Letters of Intent are a common feature in the construction and engineering industry such that it is a useful tool for both parties while negotiating a formal contract or agreement, allows one party to begin work on the basis of a Letter of Intent before the formal contract or agreement is concluded.
In circumstances where Letters of Intent are utilised, time constraints often do not permit all the terms of the contract, design and costing to be finalised and concluded so that a formal contract exists between both parties before one party carry out work under the formal contract. A likely scenario is when it is known to the Purchaser that the materials to be supplied by the Seller require long lead time to deliver and the Purchaser by way of a Letter of Intent, instructs the Seller to place order for the materials in advance of and while a formal contract is being entered.
Other scenarios where Letters of Intent are used are situations where the Purchaser requires the Seller to reserve for them the goods or services that may not be made available to the Purchaser if the Purchaser and Seller had followed through the usual process of negotiation of a formal contract or the Purchaser wants the Seller to place order for the goods earlier so that manufacturing can start early to minimise any delay caused by the ordering of the goods under normal circumstances or the Employer in a construction project requires the Contractor to mobilise into the site, pending formal contract, to reduce any delay in commencement of work. In other words, the purpose of the Letter of Intent is to enable work to proceed, to circumvent the long lead times usually reserved for a particular part of the work, by providing an intention that a formal contract would be agreed and finalised at a later stage.