Letters of intent in the construction sector

In the fast-paced world of construction, time is money. Letters of Intent (“LOI”) offer a valuable tool to kickstart and provide a legal framework for projects while formal contracts are finalised.

Find out about how LOIs are used in construction, their benefits, and considerations for using them effectively.

Our construction team advises clients on the preparation and negotiation of the terms of all construction documentation including letters of intent, main contracts, sub-contracts, consultants’ appointments, collateral warranties, performance bonds, and guarantees.

What is a Letter of Intent?

A LOI is a document which expresses a mutual intention to enter a formal contract in the future. Ordinarily, it will request the contractor to carry out certain preliminary works and/or services, whilst the parties negotiate a formal contract.

The legal effect of a LOI will depend on its form and content. We tend to find that a non-binding arrangement has very few advantages. From a contractor's perspective, inevitably, there will be uncertainty on key matters that are fundamental to the works, and even where the arrangement does not create a contract, the employer may well find themselves bound to pay the contractor for any performed works. As a result, our clients tend to prefer a LOI which creates binding arrangements, offering greater clarity to both parties on key issues such as cost and time.

Why use LOIs?

There are several advantages:

• Getting the project started - LOIs enable contractors to mobilise resources and begin essential tasks like site preparation, preliminary works, or design work before the formal contract is signed. This can streamline the overall project timeline.

• Focusing on the key points for the contract – if key terms have already been considered and largely negotiated when agreeing the LOI, this provides a good foundation to speed up the formal contract documents, saving time, money and avoiding friction.

• Credibility and funding – having an agreed LOI in place demonstrates good business practice, stronger project planning, and a solid commitment to the scheme, which can be a source of credibility and assurance for third party funders of the project and/or other parties such as suppliers or sub-contractors.

• Exclusivity – LOIs can be used to establish an exclusive negotiation period, preventing either party from engaging with other potential partners.

What should a Letter of Intent include?

While the specific content can vary, a well-crafted LOI should typically consider and address the following:

• Parties involved - clearly identify the parties involved in the project, including (where applicable) key details of any corporate entities, including their company number and registered office.

• Project description - outline the scope and nature of the proposed construction project and the preparatory works to be performed under the LOI.

• Key terms - establish the essential points of the future contract, including the proposed standard terms, timelines, payment terms, a copyright licence, and dispute resolution procedures.

• Maximum commitment – set out the total maximum aggregate sum to be paid for the works awarded together with an expiry date for the LOI.

• Confidentiality - include provisions to ensure the confidentiality of the LOI and any related information.

• Exclusivity - if applicable, specify a period for exclusive negotiation between the parties.

By understanding the role and benefits of LOIs, parties to a proposed building contract and/or development project can use these documents to streamline project initiation and facilitate successful collaboration. LOIs are a valuable tool, but they are by no means a substitute for a formal contract.

Our specialist lawyers advise on the features of an effective and clear LOI. From the outset, we work closely alongside our clients to identify what they want to achieve via the use of a LOI; thereafter, we work to make that happen. We regularly act for employers, contractors and sub-contractors in the preparation, negotiation, and completion of LOIs.