Understanding the Letter of Intent
A common question in the procurement phase of construction projects is how to speed the process up. One approach is to use a Letter of Intent (LOI). Although it can accelerate the process, it's important to understand its purpose and limitations.
What is a Letter of Intent?
An LOI is a preliminary agreement outlining the intent of both parties to enter into a formal contract. It is commonly used to define the broad outline of a transaction before resolving the finer points of the undertaking and typically covers the main terms of the deal, including scope, timeline, and payment terms. For example, it may include a request to complete certain activity or work prior to a formal contract being in place, stipulating a commercial commitment to pay the costs for the specific items detailed within the letter of intent.
It's important to note that an LOI is not a binding contract.
Why would you use a letter of intent? What does it secure?
Construction contracts, even the simple standard forms, are complicated and technical. They take time to define, propose and agree. This is can often lead to delays, which ultimately has some commercial disadvantage for one or both parties.
A letter of intent provides confidence and commitment that the contract will be finalised. However how it is written, the communication between the parties and its meaning and effect can be different in each case. It should not be assumed that you have formed, or indeed not formed, a binding commitment. Ambiguities should be avoided.
If, for instance work is carried out and payment provided, any statement such as “subject to contract” would have been waived.
In a typical sense the LOI is an interim or provisional contract and will be superseded by the finalised agreement. However, if you never form the final contract the letter of intent is effectively final.
It secures commitment and definition.
What Should a Letter of Intent Include?
The key requirements are to outline the main terms of the deal, any stipulations, requirements or timeframes that are key to creating the contract itself. This should be an iterative process, with proposal and counter proposal flowing between each party. The crucial element is to ensure that neither party is surprised by any obligations and that each party is protected.
Key Considerations for Using a Letter of Intent
Clarity and Specificity: The letter of intent should be clear and concise, avoiding ambiguities that could lead to disputes.
Mutual Agreement: Both parties must agree on the terms of the LOI.
Interim Measures: The letter of intent may outline interim measures, such as starting work or providing materials, before the formal contract is signed.
Legal Review: It's essential to have a legal professional review the LOI to ensure it aligns with your business objectives and protects your interests.
Benefits and Risks of Using an LOI
Benefits:
Accelerates the Process: An LOI can speed up the procurement process by establishing a framework for negotiations.
Demonstrates Commitment: It signals the parties' commitment to moving forward with the project.
Facilitates Interim Measures: It can allow for interim work to begin, which can be beneficial in certain circumstances.
Risks:
Lack of Binding Force: A letter of intent is not a legally binding contract, meaning either party can withdraw without consequences.
Potential for Disputes: If not carefully drafted, an LOI can lead to disputes over its terms and enforceability.
Limited Protection: The LOI may not provide the same level of protection as a formal contract.
While a letter of intent can be a useful tool in construction procurement, it's essential to weigh the benefits and risks carefully. By understanding its purpose, drafting it clearly, and seeking legal advice, you can use an LOI effectively to accelerate the procurement process whilst protecting your interests.
Author
Darren Hewitt
Darren has over 25 years experience in the construction industry. Within this time he has led and delivered construction projects for major blue chip clients.
Darren has held senior roles in both client and consultant organisations. This gives him a full understanding of the construction process and level of stakeholder engagement required to ensure successful project/programme outcomes.
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