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 contractor i.e. the company performing 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 the project starts late, then the contractor may have unproductive labour or plant costs that it cannot recover from the client. It may also face pressure to accelerate the works or value engineer some facets (like quality) to complete the project according to the original programme.
What ‘wrong’ normally means – when discussing letters of intent – is that the full contract is never signed. This has two impacts on the contractor: no obligation or right to continue the project, and no method of calculating a price for the works completed.
Without a contract for specific works, the contractor has no right to complete the project. The employer can ask the contractor to leave the site at any time. This provides no clear authority for the contractor or its subcontractors, and can leave the contractor out of pocket for longer term hire items.
No Contract Price
The cost consequences for the contractor depend on whether it only carries out the works set out in the letter of intent (the initial works) and leaves the site, or continues to carry out works beyond those instructed.
Initial Works Only: many letters of intent do not provide for payment based on tendered rates and agreed prices, but ‘reasonable costs’. This may leave the contractor losing money as ‘reasonable costs’ will not reflect the tender rates, actual costs, profit elements and so on.
Further Works: If there is no contract for the rest of the works that the contractor carries out on the project then:
- the payment procedures are those set out in the Scheme which may not provide the correct protection or time periods for meeting its own obligations
- the contractor may be entitled, where the client benefits from works done, to be paid a reasonable sum – although it may have to go to court to find out what that sum is! or
- the contractor may not be entitled to any further monies eg where the employer has expressly told the contractor that work beyond the initial works is at its risk and that it will not pay any more money (see Mowlem v Stena)
- the contractor is not subject to delay damages, nor can it recover damages for delay or disruption,
Often the contractor believes that without a full contract it might be better off sitting tight – as it has the upper hand. However, this is not actually true in practice. The consequences for the client are equally dire!