Some of the first tariff blows would land on in-progress construction and public infrastructure projects if threatened action on steel and aluminum imports into the United States goes into effect on March 12. Newly released commentary from the credit rating agency, Morningstar DBRS, projects a variety of repercussions for contractors, equipment manufacturers and their clients, with the latter including procurers in the commercial real estate, facilities management and public works sectors.
If enacted, the U.S. government-imposed 25 per cent tariff on steel and aluminum is expected to quickly flow through to input costs. Morningstar DBRS analysts foresee at least part of that will be passed through to consumers in higher prices for end-products. However, some contractors may have to absorb the full hit if they have fixed-price contracts that do not include leeway for cost escalation or a change-in-law clause to mitigate their risk. This, in turn, could undermine their financial stability and credit profiles.
If the proposed tariffs were to remain in place for an extended period, analysts project increased potential for inflationary prices, supply chain disruptions, project delays or cancellations, and more disputes and litigation between contractors and their clients related to unfolding changes in project budgets and scheduling.
“Trade wars create an environment of general uncertainty within the construction industry,” they note. “For projects in the procurement phase, risk management and efficient planning will be a top priority for contractors. We anticipate contractors will expand their contingency budgets, avoid pure fixed-price contracts, or include price escalation clauses in their contracts.”
Morningstar DBRS analysts also express skepticism that there are adequate sources of domestic supply to replace imported steel and aluminum any time soon. The most recent stats show that nearly 29 million tons (26.2 million metric tonnes) of steel was imported into the U.S. in 2024 and nearly 5.3 million tons (4.8 million tonnes) of aluminum was imported in 2023. The latter amount represents nearly half of the U.S. annual consumption, and Canada is the primary source.
“Contractors and OEMs (original equipment manufacturers) in the U.S. could look to source products locally and/or find alternatives to mitigate tariff impacts. However, the high cost of labor and energy in the local market may diminish the cost differential over imported goods,” the commentary states. “Reshoring requires extensive design, logistics and input materials. Our view is that these projects are becoming increasingly expensive (vis-à-vis low-cost countries like India and Vietnam) on the back of ongoing tariff wars affecting the cost of essential inputs.”
Credit ratings remain firm, thus far, for potentially affected industry players. Drawing on the previous 2018-19 experience, when the U.S. government implemented a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminum imports, analysts conclude that most of the agency’s “rated investment-grade issuers” are positioned to navigate the upheaval that may be coming.
“Large contractors typically have low leverage because of the self-financing nature of the industry and have the balance sheet strength to withstand near-term earnings volatility,” they observe. “We remain cautious of smaller players as they do not have a notable backlog, rely on a limited network of suppliers, and have less of a liquidity buffer. Therefore, for these smaller issuers, financial risk profiles are more exposed to margin squeeze.”
