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Construction projects often need to move quickly. Materials may need ordering, surveys commissioned, or site mobilisation started before the parties have finished negotiating the full building contract. In these situations, a letter of intent (LOI) can allow work to begin while the remaining contractual details are agreed.

That flexibility comes with risk. Unlike standard forms such as JCT or NEC contracts, there is no single legal definition or standard format for a letter of intent construction arrangement. Depending on how it is drafted, and just as importantly, how the parties behave afterwards, an LOI might simply record an intention to contract, create an interim binding agreement, or even operate as the construction contract itself.

Understanding the difference matters. Courts have repeatedly emphasised that starting work without a clearly agreed contractual framework can expose both employers and contractors to unexpected risks over payment, scope, liability and contractual rights.

Below, we explain what letters of intent are, when they become legally binding, why they are used, the key risks they present, and the practical steps you can take to reduce those risks.

Summary

What Is a Letter of Intent?

A letter of intent (LOI) is a document used to allow construction work to begin before the parties have entered into a formal building contract. It is commonly issued by an employer to a contractor, or by a main contractor to a subcontractor, where there is commercial pressure to start work, but the full contract has not yet been agreed.

Despite its widespread use, a letter of intent has no fixed legal definition. The title alone tells you very little about its legal effect. Two documents both labelled “letter of intent” may create entirely different legal rights and obligations depending on their wording and how the parties behave once work begins.

The key legal question is always the same: have the parties created a binding contract, and if so, on what terms?

Broadly speaking, letters of intent tend to fall into one of three categories.

Type A: A Non-Binding Letter.

Some letters of intent simply record the parties’ intention to enter into a contract at a later date. They do not create binding contractual obligations and instead provide reassurance that negotiations are progressing. This type of LOI offers the least legal certainty. If work begins before a binding agreement is reached, disputes may arise over payment, responsibility for defective work, or whether either party can simply walk away.

Type B: An Interim Contract.

Many letters of intent in construction create a temporary, legally binding agreement that governs a limited scope of work while the parties continue negotiating the full contract. For example, the LOI might authorise early site mobilisation, surveys, design work or the purchase of long lead-time materials, with an agreed payment mechanism and a financial cap. This is often the most practical use of an LOI, provided its scope, duration and limits are clearly defined.

Type C: A Contract Incorporating the Intended Building Contract.

In some cases, the courts conclude that although the formal building contract was never signed, the parties intended to be bound by its terms and behaved accordingly. The result is that the intended contract may be treated as legally effective despite the absence of a signed agreement. This is one reason why letters of intent can become contentious: what began as a temporary arrangement may ultimately be treated as the contract governing the project, even if neither party expected that outcome.

When is an LOI Legally Binding?

A letter of intent can become legally binding if it contains the essential elements of a contract. Generally, this means there must be:

  • Sufficient certainty over the key terms
  • Consideration, i.e. something of value exchanged between the parties
  • A mutual intention to create legal relations

Whether those requirements have been met is not always obvious. Two parties may both believe they are simply working under a temporary arrangement, only to discover later that the courts consider them to have entered into a binding contract.

One common misconception is that marking a document “subject to contract” prevents it from becoming legally binding. While those words are relevant, they are not decisive. The courts will also consider how the parties behaved after the letter was issued.

A leading example is RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (2010). Although the draft agreement stated that it would not become binding until formally executed, the parties proceeded with the work as though they already had a contract in place. The Supreme Court concluded that their conduct demonstrated an intention to create legal relations, despite the “subject to contract” wording.

This illustrates an important point for anyone involved in a construction project: once work begins, your actions may carry just as much legal weight as the wording of the letter itself. For that reason, the legal effect of an LOI construction arrangement often only becomes clear after a dispute has arisen.

The court will look at the document alongside the parties’ conduct to decide whether there was no contract, an interim contract, or a binding contract incorporating the terms that were intended for the formal building agreement.

Why LOIs Are Used in Construction Projects

The main reason parties use a letter of intent is to reduce programme risk. Construction projects rarely progress in a perfectly linear way, and there are often sound commercial reasons why work needs to begin before every contractual detail has been agreed. Typical scenarios include:

  • Urgent site preparation or enabling works to maintain programme momentum
  • Procurement of long lead-time materials or specialist subcontract packages
  • Complex negotiations where key commercial terms, such as price or risk allocation, remain unresolved
  • Funding or planning conditions requiring early activity

Used carefully, an LOI can help maintain momentum without committing the parties to the full scope of the proposed contract. That said, reliance on LOIs often reflects process risk rather than strategic necessity.

In our experience, many companies issue LOIs simply because they have become routine practice, rather than because they are the most appropriate legal mechanism.

