The letter of intent or the letter of interest is a highly questionable subject in the construction industry. People always mixed up the letter of intent with Letter of award (LOA) or Contract awarded letter. But normally Letter of acceptance or contract awarding letter is issued after the negotiation process and after all the parties are agreed on the terms & conditions, payment plans etc. As a Quantity Surveyor, it is important to identify differences between these letters.
What is a Letter of Intent?
But the letter of intent (LOI) is there because to reduce the engineering and processing time of the work or delivery. If the buyer has a concern about the time frame and the terms & condition are not agreed between the buying party and selling party (this can be Client & contractor in construction). The buying party can issue a letter of intent (LOI) to convince the selling party.
And selling party(building party) can arrange material and start the initial building or manufacturing process based on the LOI until all the negotiations are finalized. But in a good LOI should describe the following things to minimize the disputes between both parties.
- Payment terms
- invoicing schedule (intervals and procedures for the payment applications)
- Work scope (should Mention clearly with limits and exclusions)
- Date of completion etc.
Letter of intent-Case Study
As per Below case between Tesco vs Costain (1980) clearly shows, why LOI without the above key points can lead to disputes. Tesco has issued a Letter of intent to costain to build a new store. the LOI is stating that costain should be carried out the works as a Design & built work based on the Tesco standard. Costain is completing the project without any other formal contract except the above-mentioned LOI.
After some years suddenly fire broke out in the building. And Tesco is claiming that Costain’s incompetence design measurement is the reason for the incident.
But Costain is pointing out that since there is no formal contract during the construction they were not responsible for these excess damages. However, the Court has decided that the sign LOI as a contract between the parties. But this did not extend to Costain having liability for the designs subsequently produced.
Therefore what we suggest without searching in the LOI sample or letter of interest sample on the internet, it is better to concentrate on the above key points whenever you issuing an LOI
Need more insight? or Bored in reading check this Youtube video by Howcast