A letter of intent is a contract to start a construction project in the form of a letter. It may also confirm the sender’s intention to award the contract for the whole project to the recipient – the contractor.
The purpose of a letter of intent is two-fold: (1) to start the project now, in order (2) to keep the project on schedule. What happens when letters of intent go wrong? This blog considers the perspective of the client i.e. the company paying for the works.
‘Wrong’ may mean that the terms of the letter of intent are so complex that the client and the contractor simply cannot agree to the terms quickly enough, resulting in the start of the project being delayed. If a project starts late, then:
- if there is a fixed deadline, the client will have to pay additional construction costs (acceleration costs) to shorten the project duration and keep the project on schedule;
- if there is a fixed budget, the client will either have to extend the deadline for completion or it may have to change its quality standards to make design/construction quicker.
All of these decisions result in changes in time, or cost, or quality.
But the conscious balancing of those 3 aspects of a construction project is critical if the project is to be a success. If a letter of intent goes wrong, the client could face the failure of its project.
No Formal Contract
What ‘wrong’ normally means – when discussing letters of intent – is that the full contract is never signed. The client is faced with two unattractive options:
Option 1: it ends the letter of intent and asks the contractor to leave the site. Even if there is no dispute, the client will have to re-tender the rest of the project and will face project delays and additional tendering costs.
Option 2: it ignores the contract issues and allows the contractor to carry on. The client now has no document covering how much the contractor is owed, the project schedule or quality standards required. This is the worst possible result. If there is no contract for the rest of the project then:
- the client has no right to require the contractor to finish the project – the contractor is not obliged to do so
- the client has no clarity over payment procedures and could forget to issue the right notices at the right time – the contractor can demand payment in full, suspend the works, and charge interest if the client gets those procedures wrong
- the client may not achieve success in terms of meeting its aims for time, cost and quality – the contractor is only required to complete in a reasonable time, to a reasonable standard, and be paid its reasonable costs
- the client cannot rely on the usual remedies in construction contracts such as damages for delay, a defects period, or a right to vary the works.
If you cannot agree the full contract, the client has to be prepared to walk away. It is better to part ways amicably early in the project, than spend seven years in courts hearing lawyers arguing and judges deciding whether you had a contract and its terms. That, surely, would be the epitome of failure!