Companies with cost-plus contracts are much better off, and the implication here, in all this advice we are linking to, is that a business executive is out of his mind to sign a fixed-price contract, and especially one with the federal government. That’s because any change to the compensation structure of a fixed-price contract needs to meet all three of these requirements in the FAR language involving federal taxes, which tariffs are.
The first two are fairly straightforward, and somewhat easily met. The third one is the problem. The increase in costs must result from a tariff that the contractor is required to pay. Most of the tariff costs are borne by others—subcontractors, customs agents, wholesalers—they’re usually the ones who pay the tariffs, and then pass them down the supply chain. There is precedent in case law, whereby contractors can not recover price increases that are indirectly attributable to the tariffs, even if we all know that higher tariffs caused the costs to go up.