An LOI should always be a temporary solution. If significant commercial issues such as price, risk allocation or scope of works are still being negotiated, repeatedly extending an LOI can leave both parties operating on an uncertain legal footing.

In practice, this often happens because the pressure to keep the project moving begins to outweigh the pressure to finalise the contract. By the time a dispute arises, the parties may discover they have been relying on an inadequate legal framework for months.

Recognising both the value and the risks of letters of intent, the City of London Law Society (CLLS) published an updated construction letter of intent sample in 2024. The revision reflects developments including the Building Safety Act 2022 and aligns more closely with the JCT 2024 suite of contracts.

The CLLS form provides a useful starting point where an LOI is genuinely needed, but like any template, it should be reviewed carefully and adapted to reflect the particular commercial, technical and legal risks of the project. A standard form cannot anticipate every procurement route, allocation of risk or project-specific requirement.

The Key Risks of Using an LOI

A letter of intent can help a project get underway quickly, but it should never be viewed as a low-risk alternative to a completed building contract. Most disputes arise because the parties assume the LOI is only a temporary arrangement, then continue working after its intended limits have been reached.

Ambiguity

The greatest risk is uncertainty. If an LOI does not clearly define the authorised scope of work, payment arrangements, liability, insurance responsibilities or dispute resolution process, the parties may later disagree about what was actually agreed. In Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd (2016), design services were carried out under a letter of intent in anticipation of a subcontract that was never finalised. The court found that although a contractual relationship existed, there was insufficient certainty to incorporate the liability cap the consultant sought to rely on. Where an LOI leaves important questions unanswered, the courts will not rewrite it or imply the missing terms, and the parties may be left more exposed than they intended.

Scope Creep

Letters of intent are usually intended to authorise only limited early works. Problems often begin when additional work is instructed without updating the LOI. For example, an LOI may initially cover site mobilisation and procurement of long lead-time materials. As the project progresses, further instructions may gradually expand the contractor’s role beyond what the letter originally authorised. If that additional work has not been properly documented, disagreements may arise over payment, liability and whether the work was authorised at all.

The Expiry Trap

Most letters of intent include an expiry date or terminate once a specified monetary cap has been reached. In practice, projects do not always stop when the paperwork says they should. Contractors continue working, employers continue issuing instructions, and negotiations over the main contract continue in the background. The dangers of allowing an LOI to run on indefinitely were illustrated in the dispute concerning Spartafield Ltd v Penten Group Ltd, which arose after prolonged reliance on a letter of intent while negotiations on a formal contract continued.

The court was required to determine whether the parties’ conduct had effectively resulted in a replacement contract despite the absence of signature, illustrating how extended use of interim arrangements can blur the legal framework governing a project and lead to complex, costly litigation.

If an LOI expires without being replaced or formally extended, both parties may find themselves operating in considerable legal uncertainty, and a court may conclude that no contract exists, that the LOI continues to govern the relationship, or that a different binding contract has been created through the parties’ conduct.

The Monetary Cap

The financial cap within an LOI should never be treated as an administrative detail. In CLS Civil Engineering Ltd v WJG Evans and Sons Ltd (2024) EWHC 194 (TCC), the contractor began work under a series of letters of intent while the parties negotiated a formal JCT contract.

Although the scope of the authorised works expanded over time, the final building contract was never signed. The contractor continued working beyond the financial cap contained in the final LOI and later sought payment in excess of that limit, arguing that the unsigned JCT contract should apply instead. The court disagreed, holding that the letters of intent formed the binding agreement between the parties and that the £1.1 million cap remained effective, meaning the contractor could not recover the additional sums claimed.

A similar outcome was reached in Diamond Build Ltd v Clapham Park Homes Ltd (2008), where the contractor continued working beyond the cap set out in the letter of intent while negotiations on the main contract remained ongoing. The court enforced the cap and refused to award payment for work exceeding the authorised amount.

Together, these cases confirm that exceeding an agreed cap does not necessarily entitle a contractor to additional payment. If the authorised expenditure is close to being exhausted, it is usually far safer to agree a written variation or execute the main contract before further work is undertaken.

Payment Without a Contract

Where negotiations fail entirely and no contract is ever formed, the question of payment becomes even less predictable. In British Steel Corporation v Cleveland Bridge & Engineering Co Ltd (1984), work proceeded under preliminary arrangements, but no comprehensive agreement was ever finalised.

Because there was no final, signed contract, the court couldn’t use a contract to figure out how much the contractor should be paid. Instead, the court had to decide what the work was “fairly worth”, known as quantum meruit. This caused problems because it was unclear how to value the work properly, and it made it hard to tell who was responsible for potential project risks.

