EP 122

Paul Heming: Hello and welcome to episode 122 of the Own the Build Podcast with me, Paul Heming. We are continuing our free download giveaway and attached to the podcast description, you will find a BOQ template or vesting certificate template. Feel free to hit me up if you want to chat about any of those or suggest any further ones. I’d be more than happy to hear from you. In the studio though, today I am so happy about this. I am joined for the third time, the hat-trick is complete by Sarah Fox, who many of you will remember from our previous episodes. Sarah is a Construction contract expert and director at 500 Words, who deliver simple digital trust enhancing contracts to put construction companies in control. To say that Sarah is a Construction contract expert and passionate advocate of construction law and changing the way that we work is probably the biggest understatement in the world. She is the queen of Construction Contract. Sarah, I’m going to have to lie down after explaining all that. Welcome back to Own the Build. How have you been? 

Sarah Fox: Thank you very much for having me. No. I’ve been great. I’ve been great. I mean, this all came about because I think somebody posted randomly and recklessly about letters of intent. And I had to weigh in. 

Paul Heming: Well, like I said before we hit record. My girlfriend, she is architect project manager. She’s construction. And she said to me today, what are you recording on the show? And I said, you’re going to laugh because it’s kind of embarrassing and geeky, but I’m really excited about it. And I didn’t think that she would be. It’s about letters of intent that she just rolled her eyes and said, have fun. And here we are, we’re going to have some fun. 

Sarah Fox: Of course. 

Paul Heming: Well, we’ll try to, before we jump into everything Sarah, obviously you’ve been on the show twice. I know who you are. Some of the listeners will remember as well. And definitely guys, if you don’t, check back to episode 78. Particularly really, really good episode about managing inflation, the supply chain claims, definitely go and check that episode out. But, Sarah, talk to us about first your background and now your business. 

Sarah Fox: So, I am a former construction solicitor. I was working with a company now known as F-Shed Sutherland. I did a load of transactional projects, got a training qualification. And then eventually about, sort of nearly 10 years ago, now set up my own business to deliver training initially to the construction sector. And as part of that doing a whole load of research into contracts because that’s my bit. I think if you set up a contract properly, you help manage some of those disputes that. Or are created because of bad contracts or bad contract administration or not understanding it. So that’s where the training comes in. But also I wrote a paper for the Society of construction law. They run an annual prize called The Hudson Prize. And I wrote a paper. And chose as my specialist subject in the old Mastermind style letters of intent. And that’s where the whole process started. My passionate feelings about how we use letters of intent in the UK construction sector. 

Paul Heming: Yeah. I will get on to that. So, when we first met, at the time we were talking about the JCT and I’m going to misremember because that’s just what I’m going to do. But the total number of words in the JCT was something like 50 000. You wanted to not with the JCT, but your vision, your ambition was to steal things down into 500 word contracts. Simple digestible contracts. We were talking about an example contract which I thought was really short and really Nifty, which we use quite a lot, which is 2000 words. You’re like now forget it, 500 Words, let’s do this. And I admired the ambition at the time. We’re here today to talk about letters of intent. Is it a lot easier, stupid question, to get a letter of intent into 500 Words than a contract?

Sarah Fox: Well, it depends whether or not you think a letter of intent is a contract. And under English law, generally speaking at ease. So effectively we’re talking about a temporary contract for small works rather than a contract for the whole project. But actually the processes, the risks, the limits, the remedies, all the kind of stuff doesn’t actually matter. The value of the works, the size of the project doesn’t and shouldn’t necessarily dictate the length of the legal terms. It will determine the length of the technical information and all the bits of how much you’re going to get paid, how long your payment schedule is, all that kind of stuff. But it doesn’t actually change the core content you need. So quite interesting. I’ve ran a whole load of workshops on letters of intent with a series of contractors, consultants, subcontractors, law firms and their letters of intent were kind of up to 20 pages long, at which point you kind of think well… 

Paul Heming: Contract out. 

Sarah Fox: I think you’ve missed a point. Yeah. You might as well get a contract out.

Paul Heming: Its fun, isn’t it? So I’ll ask the listeners this to reflect on this because I think I saw that you’d written to me, it made me chuckle. So I read, have you ever written a letter of intent in a hurry on a Friday afternoon? Because works must start on a Monday. And I read that and I thought, you cheeky devil. Yes, I have. And I know I’m going to get to trouble for this now when we talk about it. So if the listeners have, and I know that I have, I reckon we’re in for a bit of a telling off from Sarah over the course of this. She’s grinning now over the course of the rest of this episode and we cut you kind of all, it’s a funny subject, that’s why I’m interested to talk about it with you and someone who’s so passionate about these things. Before we dive into the Meyer of what’s right and wrong about letters of intent, first you touched on a really interesting point there. Could you describe what a letter of intent is, why we use them in construction and are they contracts?

