Tne of the biggest commercial disputes I was involved with was in my early career and started with what appeared to be a perfectly sensible decision.
The planning consent had finally been granted after a lengthy delay. The client was under considerable political pressure to demonstrate a visible start and wanted contractors on site as quickly as possible. Rather than wait for the building contract to be finalised, a Letter of Intent was issued to allow the contractor to establish the site.
On paper, it looked low risk.
The contractor would mobilise, welfare facilities would be installed and contract negotiations would continue in parallel.
Unfortunately, that isn’t what happened.
The project was procured during a period of rapidly increasing construction inflation. By the time planning consent had been received, market conditions had changed and the contractor’s original price was no longer sustainable. Negotiations over the contract became increasingly difficult.
Meanwhile, the Letter of Intent continued to grow.
What started as site establishment became site clearance. Site clearance became groundworks. Groundworks became the structural frame.
Before long, a significant proportion of the project had been constructed without a signed building contract.
The commercial balance of power had shifted completely.
By the time a dispute arose, nobody could clearly agree which contractual terms applied. The client had very little commercial leverage because replacing the contractor was no longer a realistic option. What should have been a short-term administrative document had effectively become the contract.
The dispute ultimately ended up in court.
It remains one of the best lessons I’ve had in why governance matters.
What is a Letter of Intent?
A Letter of Intent (LOI) is intended to bridge a short gap between contractor appointment and execution of the formal building contract.
Used properly, it can maintain programme momentum while outstanding contractual matters are concluded.
Typical examples include:
- Site surveys and investigations
- Early contractor design input
- Procurement of genuine long-lead items
- Site establishment and enabling works
- Limited strip-out works
The important word is limited.
An LOI should never become the mechanism through which substantial construction works are delivered.
Why Clients Use Letters of Intent
There are perfectly legitimate reasons why an LOI may be appropriate. For example, a lease commitment may require occupation by a fixed date, specialist equipment may have an extended lead-in period, planning approval may have arrived later than anticipated, or funding approvals may have delayed contract execution.
In these circumstances, issuing a tightly controlled Letter of Intent can help maintain programme without exposing the client to unnecessary commercial risk.
The problem isn’t the Letter of Intent itself.
The problem is that it can remove the commercial tension and can become the default method of administering the project.
Where Things Start to Go Wrong
In my experience, the biggest risks are rarely legal, they are commercial.
Once a contractor has mobilised and significant works are underway, commercial tension changes. Negotiations become harder because the client has fewer practical alternatives. The scope authorised under the LOI often grows incrementally. One package becomes two. Two become five. Eventually the project reaches a point where stopping is no longer commercially realistic.
At the same time, the contractual position becomes increasingly uncertain.
Which amendments have actually been agreed?
Which risk allocation applies?
How are variations valued?
Do the liquidated damages provisions apply?
What happens if the contractor delays completion?
Questions that should have been resolved before work started suddenly become the subject of negotiation when relationships are already under pressure.
That is rarely a good time to negotiate.
How to Use a Letter of Intent Properly
Where an LOI is genuinely necessary, it should remain exactly what its name suggests – an interim arrangement.
Good practice includes:
- Limiting the scope to clearly defined activities.
- Setting a financial cap that cannot be exceeded without written approval.
- Fixing an expiry date rather than allowing the LOI to roll forward indefinitely.
- Referencing the intended form of contract and recording any agreed amendments.
- Documenting what is agreed, and what remains under negotiation.
- Ensuring insurance arrangements are fully in place before works commence.
- Monitoring expenditure against the authorised value on a weekly basis.
- Continuing contract negotiations with urgency, with a clear action register, rather than allowing them to drift.
Perhaps most importantly, there should always be a clear exit strategy.
The objective should be to replace the Letter of Intent with a fully executed building contract as quickly as reasonably practicable.
The Quantity Surveyor’s Role
Whilst the Project Manager typically leads the overall governance process, the Quantity Surveyor/ Cost Consultant plays an important role in protecting the client’s commercial position.
That includes monitoring expenditure against the authorised limit, ensuring payments remain within the agreed scope, identifying where additional works are being instructed outside the LOI and advising the client on the commercial implications of extending the authorisation.
If the value of works under the LOI continues to increase, that should be treated as a warning sign rather than business as usual.
Final Thoughts
I’ve never come across a client who intended to deliver a project under a Letter of Intent.
The difficulty is that small decisions made under programme pressure have a habit of becoming permanent.
Before anyone realises, the project is relying on a document that was only ever intended to bridge a short administrative gap.
My advice is straightforward.
A signed contract is always the best route. If you need to use a Letter of Intent, keep it tightly defined, keep it short, and keep everyone focused on executing the building contract.
The quickest route to site is rarely the quickest route to project success.
How We Can Help
We help clients achieve the best commercial outcomes for their projects, by helping to optimise the design and putting commercial controls in place to manage risk. We’ve produced a practical LOI Checklist that clients can use before issuing a Letter of Intent. Please DM if you would a copy.
Links
The Psychology of Cost Certainty – EthosEQ
Copyright
© 2026 EthosEQ Limited. All rights reserved.
This publication is the intellectual property of EthosEQ Limited. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means without prior written permission, except for brief quotations used for review, commentary or non-commercial educational purposes, provided EthosEQ is acknowledged as the source.
Disclaimer
The views expressed in this article are based on professional experience and are provided for general information only. They do not constitute legal, contractual or professional advice and should not be relied upon as the sole basis for making project or commercial decisions.
Every project is different, and the suitability of a Letter of Intent will depend on its individual circumstances. Clients should seek appropriate legal and professional advice before entering into contractual arrangements.
Whilst every effort has been made to ensure the accuracy of the information at the time of publication, neither EthosEQ Limited nor the author accepts any liability for any loss or damage arising from reliance on the contents of this article.
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