Construction input costs are up 7.1% year over year. The provision that decides who absorbs that is a two-page exhibit at the back of the lease that most negotiations treat as an afterthought.
The producer price index for inputs to new nonresidential construction rose 7.1% between July 2025 and July 2026, with metals among the fastest-moving categories.[1] The cause is not a mystery. Section 232 duties now run at 50% on the full customs value of primary steel, aluminum, and copper articles and 25% on derivative articles, with a reduced 15% tier for certain equipment categories, under a proclamation that runs through the end of 2027.[2] Steel studs, ductwork, electrical conduit, switchgear, copper wire, aluminum storefront, HVAC units — that is a tenant build-out, itemized.
The lease does not mention any of this. The work letter does, or fails to, and the work letter is where the money is.
The work letter is a construction contract hiding in a lease.
Practitioners have made this point for years and it is still routinely ignored: the exhibit governing improvements is a construction contract wearing a lease exhibit’s clothing.[3] It sets a scope, a price mechanism, a schedule, an approval process, a change-order procedure, and a completion standard. It is negotiated by leasing people under leasing deadlines, and it is the document that will decide a seven-figure question eighteen months later.
The core term is a number. A tenant improvement allowance is a fixed dollar figure, expressed per square foot — office ranges ran roughly $10 to $100 per square foot across 2026, retail higher, restaurants higher still.[4] That number is agreed at signing. The steel is bought at permit. Between those two dates sits a pricing environment that has moved 7% in twelve months, and a fixed number does not move with it.
So the allowance quoted in March does not buy the build-out priced in November. The delta has to land on somebody, and the only document that says where is the exhibit nobody read closely.
The doctrine will not rescue the party who lost this negotiation
There is a persistent hope, usually voiced after the bids come in, that a cost increase this abrupt must excuse somebody from something. It does not.
The impracticability doctrine excuses performance when an event whose non-occurrence was a basic assumption of the contract makes performance impracticable.[5] Courts have been consistent about what that does not include: increased cost alone. The Uniform Commercial Code says it in a comment that has been borrowed into common law reasoning for fifty years — “a rise or a collapse in the market in itself” is not a justification, “for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover."[6] The comment allows an exception for a cost increase caused by an unforeseen contingency that “alters the essential nature of the performance,” which is a much higher bar than expensive.
The leading modern statement of the test comes from Transatlantic Financing, where a carrier whose route was closed by the Suez closure had to sail around Africa at substantially greater expense and recovered nothing: the party must show a contingency occurred, that risk was not allocated by agreement or custom, and that occurrence made performance commercially impracticable.[7] The middle element is the one that decides tariff cases. If the contract allocated the risk — and a fixed-dollar allowance allocates it, silently, entirely, to whoever bears overruns — the analysis stops there.
Which means the question “who eats the delta” was answered at signing, by the structure chosen, whether or not anyone at the table framed it that way.
What the structure actually decides
Three common structures allocate this risk three different ways.
A turnkey delivery puts it on the landlord. The landlord agrees to deliver a space built to an agreed plan and finish specification, and takes the construction risk with it — including the upside if it comes in under budget. The tenant’s protection is only as good as the specificity of the space plan and finish schedule attached to the lease, because everything not in that exhibit is a change order priced at the landlord’s contractor’s discretion.
An allowance puts it on the tenant. The landlord contributes a defined sum; costs above it are the tenant’s, and the tenant is generally paying that money back through rent anyway. The negotiation that matters here is not the headline number but the definition of eligible costs — whether the allowance may be applied to soft costs, permits, architectural fees, cabling, and construction management fees, or is restricted to hard construction, which quietly shrinks it by 15 to 25%.
A shared or capped structure splits it: landlord funds to a cap, overruns shared to a second threshold, tenant alone beyond that. This is the structure that survives a volatile input market best, and it is the one most often skipped because it takes an extra afternoon to draft.
Underneath all three sit the provisions that decide whether the allocation holds:
- Change orders. Who may issue them, who prices them, how long the landlord has to respond, and what happens to the schedule. Tenant-caused delay usually starts rent; landlord-caused delay usually does not stop it unless the lease says so.
- Allowance-use deadlines. An allowance that expires if not drawn by a date certain is worthless to a tenant whose switchgear is on a 52-week lead time. Tie the deadline to substantial completion, not to a calendar date set at signing.
- Disbursement conditions. Lien waivers, retainage, and a requirement of full completion before any funding turns an allowance into a reimbursement the tenant must finance in the interim.
- Escalation and de-escalation. Construction practice has a standard answer to exactly this problem: a material price escalation clause that names the affected materials, sets a baseline price, adjusts against a published index once a threshold movement is crossed, and — importantly — runs in both directions, so a fall in copper produces a deductive change order.[8] It exists in standard form.[9] It almost never flows through into the lease work letter, which is how a landlord ends up with an escalation obligation to the general contractor and no matching right against the tenant.
That last item is the structural failure worth naming. When the escalation risk is absorbed in the prime construction contract but not passed through in the work letter, the landlord has bought a hedge for one side of the deal and none for the other. The gap is invisible in both documents individually and obvious the moment you read them side by side.