Delays in Agreeing the Main Contract

Perhaps the greatest commercial risk is allowing the letter of intent to become the project’s default contract. The longer negotiations continue, the greater the likelihood that important issues such as design responsibility, variations, extensions of time, defects or termination rights remain unresolved.

By that stage, the parties may have committed substantial time and money while still relying on a document that was only ever intended to bridge the gap before the formal contract was signed.

What to Include in a LOI

If you decide that a letter of intent is the right approach, the document should clearly define what has been agreed and, just as importantly, what has not. Many disputes arise because an LOI leaves important issues open to interpretation or assumes they will be resolved later. At a minimum, an LOI should deal with the following matters.

A Clearly Defined Scope of Work

The authorised works should be described as precisely as possible. Rather than giving broad permission to “commence the works”, the LOI should identify exactly which activities may begin, whether that is carrying out surveys, procuring long lead-time materials, mobilising to site or completing specific design activities. This helps prevent the authorised scope gradually expanding without either party realising it.

A Payment Mechanism and Monetary Cap

The LOI should explain how the contractor will be paid and specify the maximum financial commitment authorised under the letter. The payment mechanism should be sufficiently detailed to avoid uncertainty, whether payments are based on agreed rates, measured works or reimbursement of defined costs. The monetary cap should be monitored throughout the project so that it is not exceeded without written agreement.

An Expiry Date and What Happens Afterwards

Every LOI should contain a clear expiry date or other defined endpoint, and should explain the consequences of expiry. For example, does the contractor have authority to continue working? Must the parties agree a written extension? Will work stop until the formal contract is signed? Leaving these questions unanswered creates unnecessary legal uncertainty.

Authority to Issue Instructions and Access to Site

The LOI should identify who has authority to issue instructions under the arrangement, reducing the risk of disputes where additional work is carried out following informal requests from individuals who did not have authority to commit the employer contractually. Where the authorised works involve procurement on the employer’s behalf, site access, or coordination with other contractors, these should also be addressed, along with who owns and is responsible for any partially completed work.

Insurance Responsibilities

Insurance obligations should be addressed before any work begins. The parties should understand which insurance policies are required, who is responsible for maintaining them and whether evidence of cover must be provided before authorised works commence.

What Happens if the Main Contract Is Never Signed

Although both parties usually expect the formal contract to follow, that does not always happen. The LOI should explain what will happen if negotiations ultimately break down, including entitlement to payment for completed or partially completed works, ownership of materials procured or fabricated off-site, and demobilisation costs. Addressing this possibility in advance provides greater certainty than leaving the parties to argue later about which terms, if any, apply.

Applying the Main Contract Retrospectively

Where the parties intend the formal building contract to replace the LOI, it is often sensible to state that the completed contract will apply retrospectively to work already carried out under the letter of intent. This can help avoid uncertainty about whether different contractual terms apply to the early stages of the project and create a smoother transition once the formal contract has been executed.

Using an LOI Following Contractor Insolvency

Letters of intent have become increasingly common where a main contractor becomes insolvent during a project. When this happens, employers are often balancing two competing priorities. On one hand, they need to keep the project moving to minimise programme delay and additional costs. On the other, they may not yet be in a position to negotiate and execute a full building contract with a replacement contractor.

An LOI can provide a practical way of authorising urgent work while longer-term arrangements are put in place. It may be used to appoint a replacement contractor to complete essential works or, in some circumstances, to engage existing subcontractors directly so that critical activities can continue.

However, these situations also introduce additional legal and commercial risks. The parties may not yet have a complete picture of the works already completed, responsibility for defective workmanship, the condition of partially completed construction, or outstanding payment obligations following the original contractor’s insolvency. If the scope authorised under the LOI is not carefully defined, the replacement contractor could inadvertently assume responsibilities that were never intended.

Where an LOI is used following contractor insolvency, particular care should be taken to define the precise works being authorised, responsibility for existing defects, payment arrangements for completing partially finished work, insurance responsibilities, and how the replacement contract will interact with the original project documentation.

These situations are often commercially urgent, but that urgency makes careful drafting even more important. Our insolvency and corporate recovery team works alongside our construction lawyers to advise on the issues that arise when a project must continue after a contractor’s insolvency.

Adjudication Rights Under an LOI

Many parties assume that a letter of intent is simply a temporary commercial arrangement that sits outside the usual contractual framework until the formal building contract is signed. That assumption can be costly. Where an LOI creates a binding construction contract, it may also give the parties the same statutory right to adjudicate as they would have under a formal construction contract.

This principle was confirmed in Harvey Shopfitters Ltd v ADI Ltd [2003] EWCA Civ 1757. The Court of Appeal held that a letter instructing the contractor to proceed formed a binding contract incorporating the intended standard-form conditions, even though the parties had envisaged the execution of a formal contract, and that the parties could refer their dispute to adjudication even though the anticipated formal contract had never been executed.

