Letter of intent

A letter of intent usually follows tender evaluation, once a preferred contractor or subcontractor has been chosen but the contract is not yet finalised. The client wants work to start, often design, long lead procurement or site establishment, while lawyers finish the documents.

A well drafted LOI states what work is authorised, a cap on the amount payable, how that work will be valued, which terms apply in the meantime, when the letter expires, and what happens if the formal contract is never signed. Some letters simply say the client intends to award and authorise nothing. Those give the contractor no right to be paid for anything it does.

The same tool is used down the chain. Head contractors issue letters of intent to subcontractors to secure long lead items such as lifts, structural steel or façade systems before the subcontract is signed. The same checks apply in both directions: what is authorised, what is the cap, and what terms govern the work in the meantime.

Starting on an LOI is common, and sometimes necessary to hold the programme, but the risks fall mainly on the contractor.

• Unclear status. Whether an LOI is binding depends on its wording and the parties' conduct. Disputes about whether there was a contract at all are expensive.

• Payment capped. Work beyond the stated cap may not be paid, even if the client asked for it.

• No agreed terms. Without agreed terms on defects, delay, liquidated damages and variations, it is hard to know who carries which risk.

• Lost leverage. Once the contractor is mobilised and spending, it has less bargaining power over the final contract terms.

• Termination. Many LOIs let the client end the arrangement at any time, with payment limited to work done up to the cap.

In most states, security of payment legislation applies to arrangements as well as formal contracts, so payment claims for authorised LOI work may still be possible. Get advice on your own letter before relying on that.

A letter of acceptance accepts the tender and, usually, forms the contract on the tendered terms. A letter of intent signals an intention to contract later. The difference matters: one commits both parties to the full scope and price, the other may commit them to very little.

Some clients use the terms loosely, so read what the letter actually does rather than relying on its title.

• Working beyond the authorised scope. Track spend against the cap and stop or seek an increase before you reach it.

• Letting the LOI run on. Letters extended month after month while the contract stalls build up unpriced risk.

• Placing subcontracts on firmer terms than you hold. If your LOI can be cancelled, your commitments to suppliers should be cancellable too.

• Not recording directions. Keep written records of every instruction received while working under the letter.

Not pushing to close out the contract. Diary a date to convert the letter into a signed contract and escalate if it slips.