Letters of intent - binding or non-binding considerations - essential terms and termination

Sep 16, 2026

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Construction projects should generally not start until a complete contract is executed, since formal contracts clarify rights and obligations, price certainty, risk allocation, scope definition, dispute resolution and termination circumstances. When delays are impracticable, parties may proceed using a letter of intent (LOI), but this raises key issues about whether the LOI is binding, incentives for completing negotiations, and the need for specific legal advice. The document details payment, scope, performance standards, caps, variation rights, set-off, and termination procedures to limit uncertainty before a final contract replaces the LOI.

LanguageEnglish

CategoryLetters

FormatPDF

Pages5

Reading Time2 min

AccessFree to download

Introduction

Binding or non-binding?

Essential terms for a LOI

Payment and scope of the works

Termination

Draft contract

Letters of intent [www.pwc.com.au](www.pwc.com.au) Letters of intent Introduction Ideally, construction work should not proceed on a project until a full and complete contract has been entered into by the parties. The benefits of entering into a formal contract are significant and include: 􀁸 certainty of rights and obligations 􀁸 certainty of price 􀁸 clear allocation of risk between the parties 􀁸 detailed description of the scope of works 􀁸 provision for the resolution of disputes between the parties 􀁸 provision for the termination of the agreement in clearly defined circumstances. However, sometimes it is not practicable or commercially desirable to delay the commencement of construction until a contract has been signed. In these circumstances, the parties may wish to proceed on the basis of a letter of intent, sometimes referred to as a letter of agreement or letter of acceptance (LOI) . This alert raises and comments on the critical issues for an Owner or Developer to consider if it is contemplating proceeding with construction before executing a contract with its Contractor (or design with its consultant) . The primary disadvantages for an Owner in relation to many LOIs are as follows: 􀁸 there is often uncertainty as to whether an LOI creates a binding agreement. As a result, the parties’ rights and obligations in relation to carrying out the work and the payment for that work are not certain 􀁸 often there is little incentive for the Contractor to complete negotiations and execute a final contract, since the uncertainty referred to above will generally benefit the Contractor. Nonetheless, a properly worded LOI is generally better than proceeding without any documentation, but it is no substitute for a complete contract. Binding or non-binding? The main issue to consider is whether the Owner wants to merely express an intent to enter into a contract or actually enter a contract for the commencement of certain works whilst the contract is finalised and executed. If the Owner wants to express intent but not be bound by the LOI, then the LOI needs to clearly state that position. Specific legal advice should be sought on the content of any LOI before it is issued to a Contractor or consultant. Although it is not strictly necessary if the LOI is clearly drafted, the following paragraph can be added to the LOI for certainty: This non-binding letter of intent is simply a statement of the parties’present intentions with respect to its contents. Each party represents to the other that no reliance will be placed on this letter. This letter does not and is not intended to constitute a binding obligation. In most circumstances the Owner’s purpose with a LOI is to authorise certain works to commence before the contract is signed. In this case, the LOI is in fact a contract and therefore the usual pre-requisites for a contract must be present. It is crucial that the LOI does accept the Contractor’s or consultant’s proposal or submission (usually as part of a tender process). This is important regardless of whether the letter is merely expressing intent to enter a contract or is a binding contract itself. By accepting a Contractor’s proposal certain qualifications, exclusions or contractual terms that conflict with the Owner’s requirements may be incorporated into the deal inadvertently. Essential terms for aLOI Payment and scope of the works The critical portion of the LOI is that dealing with payment, the scope of the Contractor’s works and the standard of performance required of the Contractor. In this regard, the LOI should cover the following. 􀁸 the basis upon which the Contractor is to be paid for work under the letter (eg cost plus margin, lump sum etc) 􀁸 timing and processes for the submission of invoices for payment (it may be appropriate for no payments tobe made until the contract is signed – This can be a useful incentive for the Contractor to sign the contract) 􀁸 a cap on

FAQs

Why are formal contracts preferred before construction begins?

Formal contracts provide certainty of rights and obligations, price, risk allocation, detailed scope, dispute resolution, and clear termination circumstances.

How should an LOI be drafted if the Owner does not want to be bound?

The LOI must clearly state that intent without creating reliance or binding obligations, and specific legal advice should be obtained before issuing it.

What essential items must an LOI cover regarding payment and scope?

The LOI should specify the payment basis, invoice submission timing/processes, any payment cap, a precise scope of works, variation rights, and (if appropriate) a completion date, performance standard, and set-off rights.

Sep 16, 2026

Upload by Ben