For employers and contractors alike, this can come as an unwelcome surprise. A party may believe they are operating under an informal, short-term arrangement, only to find themselves involved in statutory adjudication before the main contract has even been agreed.

The Construction Act can also have important consequences where an LOI does not deal adequately with payment. If a binding construction contract exists, but the payment provisions do not comply with the statutory requirements, the relevant payment provisions of the Scheme for Construction Contracts may be implied automatically. This means that leaving payment arrangements vague or assuming they can be agreed later does not remove legal obligations. Instead, statutory provisions may fill the gaps, often producing an outcome that neither party anticipated.

The practical lesson here is that if a letter of intent is intended to govern construction work, it should be drafted with the same care as any other contract. Assuming that the parties are operating in an “informal” legal environment can lead to unexpected rights, obligations and dispute resolution procedures applying long before the formal building contract is signed.

Practical Guidance: Managing an LOI Once It Is in Place

Issuing a well-drafted letter of intent is only part of the process. Once work has started, the LOI should be actively monitored to ensure it continues to provide the protection the parties intended. Many disputes arise not because the original document was poorly drafted, but because no one noticed that its limits had been exceeded.

Monitor the Financial Cap

The authorised expenditure should be reviewed regularly throughout the project. If costs are approaching the agreed cap, the parties should decide whether to increase it by written agreement, replace the LOI with the formal building contract, or pause the authorised works until the contractual position has been clarified. Allowing work to continue without addressing the cap can expose both parties to unnecessary financial risk.

Keep Track of the Expiry Date

An expiry date should be treated as a contractual deadline, not simply a diary reminder. If additional time is needed, any extension should be agreed and recorded in writing before the LOI expires. Relying on verbal conversations or assumptions that the arrangement will simply continue may create uncertainty if a dispute later arises.

Control Changes to the Authorised Works

Construction projects naturally evolve as work progresses. However, every additional instruction should be considered against the scope authorised under the LOI. If the project moves beyond the activities originally contemplated, the parties should consider whether the LOI remains appropriate or whether the formal building contract should now be executed.

Continue Working Towards the Main Contract

Perhaps the most important practical step is to avoid treating the LOI as a long-term solution. Letters of intent are designed to bridge a short period while the remaining contractual issues are resolved and are rarely suitable for governing an entire construction project. Maintaining momentum on the negotiation of the main contract reduces uncertainty for everyone involved and provides a far more comprehensive framework for dealing with variations, extensions of time, defects, termination and dispute resolution.

Getting Letters of Intent Right

A letter of intent can be an effective way to keep a construction project moving where there is a genuine commercial need to start work before the formal contract is ready. Used carefully, it can reduce programme delay while giving both parties greater confidence during the early stages of a project.

However, an LOI should never be viewed as a substitute for a properly negotiated building contract. Unclear drafting, poorly defined scope, expired authority or exceeding an agreed financial cap can all lead to disputes that are far more expensive than the time saved at the outset.

If you are considering issuing or signing a letter of intent, or a dispute has arisen before the formal building contract has been executed, obtaining legal advice at an early stage can help you understand your contractual position and reduce the risk of costly disagreements. Witan’s construction law team advises employers, contractors and subcontractors on construction contracts, letters of intent and construction disputes. Contact our team on 0300 303 2071 or complete our online enquiry form to discuss how we can help.

FAQs

Is a letter of intent legally binding?

It can be. A letter of intent becomes legally binding if it contains the essential elements of a contract, namely certainty over the key terms, consideration and a mutual intention to create legal relations. Marking a document “subject to contract” is relevant but not decisive, as the courts also look at how the parties behaved after the letter was issued.

What is the difference between a Type A, Type B and Type C letter of intent?

A Type A letter is non-binding and simply records an intention to contract later. A Type B letter creates a temporary, binding interim contract covering limited works. A Type C letter is treated by the courts as if the parties had agreed to be bound by the full terms of the intended building contract, even though it was never signed.

What happens if a letter of intent expires before the main contract is signed?

If it expires without being replaced or formally extended, both parties may face considerable legal uncertainty. Depending on the circumstances, a court may find that no contract exists, that the expired letter continues to govern the relationship, or that a different binding contract has arisen through the parties’ conduct. Any extension should be agreed and recorded in writing before the expiry date is reached.

Can a letter of intent give rise to adjudication rights?

Yes. Where a letter of intent creates a binding construction contract, it may also carry the same statutory right to adjudicate as a formal construction contract. Parties who believe they are operating under an informal, short-term arrangement can find themselves involved in statutory adjudication before the main contract has been agreed.

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