On February 1, 2025, President Trump issued Executive Order No. 14193 titled “Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border” (the “EO”) (available here). The EO announced tariffs that would impact a wide range of Canadian, Mexican, and Chinese goods imported into the United States. Among other sources of authority, President Trump cites to the International Emergency Economic Powers Act (50 USC. 1701 et seq.) that authorizes the President to implement tariffs to “deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside of the United States . . . if the President declares a national emergency with respect to such threat.” 35 USC. § 1701. As of February 3, 2025, President Trump paused the anticipated tariffs for Canada and Mexico for at least 30 days. On February 10, 2025, President Trump signed an order imposing a 25 percent tariff on aluminum and steel imports as well. This alert identifies potential options available to contractors to recover under fixed-price and flexibly priced contracts increased costs associated with the anticipated tariffs, as well as potential exemptions warranting consideration.

Recovery of Costs under Fixed-Price Contracts

Federal Acquisition Regulation (“FAR”) 52.229-3 requires a contract price to be increased “by the amount of any after-imposed Federal tax” so long as the contractor warrants that the newly imposed tax was not included in the contract price. An “after-imposed Federal tax” means “any new or increased Federal excise tax or duty . . . that the Contractor is required to pay or bear as a result of . . . administrative action taking effect after the contract date.” FAR 52.229-3(a) (emphasis added).¹ Pursuant to the FAR clause, increased costs resulting from the tariffs imposed by the EO likely are recoverable to the extent the effective date of a contractor’s contract or modification is before February 1, 2025, which is when the EO was issued, and the contractor promptly notifies the cognizant contracting officer (“CO”) of the tariff that the contractor expects to result in an increase in the contract price. Considering how President Trump has temporarily paused the anticipated tariffs for Canada and Mexico, there is an argument based on a less conservative interpretation that the EO will not be “effective” for Canadian and Mexican imports until the date on which the temporary pause is lifted, thereby creating some ambiguity as to whether a contractor may recover increased costs if a contract is effective after February 1 but before the temporary pause is lifted. That said, it would be prudent for contractors to adopt a more conservative interpretation at this time, and therefore, consider pricing their current proposals and submitting revised proposals that reflect the anticipated increased costs due to the tariffs (and disclose to the Government as such). 

Contractors also may wish to review their fixed-price contracts to determine whether they contain any economic price adjustment clauses such as FAR 52.216-4, which requires the cognizant CO to negotiate a price adjustment (subject to certain limitations) after receiving from the contractor a notice of a price change. 

Recovery of Costs under Flexibly Priced Contracts

Contractors that are performing flexibly priced contracts generally should rely on the FAR’s allowability rules at FAR 31.201-2 to recover increased costs associated with the anticipated tariffs under the EO. FAR 31.201-2 requires that a cost is: (1) reasonable; (2) allocable; and (3) consistent with the Cost Accounting Standards, generally accepted accounting principles and practices (if appliable), contract terms, and any FAR cost principles. To that end, while there is no cost principle that specifically addresses tariffs, FAR 31.205-41 - Taxes, likely would apply to the anticipated tariffs under the EO. That cost principle generally makes the costs of taxes allowable unless specifically identified as unallowable by paragraph (b) of the cost principle. For example, the cost principle makes tax costs unallowable if an exemption is available to the contractor or the Government, except when the cognizant CO determines that the administrative burden of obtaining the exemption outweighs any benefit to the Government.

Although the FAR does not prescribe the inclusion of FAR 52.229-3 in flexibly priced contracts (see FAR 29.401-3), it may be possible for contractors to seek the inclusion of that clause in their flexibly priced contracts through negotiations. Contractors also should review their existing contracts for any changes clauses pursuant to which an equitable adjustment to the estimated cost and fee may be warranted. Additionally, if a contractor is anticipating a significant amount of tariffs under the EO and believes the amount of the tariffs may cause the contractor to exceed the estimated cost of a particular contract, notifying the cognizant CO pursuant to a limitation of costs and/or a limitation of funds clause (if included in the relevant contract) may be appropriate to seek additional costs and/or funds to address potential overruns. 