And force majeure will not close the gap either
Work letters usually carry a force majeure clause, and it usually excuses delay, not price. A tariff does not stop steel from arriving; it makes it cost more. A clause that tolls the completion deadline for “governmental action” gives the landlord more time and gives nobody more money. If the parties want a price consequence, they have to write a price consequence — which is the same lesson the data center power clause teaches from the other direction: a remedy the document does not name is a remedy nobody has.
It is also worth noticing the asymmetry with operating expense clauses. Pass-through provisions were drafted to move rising costs to tenants and generally lack a mechanism to move falling costs back. Work letters have the opposite problem — a fixed allowance is symmetric in form and asymmetric in practice, because the party holding a fixed number in an inflating market is the only one who can lose.
Why this is a portfolio question, not a document question
A landlord with forty leases in build-out does not have one work letter. They have forty, executed across a market that repriced metals twice, some turnkey, some allowance, some capped, with eligible-cost definitions that differ by a broker’s preference and allowance-use deadlines that were copied from a 2019 template drafted for 12-week lead times.
The exposure is not in any one exhibit. It is in the distribution — how many allowances expire before delivery is possible, how many exclude soft costs, how many carry escalation pass-throughs that match the general contractor’s, and how many contain none of it. That is a question about a library, and no one can answer it by opening documents one at a time.
Reading forty work letters at once#
Which of our leases let the tenant apply the allowance to soft costs? Which have a use-it-or-lose-it date inside the next two quarters? Which pass material escalation through, and which leave us short against the GC?
That is exactly the work that used to consume associate weeks and produce an answer that was stale by the next signing.
This is the problem Acrebase is built for. Acrebase is AI-powered contract intelligence for commercial real estate: it parses leases, work letters, purchase agreements, and amendments into structured data, flags unusual or missing provisions, and lets you query an entire contract library in plain language — with every extraction traced back to the exact language in the source document, because an escalation right you cannot cite is an escalation right you do not have.
For teams that would rather catch it during drafting than during construction, the same review sits inside Microsoft Word. The Acrebase Word add-in puts chat, proofreading, an approved clause library, and redlining in the task pane next to the document, so a work letter that funds only on full completion, or an allowance deadline set to a calendar date, gets flagged while it is still a draft — and so the fallback position your counsel already approved is the one that actually goes out. It is the working version of the argument we made about AI in CRE due diligence: the software handles extraction and comparison across the portfolio, the attorney keeps the judgment. And since a build-out priced today is a build-out that gets more expensive while the parties argue, it is worth remembering what long negotiations do to deals.
The practical takeaway: decide, in the work letter, in words, who absorbs a material price increase between execution and buyout — and if the answer is “shared,” name the index, the baseline, the threshold, and the cap. If the document is silent, the doctrine will not fill the gap. It will simply enforce the fixed number you agreed to, which is another way of saying the party holding the allowance eats the delta.
Footnotes
[1] Associated General Contractors of America, “Construction Input Costs Climb 7.1 Percent Between July 2025 and July 2026” (Aug. 17, 2026). https://www.agcfla.com/2026/08/17/construction-input-costs-climb-7-1-percent-between-july-2025-and-july-2026-as-impacts-from-war-and-tariffs-spread-beyond-petroleum-and-metals/
[2] Perkins Coie, “Restructured and Additional Section 232 Tariffs on Aluminum, Steel, and Copper” (proclamation of June 1, 2026; effective June 8, 2026 through Dec. 31, 2027). https://perkinscoie.com/insights/update/restructured-and-additional-section-232-tariffs-aluminum-steel-and-copper
[3] Mashian Law Group, “The Work Letter: The Construction Contract Hidden in the Lease.” https://mashianlaw.com/the-work-letter-the-construction-contract-hidden-in-the-lease-part-1/
[4] The Cauble Group, “Tenant Improvement Allowance: 2026 Ranges” (office $10–100/SF; retail higher; restaurant $100+/SF). https://www.tylercauble.com/blog/tenant-improvement-allowances
[5] Restatement (Second) of Contracts § 261 (1981); id. cmt. d (increased cost alone is not enough absent a contingency altering the essential nature of performance).
[6] U.C.C. § 2-615 cmt. 4.
[7] Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966).
[8] ConsensusDocs 200.1, Time and Price Impacted Materials Amendment (named materials, baseline price, index-based adjustment above a threshold, de-escalation, notice, and time extension for unavailability). https://www.consensusdocs.org/contract/200-1-time-and-price-impacted-materials/
[9] OwnersRepNY, “Experts Share Top Costly Tenant Improvement Work Letter Oversights” (eligible costs, disbursement conditions, change-order mechanics, allowance deadlines). https://ownersrepny.com/experts-share-top-costly-tenant-improvement-work-letter-oversights/
Acrebase is AI-powered contract intelligence for commercial real estate — clause extraction, risk flagging, and portfolio-wide search, plus an AI contract review add-in for Microsoft Word. Learn more at acrebase.com, install the Word add-in from Microsoft AppSource, or get in touch about pricing.