They want me to start on a letter of intent
The subcontract isn't ready, the start date is, and the main contractor has sent a letter asking us to get going.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
What's happening?
A letter of intent gets you on site while the subcontract is still being written. It usually lets you start some of the work and caps what you can spend or recover. It says little about how the work will be valued, when you can apply for payment, or what happens if the subcontract never arrives. Once you start, the letter is often the only paper the job ever has.
The risk sits in five points: the cap, the scope it covers, the price basis, the expiry date and the payment route. Read each one against your quote and against what you will commit in the first weeks on labour, material orders and plant. If the cap is smaller than your first month's commitments, you are over it before the job has properly started. If the job then ends on the letter, the cap can be the limit of what you recover.
Whether the letter is itself a binding contract, and what its words mean in law, depends on the wording and on what happens next. That is a question for your solicitor. The commercial check, and a written record of the gaps, are jobs you can do now.
The solution
Read the letter before you commit to it. Check the cap against your first weeks' spend, the scope against your quote, and the price basis, expiry and payment dates. Send each gap back as a short written proposal, so every point is agreed or recorded as open before the first gang arrives. Then put the cap in your cost system with a warning well before it, and the expiry in the diary.
Our Letter of Intent Loss Prevention service makes that check before you start. We put the gaps to your main contractor in writing, in your name. Then we set the working rules your team follows until the subcontract is signed. One named person asks for a higher cap or a signed subcontract before either runs out. The legal questions go to your solicitor.
Example
Illustrative example. The scenario and figures are invented.
The facts
A mechanical subcontractor is asked to start a £600,000 package on Monday. The letter of intent is capped at £75,000 and valid for 8 weeks. Its plan for the first month commits £40,000 of labour and £50,000 of pipework and plant orders.
What happens
- The subcontractor reads the letter against its quote and its first month's plan. The committed spend, £90,000, is already over the cap.
- The letter says nothing about how the work will be valued. The subcontractor proposes that its quoted rates apply to everything done under it.
- The letter gives no application dates, so the subcontractor proposes monthly applications on the 25th.
- The main contractor raises the cap to £150,000 and accepts the rates and the application dates. It leaves the expiry at 8 weeks, and the subcontractor records that point as open.
- The subcontractor puts the £150,000 cap into its cost system with a warning at £110,000. It puts the expiry in the diary with a reminder in week 6.
The letter against the plan
| Item | Amount |
|---|---|
| Package | £600,000 |
| Cap as first issued | £75,000 |
| First month's committed spend | £90,000 |
| Cap agreed before the start | £150,000 |
The outcome
Work starts inside a written cap, on the quote's rates, with dates to apply for payment. The week 6 reminder gets a 4 week extension in writing, and both sides sign the subcontract in week 10.