Letters of Intent in Construction: What They Bind and What They Don't
A letter of intent (LOI) is a document that precedes a formal construction contract. The owner wants the contractor to start doing something — preconstruction services, long-lead procurement, limited mobilization, site preparation — before the main contract is fully negotiated and executed. The LOI authorizes that early work and typically provides a cost reimbursement mechanism for it, but it's not a full contract.
LOIs are common on large projects where the schedule can't wait for months of contract negotiation. But they're also a significant source of disputes because they often leave ambiguous which party is bound to what. A well-drafted LOI is clear about what's committed; a poorly-drafted one creates fights when one side wants to walk away or change terms.
LOIs range from largely non-binding "agreements to agree" (indicating mutual interest without commitment) to largely binding "letter agreements" that function as mini-contracts for specific early work. Most construction LOIs are partially binding — binding on specific scope and cost, non-binding on the broader project contract that's still being negotiated.
Whether an LOI is binding depends on its specific language and the governing jurisdiction's law. Courts look at what the parties intended and what they did. When an LOI specifies scope, price, and performance obligations and both parties act on it (contractor starts work, owner pays), a court is likely to treat those commitments as binding even if the LOI also contemplates a future contract.
LOIs typically authorize one or more of these scopes:
Common construction LOI scopes
- Preconstruction services — constructibility review, schedule development, cost estimating, value engineering
- Long-lead material procurement — ordering equipment or materials with long lead times so they arrive in time for construction
- Limited mobilization — temporary facilities, site fencing, initial supervision, beginning of physical presence on site
- Design assist — contractor participation in design development, providing pricing and constructibility feedback
- Demolition or site preparation — early work that must happen before main construction can start
- Permit filings — applying for permits that have long processing times
Each authorized scope should be specific. An LOI that says "contractor may begin preconstruction services" without defining what services is a recipe for later disputes about what was actually authorized.
The LOI should specify how the contractor gets paid for work under it:
Cost mechanisms in construction LOIs
- Fixed price — LOI authorizes specific work at a specific price, paid per an agreed schedule
- Cost plus fee — contractor is reimbursed for actual costs plus a fee, with a not-to-exceed cap
- Hourly — preconstruction services paid at hourly rates for specific personnel categories
- Capped reimbursement — total LOI authorizes up to a dollar limit beyond which additional work requires separate authorization
A common structure: LOI authorizes up to $150K of preconstruction services on a cost-plus basis, with the contractor providing monthly invoices showing actual cost and fee. This keeps the contractor's exposure bounded while giving the owner flexibility to cap or expand as the project develops.
A key LOI provision is what happens if the parties don't ultimately execute the main construction contract. Various scenarios:
LOI termination scenarios
- Project doesn't proceed — owner decides not to build; LOI typically entitles contractor to payment for LOI work performed but nothing more
- Owner selects different contractor — LOI work is paid; contractor may have claims for investment in project relationship but usually no lost profits recovery
- Contractor withdraws — LOI often allows contractor to withdraw with payment for work to date, though consequences vary by LOI terms
- Negotiation impasse — neither side can be faulted; LOI work is paid, project may be deferred or restructured
The LOI should address these scenarios explicitly. Without explicit language, the parties end up arguing whether the contractor was promised the whole project (and therefore entitled to lost profits on a walkaway) or only the LOI work (entitled only to payment for work done).
A contractor performing LOI work should have clarity about whether they're being paid only for LOI work or whether there's any commitment to the main project. The difference can be millions of dollars on a large project — worth getting right in the LOI.
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Transition to the Full Contract
When the main contract executes, the LOI typically gets superseded. Clean practice: the full contract references the LOI and states that the LOI's scope and commitments are rolled into the main contract. LOI costs paid to date are credited against the main contract. The LOI itself is superseded and preserved only as historical record.
This transition is important because the LOI's terms (especially cost mechanism and specific authorizations) may be different from what the main contract says. Without explicit supersession, disputes can arise about which governs when there's a conflict.
Contractors should be specifically aware of these LOI risks:
Contractor risks under LOIs
- Performing work beyond the LOI's authorized scope — may not be reimbursed if the main contract doesn't execute
- Long-lead procurement without adequate LOI backing — contractor may be stuck with material if the project cancels
- Being held to commitments in the LOI that exceed what the main contract ultimately says
- Pricing assumptions that become impossible to meet by the time the main contract is ready to sign
- Scope creep — owner using the LOI period to extract extra preconstruction work at LOI rates
A disciplined contractor treats the LOI as a bounded commitment — authorized work, capped dollar exposure, clear exit if the main contract doesn't execute. Beyond those bounds, further authorizations are required; exceeding them without authorization risks unreimbursed cost.
Owners have LOI risks too:
Owner risks under LOIs
- Being committed to the contractor when they may prefer competitive rebidding later
- LOI costs that aren't capped or that exceed expectations
- Contractor mobilization that can't easily be reversed if the project changes direction
- Disputes about what's owed if the parties don't proceed to main contract
Owners should similarly structure LOIs to preserve optionality — limiting authorized work to what genuinely must happen early, capping costs, and specifying clear exit rights if project circumstances change.
A letter of intent in construction authorizes specific pre-contract work — preconstruction services, long-lead procurement, limited mobilization — while the main contract is still being negotiated. LOIs can bind the parties to specific commitments even while being explicit that the main contract isn't yet in place. The scope authorized, the cost mechanism, the termination provisions, and the transition to the full contract all need specific drafting. Contractors who treat LOIs as authorizations to start doing work — without attention to what's actually bound — expose themselves to cost they can't recover. Owners who use LOIs casually lock themselves into relationships they might not ultimately want. A well-drafted LOI is a specific commercial tool; a poorly-drafted one is a source of disputes.
Written by
Marcus Reyes
Construction Industry Lead
Spent twelve years running AP at a $120M general contractor before joining Covinly. Lives in the world of AIA G702/G703, retainage schedules, and lien waiver deadlines. Writes about the construction-specific workflows that generic AP tools get wrong.
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