Navigating Tariff Developments in Government Contracting

The Trump administration’s imposition and reinstatement of tariffs (as Pillsbury has analyzed here, here and elsewhere) has led to supply chain disruptions and increased import costs for contractors. On cost-type contracts, we are of the view that under FAR 31.205-41 (Taxes), allocable tariff duties—which are analogous to taxes—should be presumptively allowable absent an applicable contractual or regulatory prohibition. In advocating for reimbursement of tariff impacts on firm fixed-price contracts, contractors should draw from this principle and consider several other key clauses.

First, contractors should analyze their contracts to see if they incorporate FAR 52.225-8 (Duty-Free Entry). Under this clause, supplies eligible for duty-free entry include: (i) items afforded duty-free entry under the U.S. Harmonized Tariff Schedule (HTS); and (ii) supplies for Government-operated vessels or aircraft pursuant to 19 U.S.C. § 1309; and (iii) other supplies identified by name in the contract as being entitled to duty-free entry. However, contractors must match supplies to a tariff classification number that provides duty-free treatment for government purchases, which are generally classifications under Heading 9808 of the HTS.^[1]

Second, FAR 52.229-3 (Federal, State, and Local Taxes) can provide cost relief under fixed-price contracts. FAR 52.229-3 is a standard clause included in most fixed-price contracts. It provides that the contractor may be entitled to an equitable adjustment for after-imposed federal taxes. FAR 52.229-3(c) allows for an increase in contract price based upon a new “Federal excise tax or duty” on the contract materials that the contractor “is required to pay or bear.” In our view, the tariffs being imposed under statutes such as Section 232 of the Trade Expansion Act of 1962 and the International Economic Emergency Powers Act (IEEPA) likely qualify as a “Federal excise tax or duty.” There are two conditions to potential recovery: (1) the tariffs must have been imposed or increased after the contract date and not have been included in the contract price, and (2) the contractor must “promptly notify” the CO of the developments that may reasonably result in an increase or decrease to their contract price. In our view, this clause will provide relief only in contracts executed before the imposition of a relevant tariff.

Third, contractors performing defense agency contracts should look for DFARS 252.225-7013 (Duty-Free Entry). Specific to Department of Defense (DoD) contracts, this clause facilitates duty-free entry for (i) end products and components from certain “qualifying countries” as provided in DFARS 225.003, (ii) “eligible products” under the World Trade Organization Agreement on Government Procurement (“WTO GPA”) or other relevant free trade agreements, as defined in FAR 25.003, and (iii) other supplies for which the contractor estimates that duty will exceed $300 per shipment. To implement this exception, DoD issues certifications allowing importers to enter supplies duty-free under Harmonized Tariff Schedule (HTS) 9808.00.30 when DFARS 252.225-7013 flows down to their contracts. (See 19 C.F.R. 10.102(b)(1).)

Finally, we note that contractors should be vigilant for potential tariff-related schedule impacts. Tariffs can lead to more than just cost increases—they may also cause supply shortages and disruptions that delay contract performance. Various FAR clauses—such as FAR 52.249-8(c), FAR 52.249-10(b) and FAR 52.249-14—excuse contractors for delays caused by unforeseeable events beyond their control, including acts of the Government. Additionally, if a contractor is entitled to an excusable delay but is still required by the Government to adhere to the original schedule, the contractor may recover increased costs incurred to accelerate performance—known as “constructive acceleration.”

The evolving tariff landscape presents both challenges and opportunities for government contractors. By proactively addressing the implications of FAR 52.225-8, FAR 52.229-3 and DFARS 252.225-7013, contractors can better position themselves to manage increased costs and maintain compliance. Staying informed and engaged with COs and agency legal advisors is crucial to successfully navigating these developments. To date, we have assisted client requests to COs to add duty-free clauses to existing contracts; assisted clients as they collaborate with prime contractors to add such clauses to subcontracts or take the necessary steps to capitalize on such clauses; and drafted excusable delay notifications that seek schedule relief as parties address and resolve duty-free issues. Pillsbury’s multidisciplinary, bi-coastal team comprising lawyers from its award-winning International Trade and Government Contracts groups continues to closely monitor developments in these areas. We would be privileged to assist you.

^{[1] These include, for example, materials certified as necessary “in the interest of the common defense and security” by the Nuclear Regulatory Commission or U.S. Department of Energy, HTS 9808.00.50; materials certified by GSA to be “strategic and critical materials” procured under 50 U.S.C. 98-98h, HTS 9808.00.40; and for DOD contracts, materials certified as emergency war material, HTS 9808.00.30. The major new tariff regimes imposed to date recognize that Chapter 98 exclusions continue to apply, including with respect to the “reciprocal” tariffs. CSMS # 6464925 (Apr. 4, 2025) (“The additional duties imposed by the headings above shall not apply to goods for which entry is properly claimed under a provision of chapter 98 of HTSUS pursuant to applicable U.S. Customs and Border Protection (CBP) regulations”).}