Jacob Austin 00:00:00 Hi all! Jacob Austin from QS.Zone, and welcome to episode number 137 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is all about letters of intent, what they really are, why they create far more risk than most subcontractors realise, and what you must do before you mobilise on the back of one. So let's dig in. You get a call. The main contractor wants you on site Monday. The contract's not ready yet — a few things still being ironed out — but they'll send you a letter of intent. Don't worry, they say. You'll be covered. Crack on. And so you crack on. You buy materials. You mobilise labour. You start running up costs. Weeks pass. The formal contract never arrives. Then comes the argument — about scope, about variations, about what terms actually apply. And when you try to recover your costs, you hit a financial cap you didn't clock when you first read that letter.
Jacob Austin 00:01:38 This is not a hypothetical scenario. The Technology and Construction Court, the TCC, the Court of Appeal, and the Supreme Court has heard it. And every single time the lesson is the same. The moral of the story is to agree first and start work later. Those aren't my words. They come from the Supreme Court. If you want to refer to the case, it's PT's Flexible Systems versus Muller in 2010. The problem is in the construction industry. It rarely works that way. So if you're going to receive a letter of intent and work under one, and at some point you probably will. You need to understand exactly what it is, what it isn't, and what the traps are. Because the traps are large, an exposure can be significant. So let's think about what exactly a letter of intent actually is and why. The question is harder to answer than it sounds. A letter of intent is broadly a written expression by one party of their intent to enter into a contract with another at a future date.
Jacob Austin 00:02:52 In theory, it creates no rights and it has no liability. It's not a contract, it's a piece of administrative convenience, a way of allowing work to start while the formal paperwork catches up. That's the theory. The reality is a lot messier. The TCC has recognized that letter is intent to come in many different forms, and at one end of the spectrum, you have a document that is genuinely nonbinding with no rights, no obligations, nothing enforceable on either side. And at the other end, you have basically a contract in everything but its name. And in between, you have everything else. Because of the complexities of these arrangements, they have been through the court. Time after time. And Judge Lloyd, in the case between IRD, C Group and Brunel University, put it clearly that some letters of intent are merely expressions of hope. We intend to enter into a contract. Others fall short of a full contract and then again, others are. Essentially the subcontract itself without the label. The phrase letter of intent is not a term of art.
Jacob Austin 00:04:14 There is no fixed legal meaning that attaches to those words so they can mean anything. Anything with the title letter of intent could actually be one. So that means that every time the court has heard a case on letters of intent, it has to be considered in full, in its own merit, on its own circumstances and the content of the document and its surrounding context. So why does that matter to you as a subcontractor? Or firstly, because you can't assume that a letter of intent protects you in the way you think it does, or limits you in the way the main contractor says it does. You have to read it, and as it probably has been drafted carefully by a main contractor's legal team, which it almost certainly will. It will have a financial cap on what you can recover. That cap is the single most important commercial feature in any letter of intent that you'll receive. The cap is where the money goes, and it's where subcontractors consistently come unstuck. In a case between CLS Civil Engineering and WG.
Jacob Austin 00:05:26 Evans and Sons decided in 2024. The court held that a £1.1 million cap in a letter of intent was binding. WG Evans had argued that the parties were working under a JCT intermediate building contract. They were asking for £1.4 million, and the court rejected that claim because the cap stood the difference between those two figures, the £300 or other £300,000. That was work that had been completed, paid out for by the subcontractor, and the costs never recovered. That's not a unique outcome. The same principle applied in Mowlem versus Stena Line ports, where the contractors claim beyond a £10 million cap was rejected. The court's reasoning was instructive. A financial cap in a letter of intent makes no commercial sense. If the contractor can simply carry on past it, do as much work as it wants, and claim the excess. That would make the cap meaningless. So the cap is enforced, and the trap here is really simple. You receive a letter of intent. You see a financial limit of, say, £250,000. You assume that's a starting position, a first structure payment whilst the formal contract is sorted.
