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Read a letter of intent like a contract and track its cap

A letter of intent is often the only paper the job ever gets, and it usually caps what you can recover and says little else. If you must start before the subcontract is signed, read the letter as closely as a subcontract, above all the cap.

Updated: . By Jack Butler-Kettle, Construction Claims Consultant.

If the work has already run past the letter, see how work beyond a letter of intent is valued and recovered.

Why it matters

It is easy to read a letter of intent as a comfort, a sign the full subcontract is coming, and start work on it. Often it is the only paper you get. It usually says three things: start, spend up to a stated sum, and expect nothing beyond it. The subcontract may never arrive. The cap gets passed in week 6 because nobody on site knew it existed. Every pound past it is spent on a promise nobody made. If the job ends on the letter, as many do, the cap can be the limit of what you recover. Everything else becomes a negotiation from weakness.

How to do it

  1. Read the letter with the same checklist you use for a full subcontract. Cover the scope, sum, cap, price basis, payment terms, what happens at the cap and how it ends.
  2. Put the cap in your cost system as a hard limit, with a warning at 75 per cent. Tell the site team the figure.
  3. Put the letter's expiry date in the diary, with the date you will chase the subcontract if it has not arrived.
  4. Write before you reach the cap, asking for it to be raised or the subcontract signed. Keep the reply with the letter.

Example

Illustrative example. The scenario and figures are invented.

The facts

A mechanical subcontractor is asked to start a £600,000 package on a letter of intent while the subcontract is finalised. The letter is capped at £75,000 and valid for 8 weeks, and work starts on Monday.

What happens

  1. The commercial manager reads the letter, records the £75,000 cap in the cost system and tells the site manager the number.
  2. In week 5 the cost system shows £58,000 committed. The commercial manager writes asking for a higher cap or a signed subcontract.
  3. The main contractor raises the cap to £150,000 in writing.
  4. In week 6 the subcontractor's spend passes £75,000, inside the raised cap.
  5. In week 7 the main contractor issues the subcontract.

The outcome

Every pound spent is inside a written limit. Without the warning, by week 6 the spend would have been £30,000 over a cap nobody was watching. Nothing in writing would have said it would be paid.

To have this set up for you, see our Letter of Intent Loss Prevention service.