A few percentage points of added costs can greatly throw off estimates and valuations. While over-budget projects are always a possibility for professionals in the architecture, engineering and construction (AEC) industry, it’s a risk that is heightened today in the current economic and geopolitical climate.

Client expectations in the industry are always high, no matter what is going on in the world. That means that lawsuits for professional negligence may still be brought against you, even for problems largely outside your control, like tariffs and inflation. Here’s how design professionals can guard against these AEC risks during times of economic uncertainty.

Tariffs, Inflation and Project Cost Unknowns

Since the beginning of the year, new import tariffs have been announced, modified or reversed over 22 times. Many of these affect critical construction inputs and commodities. Meanwhile, overall price inflation since 2020 currently stands at 24.21%. Looking at some of the costs a typical project is likely to encounter compared to five years ago:

• Steel mill products cost 73.4% more.
• Fabricated structural metal products cost 58.3% more.
• Iron and steel cost 57.7% more.
• Copper wire and cable cost 54.3% more.
• Concrete products cost 41.9% more.
• Brick and structural clay tile cost 32.6% more.
• Lumber and wood products cost 26.7% more.

Even so, data for many of the construction-specific tariffs is yet to come. These figures mostly reflect the reality through the end of 2024. With many project timelines stretching out years into the future, a lot of cost uncertainty remains.

Solutions for Current Projects

While not all solutions are available for projects already underway, architects, engineers and construction industry professionals do have options for mitigating their risks. Here are a few recommended by experts:

Procurement

Sourcing needed materials proactively may allow design industry professionals to get ahead of further potential price swings. Diversifying a project’s supply chain could help if there are disruptions with one particular supplier.

Price Negotiation

Negotiating on pricing is also an option. Procuring needed materials upfront may open up the opportunity for a volume-based discount or favorable fixed price. Escalation clauses may also be possible with newly inked supplier deals.

Financials

Ensuring your firm’s financials are in a good position may also help. On the one hand, you will be better positioned to absorb unavoidable cost increases. On the other, you may have better access to financing and the ability to plan for tax savings.

Solutions for Future Projects

A broader array of risk management solutions opens up for projects your firm will take on in the future. With nothing set in stone, some of the best options include:

Early Planning

Smarter planning is a must, given the upfront knowledge that prices may increase. Try to get a head start on key aspects of the project, such as building supplier relationships, ensuring early procurement and negotiating for the best prices.

Business Efficiencies

Increasing business efficiencies will allow more flexibility to manage challenges related to tariffs, inflations and increased costs. For instance, more timely billing can help improve cash collections allowing for better purchasing timing.

Contract Risk Management

Lastly, contract risk management should be a major area of focus for any future projects you take on as a design professional. Remember that the contract isn’t just a business agreement. A great contract also serves as a roadmap to solve problems.

Harvard Business Review recently identified five key strategies:

Strengthen Force Majeure Clauses – As it stands now, government actions such as tariffs or their resulting price or cost increases are unlikely to count as force majeure events without being explicitly called out in the contract language. Contracts can be strengthened by defining such happenings as force majeure events, allowing a way forward through renegotiation of contract specifics.

Incorporate Cost-Sharing Mechanisms – Contracts stipulate which parties will assume the cost for materials, usually without acknowledging the same parties will be expected to absorb any cost increases along the way. Contract mechanisms can be incorporated requiring contractors, subcontractors, suppliers and project owners to share in cost increases, given a triggering event, such as 10% tariff threshold.

Plan for Sourcing Flexibility – Contracts that limit supplier choice may pose a greater project risk in an environment with tariffs, currency inflation and supply chain challenges. Working a plan for multi-source flexibility without penalties into new contracts can help mitigate the risk of a project facing ballooning expenses or experiencing delays due to cost overruns or tariff-related supply chain issues.

Develop Should-Cost Mechanisms – Real cost increases are one issue to contend with, but another can occur when other parties in a supply chain pad their prices, either to exploit the current environment or hedge against further cost increases. Contract should-cost mechanisms define expected costs, pricing trigger events and predetermined responses, giving parties a roadmap to navigate through such situations.

Leverage Existing Trade Agreements – While a new trade policy may disadvantage existing supply chains, it often creates new incentives for doing business with other trading partners. Contracts can be formulated to take advantage of these new supply routes, while also stipulating that goods sourced through such supply chains meet all the requirements to be exempt from any unnecessary tariffs and fees.

More Risk Solutions

For the foreseeable future, economic uncertainty is likely to remain. While strategies to plan ahead, diversify supply lines, negotiate with partners and control contract risks can help significantly, they aren’t perfect. Even in an environment where tariffs and inflation aren’t a defining issue, a project’s costs can increase, and a design professional can be blamed.

When your estimates and valuations are off and a client begins to consider a legal remedy, having the right insurance is key. Professional liability coverage can help provide important protection for architects, engineers and construction professionals when other means of avoiding a lawsuit have been exhausted. Coverage specifically protects you for professional services you provide, including those related to professional estimations and valuations.

The Lockton Affinity Architect + Engineer Insurance Program offers Professional Liability to a broad range of design professionals, including architects, engineers, landscapers, contractors and more. A host of coverage benefits are included, such as pre-claims assistance and free contract reviews. Request a price indication today to find out what our coverage will look like for your firm.