Jacob Austin 00:06:54 So you carry on working, expecting the formal contract to follow, which will pick up everything you spent above that figure. The contract never arrives, and now you've spent £380,000. So you claim that £380,000. Except now the main contractor points at that cap and you've lost £130,000 of cost recovery. Not because your work was defective or because you were slow, but because you kept working past the limit without getting the protection put in place. The second major trap is the assumption that a formal contract is coming. Lord Justice Coulson, now a Lord Justice of Appeal, noted in Cunningham v Collet that letters of intent are used often in the construction industry as a way of avoiding, or at least deferring difficult questions about the final makeup of the contract, and that main contractors know what they're doing. If the letter of intent serves their purposes, then there's no commercial incentive on their side to finalize and formal contract that might give you more rights. The third trap is the Housing Grants Construction and Regeneration Act. If the relationship created by the letter of intent constitutes a construction contract, which it probably does even without a formal signed agreement, then the payment provisions of the Construction Act apply.
Jacob Austin 00:08:30 That means payment notices, painless notices, and your adjudication rights. But if the letter is silent or ambiguous on payment mechanisms and no one's engaged with that question, you might find yourself in a dispute about which payment regime applies before you've even argued about the cap. This is where it's all important to get payment terms agreed and recorded in writing before you start. Now let's consider a scenario. So let's picture that you're a mechanical subcontractor. The main contractor sends you a letter of intent ahead of a commercial fitout package. The letter is just two pages. It instructs you to commence design and procurement. It references the JCT design and build subcontract as the intended form of contract, and it sets a financial limit of £300,000. It says the formal subcontract will be executed within four weeks, but the four weeks come and go. You're deep into procurement. You've committed to plant. You've mobilized two engineers and you've hit £290,000 in cost. You raise the issue with the main contractor, QTS, and he tells you, don't worry, it'll be sorted next week, but it isn't sorted next week.
Jacob Austin 00:09:55 You now hit £310,000. You keep going because you've already committed beyond the cap anyway, and stopping now would cause program damage that you might well be blamed for. So you finished the package and all told, you spent £550,000, but no formal subcontract was ever issued to you, nor was it executed. You claim the full amount of what you spent, but the main contractor serves you a payment notice for the initial £300,000. Their position is that the letter of intent is the only binding document between the parties, and the financial limit is enforceable. Were they wrong to take that as their position on the strength of case law? Probably not. So where does that leave you? Clearly it leaves you in a hole. But there are two things you should have done to safeguard your situation. First, when you hit, say, 80% of that cap, around £240,000. You should have written formally to the main contractor and said, I'm approaching the financial limit of the letter. You either require an increase to the limit of the letter, or execution of the formal subcontract before you commit further costs, and that you're not authorized to proceed beyond the cap without either of those.
Jacob Austin 00:11:24 And the second thing you should have done is lobby for that formal subcontract from day one in writing with dates creating a paper trail of the main contractors. Delays in executing that doesn't guarantee full recovery, but it creates a record and records give you options. And it quite clearly, if you'd have written and stuck behind your letter when you were nearing the cap, you would have stuck them for all of the blame of any delays if you'd had to stop work Altogether, and in doing so, you would have forced their hand to either issue your formal subcontract or extend the letter of intent to cover what you are going to spend. So how do you protect yourself? If you receive a letter of intent? Well, let's start at the top. If you receive one, then the first thing you need to know is is it binding or non-binding? The document needs to be clear if it uses language that contains obligations on both sides, instructs you to commence work, commits the main contractor to pay you, then it's likely to be treated as binding, whatever its title.
Jacob Austin 00:12:38 The next important thing to note is what is the financial cap and what does it cover? The cap applies to what you can recover, not what you can spend. You need to understand the difference. Once you're approaching the cap, stop and get written authority before proceeding. You also need to know what payment terms apply. Are there payment notice provisions? If the document is silent, then the Construction Act may imply them via the construction contract scheme, but don't assume it. Get clarity before you start doing any work. You need to know what the terms and conditions are that apply to work carried out under the letter. The Arcadis vs AMEC court, which went through the High Court and the Court of Appeal, produced very different answers at each level. That's a reminder of just how much can change depending on whether the terms and conditions have been properly incorporated. If the letter refers to a standard form or to the party's standard terms and conditions, then take that reference seriously. It might cap your liability as well as your recovery.
