3.2.3 The Letter of Intent

The Letter of Intent is a temporary form of contract that generally is the precursor to one of the more formal types listed in this section. There are several reasons for an owner and a contractor to employ a Letter of Intent:

• An owner may be desirous of starting demolition in a recently vacated office space in anticipation of attracting a new tenant.
• An owner, receiving a verbal loan commitment from a lender, may be eager to commence construction, but reluctant to execute a formal contract until he or she has received written confirmation of the construction loan.
• When a project is “fast tracked,” an owner may wish to proceed with a limited amount of work such as site clearing or limited authorization to procure items with long lead times and requiring shop drawings.
  A Letter of Intent is very specific as to the exact scope of work to be executed; the method of determining the cost of the work, i.e., cost plus or lump sum; and the event that will terminate the agreement.

The key components of a Letter of Intent are:

1. A clear definition of the scope of work via an architect/engineering drawing or a narrative describing the exact nature of the work.
2. The cost of the work, i.e., lump sum or cost plus a fee or GMP, with a list of reimbursable costs and documentation to substantiate those costs.
3. A payment schedule.
4. A date when work is to commence and the date when work is to be completed and therefore cease.
5. If a subsequent construction contract is being considered, a statement that the scope of work and all associated costs will be credited to any associated scope and costs contained in the formal construction contract.
6. A termination clause setting either a time limit on the work or an event that would trigger termination.

It is important to clearly state the “costs” that will be included in the work. As in other forms of contracts where reimbursable costs are included, attaching an Exhibit to the Letter of Intent listing all such reimbursable costs will be helpful in overcoming any misunderstandings between the owner and contractor.