Navigating US Tariffs: Mitigating Legal Risks for UAE and KSA Construction Projects
Real Estate & Construction and Hotels & Leisure Focus
Leith Al-AliSenior Counsel,Construction & Infrastructure
On the 2nd of April 2025 United States (‘US”) President Donald Trump introduced what has been widely viewed as some of the most significant escalations in trade policy in recent times- the imposition of additional US import and export trade tariffs. This included the levying of a 10% universal, baseline tariff on all imports as well as reciprocal tariffs ranging from 11% to 50% on goods from countries around the world, with the exception of China which had a tariff of 145% applied on most goods with a reciprocal tariff rate of 84%. Although a 90-day pause has subsequently been announced for all countries except China, once eventually applied, the United Arab Emirates (“UAE”) and the Kingdom of Saudi Arabia (“KSA”) will be among those countries affected by this significant change in US trade policy. The UAE and KSA are key players in the global construction industry, with ambitious infrastructure and development agendas. Accordingly, their reliance on global supply chains make them potentially vulnerable to international trade disruption, such as that caused by the US tariffs.
In this article we briefly examine the potential implications of the US tariffs for construction projects in two of the regions’ most active construction markets and provide actionable measures and strategies employers and contractors should consider in order to contractually mitigate the potential impact of the US tariffs on current and planned construction projects.
For both the UAE and KSA, construction projects are not only a strategic economic pillar but also represent an important symbol in their ongoing national transformation strategies. The construction industry is a cornerstone of their economies, both of which are driven by ambitious infrastructure projects, real estate developments as well as expansive tourism and hospitality initiatives, including Abu Dhabi Economic Vision 2030, ‘We the UAE 2031’ vision and Saudi Arabia’s Vision 2030, all of which have helped enhance economic diversification away from oil dependency with a view to ensuring robust long term fiscal development.
The UAE and KSA construction markets were already projected to experience an uptick in construction costs well before the introduction of the US tariffs. This is according to UAE-based project management consultancy firm Stonehaven’s 2025 UAE and KSA Cost Benchmarking Report, in which it anticipated that the UAE would experience cost increases of 2.7 to 3.3 percent, with the KSA market expected to see a 3.4 to 7 percent cost increase. The US tariffs are therefore likely to only further compound these cost escalations.
The UAE and KSA construction sectors are inextricably linked to global supply chains, importing and exporting various commodities, goods and other construction materials, including steel, aluminium, concrete and specialised equipment, often through a complex network of global supply and procurement channels that may involve or are exposed, in varying degrees, to the US market or US tariffed countries. This notably includes two of their key trading partners- China, which (as previously explained) has been subjected to a tariff of up to 145% and the European Union, where a 20% tariff is proposed. This indirect exposure to US tariffs can lead to tariff-induced increases in the price of global commodities and other sought-after construction goods thereby resulting in heightened exposure for UAE and KSA construction industry stakeholders to the broader global economic effects of the US tariffs.
Unless contractors have negotiated price adjustment or other relief mechanisms into their contracts to mitigate such exposure, they are likely to face strained profit margins or potential losses, particularly in respect of projects with longer construction programmes, where cost escalation risk can take time to filter through to project participants and where the effects are often amplified over a longer construction programme. Given that UAE and KSA project contracts are typically priced on a fixed lump sum basis, this will invariably place the burden of cost overruns principally on contractors and/or their supply chain.
Moreover, a number of leading contractors and consultants involved in UAE and KSA projects are global firms headquartered or with significant operations in the US. These firms are likely to begin pricing tariff risks and the resultant uncertainty into (amongst other things) their material and equipment sourcing strategies, insurance and compliance costs as well as the need to potentially prioritise domestic US contracts, in order to mitigate potential trade complexities including supply chain risks, material cost inflation and US-induced regulatory constraints.
As well as the potential cost implications referred to, tariffs on key trading partners and US-linked supply chains may have a broader ripple effect by disrupting the availability of critical construction goods, potentially leading to significant delays in their procurement and delivery. By way of example, projects in the UAE and KSA invariably depend on the use of construction equipment and machinery. Tariffs on Chinese imports could potentially limit access to affordable heavy machinery, a staple for construction projects in the region, given that Chinese exporters may seek to redirect these to other markets. Additionally, large scale projects which depend on the use of heavy equipment and machinery sourced from US manufacturers may lead to a reduction in the availability of such equipment (including spare parts) which may delay project execution as a result of the resultant reordering of global trade flows and adjustments in sourcing strategies, creating further increased shipping congestion in certain areas as well as other logistical bottlenecks.
Employers, contractors and wider supply chains should also be proactive in revisiting their contracts, risk management frameworks and procurement strategies with a view to not only mitigating potential risks but also preserving the trust and collaboration that is essential to the ongoing delivery of construction projects in an increasingly volatile global trading environment.
Employers and contractors can take steps in order to mitigate against the inflationary risk as well as other time and cost uncertainties arising from the US tariffs. We set out below some of the key actionable contractual measures and strategies contracting parties should consider in order to mitigate their impact. Although they have been proposed within the context of a typical employer-contractor contractual relationship, these measures may also be applied (albeit by way of bespoke provisions, as the context applies), to other tiers and participants in the project supply chain.