Jacob Austin 00:13:53 You need to look for whether the letter has an expiry date. If it does, then what happens at expiry. Certainly work should not continue past the expiry date without written extension or a replacement document. Push for the formal contract in writing. Every time the deadline slips, write to the contractor and record it. Don't just accept verbal assurances. The main contractors failure to execute the formal subcontract is a commercial risk, and you don't want to absorb it. Make that explicit in your correspondence. And remember, if you're approaching the cap, then write to the main contractor and say, I'm going to have to stop work unless you give me either an extension to the letter of intent that needs to include dates and monetary caps, or the full subcontract if you can't get that from them, stop work. When the contracts manager then starts hassling you about when are you coming back to site? You're doing this to my program. You can point them back in the direction of the contractors, shoot and say they've given me this letter of intent.
Jacob Austin 00:15:04 It says it stops on this date or it runs out at this cap. I can't do anything because I've spent up recruit them to do your bidding for you. They will not want a delay on their site. And when you can quite clearly and quite reasonably point to the written things that you're saying in their letter of intent, then they haven't got a leg to stand on and asking you to come back to site and blaming you for delay. It's all on them. Finally, if the value of the package is significant and the letter is complex, then don't forget you can always get some legal advice before you sign the letter. That would probably be the best thing to do. The cost of half an hour or an hour with a construction solicitor is absolutely trivial against the amount of exposure that you might be accepting if you just sign and get on with it. Key takeaways from today's chat. Remember, a letter of intent is not a contract, but it may create enforceable obligations. So read it as if it were.
Jacob Austin 00:16:13 The financial cap is real and courts will enforce it. And they have done time and time again. You can't recover costs beyond it by arguing that a formal contract should have followed. Approaching the cap is a trigger point, so stop right and get authority to spend any more money. The terms of the Construction Act will likely apply under a letter of intent, but terms need to be documented and agreed. Your entitlement to regular payments is one thing, but how quickly you get the money is something you need to agree with the contractor and write down. Main contractors have no incentive to finalize the form of contract if the initial letter of intent suits their purposes, but you do the capture on how much you can recover. So chase that contract in writing the terms and conditions incorporated into a letter of intent, whether by reference or implication, will be what the courts look to if there is a dispute. So verify exactly what is incorporated and remember in the Supreme Court's own words. Agree. First, start work later.
Jacob Austin 00:17:30 If you can't achieve that, then make sure the letter of intent covers the risk you're accepting. These can be complex agreements and they can get you in real financial hot water if you don't stick to what they say. Personally, I've never liked letters of intent where I've worked in the past. The letter of intent was so complicated, you might as well have just got the full subcontract out the door in the first place, so I always swore off filling out a letter of intent, barring one time where we were working under a letter of intent ourselves, and we wanted to put back to back caps and conditions in place to protect ourselves if the main contract never came through the door. Luckily it did, and we replaced the subcontractors letter of intent with a proper subcontract not so long later. That is exactly how a letter of intent is supposed to be used. If you're finding yourself doing full packages under a letter of intent, then tread very carefully. Regularly chase up the full subcontract and do absolutely nothing. If you are approaching the financial cap and the contractor doesn't send you a revised letter, hopefully you've now got a bit more of an understanding of letters of intent.
Jacob Austin 00:18:50 I'm not trying to warn you off them altogether and just saying proceed with caution and do it with your eyes open. I hope you've taken some value away from today's show. My mission is to help the million small contractors working out there in our industry. So if you have found that helpful, then I really need your help to share the show and pass that value on to somebody else who'd benefit from hearing it so that I can help as many people as possible. And of course, remember to subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone for more information or we're on all your favourite socials again at @QS.Zone. And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
