It is becoming all too common that contractors are engaged in projects and on site carrying out works in advance of finalising formal Building Contracts. We are regularly advising on the use of Letters of Intent and Pre-Construction Services Agreements which are seen as useful contractual intermediaries which allow employers to engage contractors, and kick-start work, without an executed Building Contract whilst maintaining a basic protection of legal rights.

There is often some confusion about which is the most appropriate measure to put in place in advance of the Building Contract being signed – the following is a brief summary of the key features of a Letter of Intent and a Pre-Construction Services Agreement:

Letters of Intent

Letters of Intent are bespoke, flexible tools. They may act as a letter of comfort which is non-binding and states only the parties’ intents or they may constitute an interim contract governing the parties’ relationship until the Building Contract is concluded. The latter is the form of Letter of Intent, which we are regularly drafting for clients, where most of the contract terms and particulars are agreed, including the Contract Sum and general scope of ‘works’, but a few are outstanding or where the technical documentation is yet to be finalised.

Letters of Intent are bespoke in nature, but will generally include the following provisions as a minimum:

Interim Agreement

A provision stating that the Letter of Intent is intended to be an interim agreement between the parties and that neither party intends to be bound by the formal Building Contract until such is validly executed.

Scope of Works

A clearly defined scope of ‘works’, including, where relevant, reference to the tender pack and any relevant correspondence.

Form of Contract

Confirmation of the form which the Building Contract is intended to take, for example, SBCC Design & Build or With/Without Quantities

Amount due to Contractor

The maximum amount due to the contractor under the Letter of Intent and any specific terms as to payment which are to be implemented.

Conditions/Requirements

Any conditions/requirements which must to be satisfied and/or concluded before the formal Building Contract can be entered into.

Retrospective Application

Letters of Intent usually provide that once the formal Building Contract is entered into, its terms shall apply retrospectively. This ensures all works carried out by the contractor are covered under the terms of the final construction contract and that any payments made to the contractor under the Letter of Intent are treated as payment on account of the obligations under the construction contract.

Intellectual Property

Prudent employers will look to obtain rights in relation to any intellectual property produced or commissioned by the contractor as part of the works. Such rights will often survive termination of the Letter of Intent and will be transferable to third parties.

Confidentiality

In the event that the conditions/requirements of the Letter of Intent cannot be satisfied and the parties do not proceed with entering into the formal construction contract, employers will want to ensure appropriate confidentiality provisions are in place to safeguard any information disclosed to the contractor.

Letters of Intent generally should not be viewed as a substitution for a formal Building Contract. In the event that a dispute arises, parties will be required to rely upon the terms of the Letter of Intent in the absence of a formal Building Contract and the terms of such are inevitably normally less robust. The risks associated have been well documented in case-law with the most recent case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] EWHC 2509 (TCC) acting as a stark reminder. In this case, the claimant, Arcadis, applied for declaratory relief capping their liability in respect of defective design on the basis of draft terms and conditions of contract referred to within a Letter of Intent between the parties. The court held that whilst draft terms and conditions of contract may have been referred to within the Letter of Intent, this was a "general reference to the terms which were still being negotiated". If the parties intended for such to be formally binding, they should have proceeded by way of a formal written agreement.

Pre-Construction Services Agreements

Unlike Letters of Intent, which are generally used in circumstances where the contract sum is already agreed and the intention is to progress the works whilst a formal Building Contract is negotiated and finalised, Pre-Construction Services Agreements are commonly used as part of a two-stage tendering procedure, which aims to involve a contractor at an earlier stage of the design and construction process.

Pre-Construction Services Agreements allow the employer to engage a contractor to assist in the design process or to advise on a wide range of matters including, for example; buildability, programming, construction risk, works packages and interface issues and the use of specialist contractors. Early engagement of a contractor can lead to greater certainty as to project costs and programming, and may be particularly beneficial for larger, more complex projects. They may allow the contractor time to select and finalise pricing with sub-contractors.

Pre-Construction Services Agreements are usually bespoke in nature, however, there are standard forms available, such as the JCT published form. The key provisions of a bespoke Pre-Construction Services Agreements broadly mirror those of a market standard Consultant Appointment Agreement and include, for example, the following:

Pre-Construction Services Agreements

A clearly defined scope of services and, where appropriate, provision allowing for additional services to be requested by the employer if and when required.

Skill, Care and Diligence

An obligation upon the contractor to carry out and complete the Pre-Construction Services having due regard to the standard of skill, care and diligence applicable.

Compliance with Statutory Requirements

An obligation to comply with relevant statutory provisions and regulations, including the Construction (Design and Management) Regulations 2015.

Amount due to Contractor

As with a Letter of Intent, the maximum amount due to the contractor under the Pre-Construction Services Agreement and any specific terms as to payment which are to be implemented.

Intellectual Property Rights

It is especially important where a contractor is being appointed under a Pre-Construction Services Agreement to assist in the early design process that provision is included which grants the employer rights in relation to any intellectual property produced or commissioned by the contractor.

Collateral Warranties

Contractors will usually be required to grant collateral warranties in favour of third parties in respect of the works/services which they have carried out pursuant to the Pre-Construction Services Agreement.

Confidentiality

In the event that the employer chooses not to appoint the contractor for stage two of the tender procedure, the employer will want to ensure appropriate confidentiality provisions are in place to safeguard any information which has been disclosed to the contractor.

It is not necessary that a contractor appointed under a Pre-Construction Services Agreement be appointed under stage two of the tender procedure under the Building Contract, however, in not doing so the employer may inevitably lose out on the benefit of the contractor’s knowledge and familiarity with the project and professional team.