Tariff Line Item Costs: Only One Mechanism for Risk Sharing

The imposition of blanket tariffs, some massive, on nearly all goods imported to the US has prompted announcements from wholesalers and retailers alike about adding a “tariff surcharge” line to their prices.  Athleisure brand Fabletics was one of the first to make news with a tariff surcharge line on its orders.  Electronics manufacturers are also announcing that they will explicitly pass along tariff costs to customers.  If you own a business, making such a move may also be a move you can consider.  They are not the only provision that can help you, however.  

WHY IT MATTERS

Whether you are able to increase prices in response to tariffs may depend on a number of factors, including the terms of your customer contracts and your negotiating power with those customers.  If your standard agreements allow you to pass along price increases due to tariffs, taxes, government order, or similar kinds of triggers, you may have the explicit right to add a “tariff surcharge” line to your pricing.  If you do not have explicit rights to add tariff surcharges, you might also have rights to implement general price increases at various milestones in the relationship, such as at any renewal or anniversary date.  You may also be able to minimize price swings by altering delivery times and similar commitments: if you are able to front-load deliveries while your costs are lower, for example, you may have a hedge against price swings.  

If your current agreements do not contain mechanisms that specifically allow you to raise prices or adjust supply chain/logistical practices, you might still have room to open a conversation with your customers: after all, a contract is merely the written commitment to agreed commercial terms.  Most every commercial contract in existence allows for modification when both parties agree to change their terms.  

Finally, whatever business choices you are making to smooth out pricing issues, be sure that you are building corresponding terms into your new and renewing customer agreements.  Give yourself the leeway to change suppliers, alter delivery times to reflect new warehousing or import timing strategies, raise prices overall or pass along specific tariff charges, and modify terms at specified trigger or milestone events (such as your costs increasing by a certain percentage).