In Plain English
Quick Answer
A document saying the owner intends to hire the contractor, sometimes authorizing them to start limited work before the full contract is signed.
Definition
Definition
A letter of intent (LOI) is a document expressing a party's intention to enter into a formal contract in the future and may authorize limited preliminary work before contract execution. LOIs are used when parties need to begin work before all contract terms are finalized. They are potentially binding on the limited scope authorized but should be followed by a fully executed contract as soon as possible.
Context
Why It Matters in Bidding
An LOI lets work begin on long-lead items or mobilization before the full contract is executed, protecting an award and the schedule. For estimators and GCs it is double-edged: it may obligate spending and create binding liability on the authorized scope while final pricing, terms, and risk allocation are still open. Clarity on the funding cap and what happens if no contract follows is essential.
Example
Example
After verbal award of a data-center project, the owner issues an LOI authorizing the GC to release a $400,000 deposit on switchgear with a 16-week lead time while the parties finalize the GMP contract.
See Also
Related Terms
FAQ
Questions Contractors Ask
Is a letter of intent legally binding in construction?
It depends on its wording. An LOI is typically binding only for the limited scope and dollar amount it expressly authorizes, such as procurement or mobilization, while remaining nonbinding on the overall deal. Ambiguous language can create unintended obligations, so both parties should state intent and limits clearly.
Why do owners issue an LOI before a contract?
To preserve schedule. When long-lead equipment, permitting, or early site work cannot wait for full contract negotiation, an LOI authorizes specific preliminary work so the project does not lose weeks. It signals commitment to the awarded contractor while final terms and pricing are still being settled.
What should a contractor confirm before working under an LOI?
Confirm the authorized scope, a clear spending cap, how costs are reimbursed if the full contract never executes, and which contract terms govern the interim work. Without these, a contractor risks performing or buying materials with no enforceable path to payment beyond the limited authorization.
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