Changes in customs duties may result in an increase or decrease in the timing and cost parameters of construction contracts.
According to standard construction industry practice, who bears the risk?
When it comes to assessing the risks associated with customs duties, the determining factor is the pricing model (cost-plus (“CP”), stipulated price (“SP”), unit price (“UP”), target cost with gain or pain sharing (“TCi”)) rather than the project delivery method itself (i.e., general contracting, traditional or progressive design-build, construction manager at risk, integrated project delivery, etc.).
The CP
The “cost” component assumed by the owner is based on the costs actually incurred in performing the work, including customs duties, except for those incurred due to a lack of due diligence on the part of the contractor (design-builder, construction manager at risk, or the design-build team):
For illustrative purposes, see CCDC-5B, Articles A-7.1 (.9, .11, .12), A-7.3, GC 6.5.3.4, GC 10.1, and GC 10.2.
This means the owner assumes the risk, subject to the exception set out above.
The owner’s risk would be limited if the “Guaranteed Maximum Price (“GMP”)” is reached, should this option be exercised. Article GC 10.1 of the CCDC-5B contract (which deals with taxes and customs duties) does not provide for adjustment of the guaranteed maximum price. However, Article GC 10.2 (which deals with the impact of changes to applicable laws, regulations, and codes) does so by referring to the principles of Articles GC 6.1 to 6.3.
The increase would either be taken from the contingency budgeted by the contractor in addition to their estimate, from the contingency allowance, or even directly from their administration fees and profits, when the GMP option is exercised.
Of course, these principles can be modified by supplementary conditions, including whether specific components of the cost of the work are priced on a lump-sum or per-unit basis (in accordance with customary practice vis-à-vis general site conditions.)
The SP
Stipulated price contracts usually provide for specific timing and cost adjustment rights in the event of changes to customs duties. The related risk rests with the owner or, in the case of a subcontract, with the contractor who has equivalent rights under the main contract.
- For illustrative purposes, see CCDC-2, Articles GC 6.5.3.4, GC 10.1, and GC 10.2 (and the corresponding provisions of ACC-1).
The UP
With regard to customs duties, the principles applicable to unit-price contracts are generally similar to or identical to those set out for stipulated price contracts.
- For illustrative purposes, see CCDC-4, Articles GC 6.5.3.4, GC 10.1, and GC 10.2.
The TCi
When the pricing model is based on a target cost and gain/pain sharing, as in the case of integrated project delivery, the situation is always unique.
In principle, changes in customs duties can be taken into account:
- in the appropriate amount for allowances and contingencies within the target cost, which usually excludes costs arising from conditions or circumstances that vary substantially from what had been anticipated;
- in the risk reserve, either by including the changes in the profit or by setting up a contingency reserve, either within the risk reserve or separately;
- as a distinct risk assumed by the owner, i.e., conferring a right to adjust the target cost so as not to affect, under this cost item, the profitability of the design-build team;
- or in a hybrid way, e.g., by limiting the participation of one or more parties in the related risk.
In conclusion, changes in customs duties do not pose any particular challenge in Canadian construction contracts, as this issue is already addressed in standard contracts and other forms in line with established practice.
The real challenge lies in quantifying the related effects, i.e., providing the level of proof required to adequately support requests for timing and cost adjustments linked to customs duties.