The impact of tariffs on Canadian construction
The tariffs on steel and aluminum have added immense capital costs to both ground-up and fit-up projects. Marcos Sibal explores the influence of the tariffs, the competitive nature of the industry at large, and options to reduce the impact on your bottom line.
The tariffs and their impact
In 2018, Canada and the US exchanged 25 percent and ten percent tariffs on steel and aluminum, respectively. The tariffs are wide ranging, impacting not only raw steel and aluminum but also manufactured goods that include steel or aluminum. Further complicating the situation, as of October 25, Canada has also imposed a 25 percent tariff on seven steel products (heavy plate, concrete reinforcing bar, energy tubular products, hot-rolled sheet, pre-painted steel, stainless steel wire, and wire rod) imported from countries other than the US in an effort to prevent dumping of foreign steel into Canada1.
The tariffs have caused prices of steel and aluminum-based products to soar to unusual heights. Comparing construction estimates created last year to those this year, we have seen prices rise beyond the traditional/historical trend of three to four percent per annum to a blended escalation rate of five to eight percent per annum in 2018. Industry reports mirror our experience. The Canadian Coalition for Construction Steel has stated that tariffs have increased the price of steel rebar by 58 percent as of August 2018 compared to a year earlier. It is estimated that the direct and indirect impact of the tariffs have added approximately six percent to the cost of constructing a 25-storey office tower or industrial warehouse2. Additionally, Normac, an industry leader in insurance appraisal specializing in providing building replacement costs, has observed the price of exterior windows increase significantly due in part to the heavy reliance on aluminium materials, which they project to increase by up to 15 percent compared to last year3.
Additional factors contributing to cost escalation
Those seeking to avoid tariffs by sourcing domestic steel face different challenges coming from supply and the cost of transport. Canada has long been a net-importer of steel and is the world’s largest purchaser of American steel. Even if steel is available at Canada’s central mills, transporting costs make it unaffordable, especially for those on the west coast – it costs over four times more to ship a tonne of steel to Vancouver from Ontario than it does from Asia. Companies seeking to avoid unpredictable price changes by “pre-purchasing materials” in advance for a contemplated project face different risks, such as the logistics of storage and the risk of theft or damage.
While the steel and aluminum tariffs are certainly a major contributor to increased pressure in overall project costs for most of 2018, the situation is further compounded by significant cost increases on a variety of other trades. As an example, in the GTA market, formwork, masonry and roofing costs have increased in response to the increased market demand. Our discussions with general contractors, sub-trades, and industry sources highlight that the high level of activity in the market are draining supply of materials and labour, thus increasing costs beyond anticipated levels. This is especially true within the GTA, Vancouver, and Ottawa markets where there are numerous large capital investment municipal projects underway such as the Eglinton Crosstown in Toronto and the Parliament building improvements in Ottawa. It has also created an opportunity for sub-trades to be able to choose projects that are less risky and with minimal complexity in order to maximize profits. The market is slightly softer in the Prairies and the east coast due to the reduced price of oil, and limited demand.
Whether it’s an individual contractor or a national builder, companies across the country are being forced to absorb losses as current costs push projects far beyond budgets set last year. Most contracts are set using the cost of materials at time of writing, resulting in many organizations facing significantly increased material costs and subsequent profit losses. We have found most contracts lack any provision for recourse in response to increases in costs as a direct result of tariffs, however we would advise seeking legal counsel regarding existing construction agreements to explore options.
Minimizing risk in new projects
Clearly these tariffs have created an environment with increased risk as industry players have unreliable numbers of both supply availability and the escalating costs. Milestone or stage estimates normally provide an opportunity to ‘pulse check’ on whether the project budget is on track or not. While professional organizations are trying their best to address what’s happening, they can only provide generic market trends and advice.
Steps to minimize cost risks
We encourage clients to build in a robust risk contingency in their overall budget to take into account market shifts related to steel and aluminum tariffs as well as a general increase in demand for specific sub trades.
Turner & Townsend has an extensive database with both local and global data on residential, institutional, commercial, and industrial facilities that form the foundation of our projections. Additionally, our project management and loan monitoring businesses get tender prices regularly, which supplements the historic data and refines our estimates. As a result, we are able to aggregate near real time costing across both raw material and sub-trade materials. While this still does not allow us to predict the future, it does provide the ability to create more robust budgets by applying our market trend data with the specific requirements of our clients’ projects. As a result, the risk of unexpected costs from material selection, design, and system selection are minimized.
For further analysis and insights, read the full Canada market intelligence report for 2019.
1. US Customs and Border Protection, 2018
2. SHK Law Corporation (2018) “The Impact of Steel and Aluminum Tariffs on Construction Industry Participants”