Letters of Intent: the benefits and risks in construction projects

letters of intent can assist in maintaining project programme, allowing contractors to progress with certain elements of work (e.g. site preparation works) and to place certain orders (e.g. for long-lead items or items where costs are volatile) whilst the final terms of the build contract or commercial aspects of the project are agreed or determined.

often in reality parties do proceed with certain works/activities in anticipation of signing a building contract, particularly when building contract negotiations are relatively advanced. Notwithstanding parties may be close to finalising the building contract, an agreement in writing for any initial works/activities is always prudent and it ensures both employers and contractors are clear and aligned on what activities the contractor may proceed with and what costs may be incurred.

letters of intent often set out the legal, commercial and/or technical items still to be agreed between parties in order to allow the final building contract to be signed. This can prove helpful in focusing the attention of parties and in closing matters out quickly.

at times letters of intent can be put in place quickly and under a degree of commercial pressure, and it is important that notwithstanding such pressures care and attention is taken to ensure the precise scope and terms of the letter of intent are drafted clearly in order to avoid any ambiguity or uncertainty which may later lead to dispute (e.g. scope of work, payment, insurance, liability/value, termination and expiry). Often the terms of the building contract, in so far as agreed, are said to apply.

parties should be clear as to exactly what the contractor is authorised to proceed with under the letter of intent and the total maximum cost that can be incurred and payable by the employer. This will be documented in a scope of works/activities and through setting a clear value threshold, beyond which the employer is typically not liable for payment unless the parties expressly agree otherwise and extend the letter of intent in writing.

letters of intent are intended to be temporary measures and so should not be in place for a significant period of time. Parties should agree and expressly state an expiry date and the consequences of expiry, including that any works/activities carried out beyond such date are a contractor risk in the absence of a formal written extension.

it should be clear what happens if the building contract is entered into and if it is not (and that the employer is not obliged to enter into the final building contract). For example, if the building contract is entered into it should be clear that any works/activities carried out under the letter of intent form part of the works under the building contract (and are subject to its terms) and that any payment made under the letter of intent is on account of the contract sum. If the building contract is ultimately not entered into, the letter of intent should narrate the requirements of the employer with regards to demobilisation and the transfer of any orders placed, if required.

for some projects, letters of intent are extended again and again by subsequent extension letters. Some cases have seen upwards of 10-15 extension letters being put in place right throughout the course of the works (in place of a building contract). As is evident from court decisions, it is not prudent to allow a project to proceed on the basis of a series of letters of intent, and all parties involved in the project (particularly professional advisers) should do what they can to prevent this from happening and to ensure a formal building contract is ultimately entered into.