Tariffs Call for Innovation Where Least Expected

September 20, 2018

John Barton, P.E., M.ASCE, serves as HNTB Corporation’s national DOT market sector leader and senior vice president. Barton’s experience includes nearly 30 years at the Texas Department of Transportation, including his most recent role as deputy executive director.

Today, he shares how what he calls the “new tariff reality” could bring out the best in civil engineers.

John Barton

Anyone who has taken a microeconomics course is not surprised that a 25-percent tariff on foreign steel can significantly impact costs of critical U.S. transportation infrastructure projects.

But for project owners like state departments of transportation and the contractors they hire to build roads and bridges, tracks and tunnels, and airports, it’s not a time for handwringing or complaining. It’s a new reality – which includes a cautionary tale that comes with an escalation clause. And a call for innovation not only on the job site, but also in the back office. That’s right, long before the first shovel of dirt is turned.

Steel is essential to infrastructure projects. Steel rebar reinforces new roadways. Steel girders are the backbone of bridges. These finished products fasten tunnels, guide subways, and anchor runways. It takes billions of bolts, screws, frames, and custom parts used in vehicles, fare boxes, traffic lights, signs, and a thousand other essentials from bulldozers to dump trucks, to make mobility happen. And, as a leading cost factor in any new transportation project, when the commodity’s price suddenly goes up, promises and projections go out the window.

It is true that transportation projects receiving any federal funding are required by law to use U.S. steel – that Buy America directive – a requirement unchanged by any tariffs. But supply and demand fundamentals are also at play and are real. Whether exemptions apply or don’t, a tariff on foreign steel could cause U.S. manufacturers and other consumers of steel products who typically buy overseas to shop domestically for their steel, increasing demand on our U.S. supply and sending prices higher.

And it’s beginning to squeeze.

The Associated Press reported in June that officials in Kansas City are now recalculating the cost of a $250 million streetcar extension project approved by voters last fall. California is closely monitoring steel prices to determine if adjustments are needed in future contracts. Pennsylvania officials are concerned about the effect on their four-year construction plan and Rhode Island is asking for federal money to cover higher costs.

It’s not the first time commodity price swings have left state governments holding the bag. In 2008, the price of oil, also an essential for infrastructure projects, unexpectedly spiked to its highest price in history, topping $145 a barrel. Six months later, the price collapsed to less than $50. This sudden rise and then drop in price, however, didn’t change the price of contracts awarded before these abnormal swings occurred, which were estimated using either lower or higher oil prices.
In many cases, contract adjustments never happened, resulting in either the taxpayers simply paying more or contractors absorbing losses.

Projecting the costs of large, complex infrastructure projects will never be an exact science. There are too many variables beyond the control of project owners and builders. Tariffs, the supply of materials, labor issues, and weather are but a few.

Today’s new tariff reality is a good reminder that public agencies and private contractors can do better to ensure that the public’s best interests are met.
Contractors should always estimate project costs with nothing but the best information on hand. Steel costs more, and those higher costs should be reflected in any project bid. Public agencies responsible for these projects, however, should also structure contracts so that there is more flexibility to handle sudden commodity price fluctuations.

If the costs of commodity-sensitive projects unexpectedly rise drastically, contracts for them need to be capable of allowing the contractor to recoup some or all of those costs. If costs drastically fall due to unexpected price decreases, contracts also need to be capable of being adjusted appropriately so that scarce public resources are spent efficiently and effectively.

Innovation isn’t a word reserved solely for the technologists and engineers on massive transportation projects. Procurement professionals can capitalize on it too, and develop new contract provisions that accommodate sudden commodity price changes, deliver projects fairly and equitably, and protect our country’s important investments in infrastructure. We must be thoughtful in how we manage and deliver public projects that carry risk and of how to best protect the public’s interest.

If you are interested in writing a Member Voices article for ASCE News, email ascenews@asce.org.

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