Price escalation: Price escalation clauses often allow adjustments to be made to the contract price due to rises or falls in the cost of labour, goods, materials and other inputs to the works. The commonly used FIDIC Red and Yellow Books (1999) (the “FIDIC Contracts”) include such a provision (see Sub-Clause 13.8 [Adjustments for Changes in Cost]) which is intended to provide a contractor with a mechanism by which to claim cost adjustments where it would otherwise be unreasonable for it to bear the risk of such escalating costs.
Employers are often inclined to amend or delete this provision entirely from the FIDIC Contracts in order to limit or avoid exposure to such market risks and cost fluctuations. If however, such a provision has been retained in the executed contract, parties are advised to carefully examine the drafting to understand its precise implications.
Where a project contract is yet to be executed and the parties’ have in principle negotiated the inclusion of such a relief mechanism, the provision should be carefully drafted to ensure the exact scope and implications of cost adjustments are clearly articulated, including clear identification of the items covered, defining the price indices used and specifying the baseline and trigger for adjustment.
Force majeure: Although the introduction of tariffs might not typically qualify as a force majeure event (and is unlikely to be construed as such within the meaning of “Force Majeure” under Sub-Clause 19.1 [Definition of Force Majeure] of the FIDIC Contracts), a bespoke clause might encompass drafting to allow for sudden regulatory changes affecting material supply and/or other project costs thereby potentially providing grounds for a party to claim relief from certain contractual obligations.
Employers and contractors should closely examine the force majeure provisions in standing contracts to determine whether the US tariffs qualify as a force majeure or equivalent exceptional event and the contractual implications of this (including a party’s entitlement to claim additional time and/or costs).
For project contracts that are still being negotiated, employers and contractors are advised to ensure the applicability of such tariff changes and cost fluctuations is expressly addressed in the force majeure provision, in order to limit scope for uncertainty and ambiguity post contract execution.
Changes in law: Although often deleted by employers or at least amended to dilute a contractor’s right to claim relief for changes in law, the unamended FIDIC Contracts (see Sub-Clause 13.7 [Adjustments for Changes in Legislation), generally allow for the contract price to be adjusted as a result of an increase or decrease in costs resulting from a change in law, the introduction of new laws and the repeal or modification of existing laws, or in the judicial or official governmental interpretation of such laws after the “Base Date” (i.e. the date that falls 28 days prior to the latest date for submission of the contractor’s tender). Where applicable, an extension of time may also be claimed.
The extent of each parties’ rights and obligations within the context of a change in law claim will therefore largely depend on whether the US tariffs qualify and fall within the scope of the agreed change in law provision. The relevant clause should therefore be examined.
For project contracts that have not yet been executed, employers and contractors are advised to ensure the consequences of such changes in law (specifically within the context of such tariff changes) are clearly defined in order to reduce scope for disputes during project execution.
Supply chain risk allocation/notification obligations: Contracting parties should be mindful of and where applicable specify contractually the key long-lead and tariff sensitive items during procurement planning and in doing so define responsibilities for sourcing, delays and cost overruns during project execution accordingly, including with respect to notification obligations. This is to ensure that the risks associated with the procurement of such items are clearly allocated and any early warning and other contractual notification obligations are promptly adhered to.
For a contractor this may, for example, help ensure it does not inadvertently waive its right to claim for relief on account of a breach of its notification obligations within the context of claim brought pursuant to Sub-Clause 20.1 [Contractor’s Claims] of the FIDIC Contracts. Conversely employers, will want to preserve their right to reject a claim where a contractor’s claim for relief is found to fall foul of the notification requirements under Sub-Clause 20.1, thereby rendering it time barred.
Currency risk: The US tariffs may result in fluctuating currency exchange rates which may affect the cost of procuring certain goods. Sub-Clause 14.15 [Currencies of Payment] under the FIDIC Contracts include a basic framework for addressing currency risk, however does not include a mechanism for addressing changes in exchange rates.
Standing contracts should therefore be reviewed to determine whether their terms clarify the parties’ risk allocation in this regard.
For contracts yet to be executed, employers and contractors should be mindful of whether their contracts clearly address the currency in which amounts due will be paid and, where multiple currencies are envisaged, that a clear mechanism can be applied to allocate currency fluctuation risk.
With a myriad of factors at play, the time and cost impact of the changes in US tariffs on the UAE and KSA construction markets remains to be seen. Employers and contractors will likely need time to properly scrutinise and evaluate their implications. It will be important for industry stakeholders in both markets to consider at an early stage (on both a macro and microeconomic level) the potential direct and indirect commercial implications on current and planned construction projects, with a view to informing each as to the steps that need to be taken in order to mitigate the potential legal and commercial risks that can arise as a result. Employers, contractors and wider supply chains should also be proactive in revisiting their contracts, risk management frameworks and procurement strategies with a view to not only mitigating potential risks but also preserving the trust and collaboration that is essential to the ongoing delivery of construction projects in an increasingly volatile global trading environment.
For further information,please contact Leith Al-Ali and Euan Lloyd.
Published in June 2025
