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Sealed with the best intentions

Contractors and clients could both pay the price unless careful thought is given to securing projects

Letters of intent help work to start on projects before all the contractual arrangements are in place. However, if not properly thought out, they can cause more problems than they solve.

Carefully consider the payment provisions under any letter of intent - contractors will want to ensure they know how much will be paid and when, and clients will want to limit their exposure.

Therefore, make sure that an appropriate payment mechanism is included. This is often expressed as being in accordance with the terms of the intended contract. Check this is adequate, especially where changes are proposed to payment terms.

Contractors should make sure any limit on the sum payable under the letter is generous enough to allow the work to be carried out. If further work is carried out, they will be at risk of non-payment.

In the event that the required works are extended under the letter of intent, a specific extension to the sum payable should be made.
It is fairly common practice for work to continue regardless of the wording of the letter of intent. But close management of the programme and applications for payment will need to be undertaken to make sure that you are not left exposed.
Equally, employers will need to make sure that there is a cap on costs and that they are under no obligation to make further payments until the contract is entered into. Statements should be considered excluding liability to the contractor for any loss of profit or opportunity, or any other loss, as a result of the cancellation of the instruction and that payment on a quantum meruit basis for work carried out is excluded.

Consider the following when entering into any letter of intent depending on whether you are the client or contractor:

  • The names of the parties should be clear and correct as well as details of the contract the parties intend to enter into and any amendments.
  • Set out a detailed description of the scope of the works.
  • Detail the intended start and end dates and whether LADs are applicable.
  • Include the contract sum for the works if known. Make sure a separate statement is included which sets out the maximum liability for the employer under the letter.
  • Ensure payment provisions are clear.
  • Include clear and concise termination provisions.
  • Requirements for insurance should be set out and evidence should be requested to show policies are in place.
  • Consider what warranties are to be provided from any sub-contractor.
  • Include provisions covering copyright licences for contractor design.
  • Is a time limit appropriate for the letter of intent?
  • Confirm that once the contract is signed the letter is superseded and the monies paid will form part of the contract sum.
  • Consider what dispute provisions apply.

Andrew Jones is a partner at law firm HBJ Gateley Wareing