What Is an LOI in Construction?

February 24, 2024

The use of a letter of intent (LOI) is common in the construction industry to allow the mobilisation of a contractor to commence works before the contract for the project has been formally agreed and executed. It can be a useful device to enable the progress of design and procurement to be maintained despite the need to keep the project on schedule in the face of time critical circumstances.

However, there is a risk that those who use them are not fully aware of the extent to which they create binding obligations. In some cases, depending on the wording and the conduct of the parties, an LOI may not be legally binding at all, whereas in others it can form a full legal contract.

As the article below points out, an LOI should only be used as a framework and temporary agreement and should be clear about what work is being undertaken. The standard contract to be used in substitution should be specified and there should be agreed limits on expenditure and client liability. These should be monitored, watched and reviewed to ensure that any unused LOIs are replaced by the appropriate full contract as soon as possible.

The recent case of Ampleforth vs Morrison Homes is an important reminder that LOIs should be treated with caution. They are a poor relative to the careful preparation of a properly drafted and signed building contract but they remain useful in time critical situations where delay in getting legal documents sorted could mean the loss of value and profit.

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