the increase, assuming the seller provides the required written notice. This clause, while concise, may does not incorporate the detail that a local government might desire.
In another short clause from a construction contract from a municipality in North Carolina, the language provides discretion to the municipality—through its engineer—to approve material price adjustments:
Adjustment to material contract Unit Pricing due volatility of material pricing, unstable markets, and sudden price increases of materials within this contract will be considered on a case-by-case basis. If approved by the Engineer, a Change Order will be executed to adjust the Contract Price as described in Article 11 of the contract EJCDC C-700 section. Paragraphs 11.02 Change Orders, 11.07 Change of Contract Price, and 11.09 Change Proposals describe this process.
In addition, adjustments shall be for materials only and shall not include labor, equipment, taxes, profit, other markups, or transportation charges. Requests for price adjustments shall be submitted by the prime contractor to the Engineer with adequate documentation to justify the material price adjustment.
Similar to Fullerton’s clause, this clause does not attribute the increase in material price to tariffs. In that way, this clause is more broadly applicable than a tariff-specific clause. Still, this clause is open-ended and does not provide certainty to the prime contractor that a request will be approved. Considering the instability of materials pricing in the current market, contractors might disfavor a clause with as much flexibility as this one.
Looking beyond North Carolina, a school district in Virginia opted for a more detailed clause that is specific to tariffs and gives the school district discretion to increase the contract cost. The full text of the Stafford County Public Schools clause is available here. Notably, this clause also caps the allowable increase in costs at 25% and requires specific documentation and certifications from a contractor to substantiate the need for increased costs.
Again, the purpose of reviewing these clauses is to illustrate the diversity in drafting styles and to emphasize that different clauses come with their own advantages and disadvantages. The next section presents a comprehensive clause that incorporates many of the general approaches previously discussed in this blog post.
Consider This: A Sample Clause
This sample clause drafted by the author serves as a starting point for your organization to use in its solicitation documents and contracts. It allows for both upward and downward price adjustments by both the contractor and the contracting entity—your local government. The clause includes a defined threshold for when a price escalation may be requested and sets an overall cap on how much contract costs can increase. As you will see, the sections highlighted in yellow prompt the drafter to fill in the blanks. Please use the information provided in this blog post to inform your decision-making and always consult with your unit’s attorney before incorporating language into solicitation documents or contracts.
If you have questions about drafting a price adjustment clause or feedback about this blog post, please drop me a line at cuccaro@sog.unc.edu.