Other Considerations

If recovery for increased costs is not an available option, contractors may wish to consider seeking an exemption provided under the FAR and the Defense FAR Supplement (“DFARS”). FAR Subpart 25.9 and DFARS Subpart 225.9 each provide policies and procedures for exempting from duties certain foreign supplies purchased under government contracts, but the policies and procedures provided under the DFARS are the more comprehensive of the two. The FAR and DFARS identify the following respective categories of supplies for which duty may be exempt:

• The FAR – (1) supplies listed in Subchapters VIII and X of Chapter 98 of the US Harmonized Tariff Schedule (“HTS”);² and (2) supplies, excluding equipment, for Government-operated vessels or aircraft. See FAR 25.903.
• The DFARS – (1) qualifying country supplies (end products and components); (2) eligible products (end products but not components) under contracts covered by the World Trade Organization Government Procurement Agreement or a Free Trade Agreement; and (3) other foreign supplies for which the contractor estimates that duty will exceed US$300 per shipment into the customs territory of the United States. See DFARS 225.901.

Importantly, pursuant to the EO, the HTS may undergo adjustments sometime soon that may eliminate or otherwise impact any HTS-based exemptions provided under the FAR and DFARS. Contractors should carefully review the categories of supplies provided in the exemptions, as well as their contracts for relevant FAR/DFARS clauses (e.g., FAR 52.225-8, Duty-Free Entry, and DFARS 252.225-7013, Duty-Free Entry) to determine whether any supplies they are purchasing under federal government contracts are eligible for an exemption and when contractors must notify the cognizant CO to seek an exemption (e.g., an exemption is not available to contractors that have already paid for the duty).

The terms of FAR 52.225-8 and DFARS 252.225-7013 do not require that prime contractors flow down the clause in their subcontracts, but do require flowing down the substance of the clause if the subcontract meets certain conditions. See FAR 52.225-8(j); see DFARS 252.225-7013(j). Applicable regulations contemplate that subcontractors may seek an exemption by directly notifying the government of products or supplies that are eligible for duty-free entry. See, e.g., DFARS PGI 225.902 (“Upon receipt of the required notice of purchase of foreign supplies from the contractor or any tier subcontractor. . . .”). That said, contractors may wish to include in their duty-free clause(s) the requirement that subcontractors also notify the higher-tier contractor to ensure that the prime contractor is aware of what duty-free exemptions are being sought under their prime contracts. 

Finally, we note that pursuant to the sovereign acts doctrine, a contractor’s argument that the government breached its contract by issuing the EO, thereby impacting the contractor’s performance of a contract, is unlikely to prevail barring extreme circumstances and facts. See, e.g., Conner Bros. Const. Co. v. Geren, 550 F.3d 1368, 1371 (Fed. Cir. 2008) (citations omitted) (“The [doctrine] provides that the United States when sued as a contractor cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign . . . and it is designed to balance the Government's need for freedom to legislate with its obligation to honor its contracts.”).

Although the anticipated tariffs under the EO for Canada and Mexico have been temporarily paused, contractors should take this time to review their contracts, assess potential impacts, and pursue appropriate remedies to address any increased costs of performance.

1. FAR 52.229-3 does not specifically use the term “tariff,” but the tariffs under the EO likely qualify as a duty. See EO (using the terms “duties” and “tariffs” interchangeably”); see also 19 U.S.C. § 2481 (defining a duty as “the rate and form of any import duty, including but not limited to tariff‑rate quotes”); see also 19 U.S.C. § 2483 (using the term “duty” to describe the President’s power to amend the U.S. Harmonized Tariff Schedule).↩
2. The most current HTS is available at https://hts.usitc.gov/reststop/file?release=currentRelease&filename=Chapter%2098↩