Letters of intent in the construction sector

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

Our construction team has advised many clients on the suitability for their project and if so, the terms for a letter of intent. We offer practical and cost effective drafting, review and negotiation at this key initial stage of construction projects.

What is a Letter of Intent?

A Letter of intent 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 Letter of Intent 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 Letter of Intent which creates binding commitments, offering greater clarity to both parties on key issues such as cost and time.

Why use a Letter of Intent?

There are several advantages:

• Getting the project started - enables 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 a Letter of Intent provides a good foundation to speed up the formal contract documents, saving time, money and avoiding friction.

• Credibility and funding – 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 – 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 Letter of Intent 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.

• 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 Letter of Intent.

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

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

Please do get in contact. We regularly act for employers, contractors and sub-contractors in the preparation, negotiation, and completion of Letters of Intent.