Sarah Fox: So I’m going to do deal with the last question first because I’ve already talked about it. Are they contracts? Yes, generally speaking they are because they ask the contractor to provide something of value and they say that they will pay in some way, shape or form for those works when they’re carried out. So that’s pretty much all we need to create a contract under English law. So yes, generally speaking under English law they are considered to be contracts. Now different parts of the world use letters of intent in a very different way. And I know the Middle East creates letters of intent, which are just, you have to start the works. If you don’t start the works, we can’t award you the contract, but we won’t pay you until we’ve awarded you the contract. That’s a very, very different beast. So we are not talking about that. We’re talking about the sort of things that people will maybe around the world be copying and pasting on a Friday afternoon in order to get out and finish their work for the week. So you said are they, sorry, what were the other two questions? I’ve already forgotten them.

Paul Heming: So, I’ve almost kind of forgotten them as well now, but what I was saying is, so could you describe what they are and why we use them in construction?

Sarah Fox: Okay, so we tend to use them because somebody said the works need to start on Monday in order to complete the program. And we haven’t quite finished getting all the details, all the documents, all the agreements we need in order to carry out a full contract. 

Paul Heming: We won a quick and crude contract without actually putting… 

Sarah Fox: We want something quick. It’s a kind of a temporary got stock gap. Now it could be that some fundamental issues haven’t been agreed like the price or the total works or it could be that the person who needs to sign this contract is not available and therefore for governance reasons we can’t get it signed. So there’s all sorts of reasons why we might not get it signed… 

Paul Heming: For me, it was always quick and simple way to get the wheels moving, if that makes sense. And yeah, you’re right, there’s a number of reasons why you do it. It might be my time, it might be someone else’s time, might be signatories, lots of different things. It felt to me like low stress solution to a high stress problem.

Sarah Fox: Yeah. So it is a low stress solution and the reason we tend to copy and paste is because there aren’t any good examples out there and we can’t really tell a good from a bad example. So that’s reason why we copy and paste. But also we tend to enter into them in the belief that the full contract will properly get signed in the short time afterwards. Now that doesn’t always happen and that’s where the big risks lie. But generally speaking a letter intent should be a temporary interim contract to carry out a discreet set of works or to order long lead materials that are needed to keep the project to program.

Paul Heming: And so let’s take an example. I’m going to go back to my experience, right? I am the curtain walling, design, supply and installer and I subcontract the install, right? Generally. So I’ve designed and supplied it. I kind of need to get 95% of the way through the procurement. I know who I’m going to go with. We’re in the last offings, if you like, of our negotiations. I need them to go on site, I don’t know for to do some temporary site setup or something like that. My client is pushing me. So I think right, I can’t be bothered. Here’s a letter of intent. Can you go to site on Friday? Because you’re going to win the works crack on. Now you are nodding it along. Understanding the process and the position that I am in. People listening will feel like, there’s probably a few in that position today, right? And thinking, scrambling around thinking, oh, just get an LOI done. How does that make you feel other than just kind of smug?

Sarah Fox: No, it doesn’t, it never makes me feel smug because it took me a long time to realize and to unpick it, I effectively had to unweave the carpet of letters of intent. So it was a lot of hard work to get to that point. I know that the vast majority of letters intent go smoothly. They don’t end up in disputes, they don’t end up in debates. They’re a quick fix, temporary slap dash solution. And as long as you get the contract signed and between when you sent the letter of intent and when you get the full contract signed, nothing fundamental has changed, then you’re okay. But imagine you sent one in March, 2020, a letter of intent and two weeks later you were trying to persuade them to sign the full contract. Well, two weeks later in March, 2020 was a very different landscape we were looking at. So they are not going to sign the contract you thought they were going to sign. 

Paul Heming: So what’s the problem? 

Sarah Fox: Well, the problem is, if you don’t get the full contract signed, a letter of intent is rubbish because it presupposes you will get the full contract signed. So it doesn’t have all the different mechanisms we expect in a contract. It doesn’t have limits on the contractor’s liability. It doesn’t have change mechanisms, it doesn’t have extension mechanisms, it doesn’t have defect mechanisms. It doesn’t talk about quality standards. It doesn’t talk about, all the things we expect in a contract are kind of put in a balance until the contract is signed. If we don’t get that contract signed, we are in big trouble.

Paul Heming: So let’s go back to my example. Let’s imagine that was February, no, let’s say March, I’m trying to remember what the date. So let’s say it was March the 16th, it was a Friday and I was thinking on Monday, it’s going to happen. So I send this, I send my LOI and that LOI, I’m guessing is kind of just saying you’re going to get a contract for a million, I’m giving you rights to 10 grand or whatever, is kind of how I think I’d have structured my, I haven’t done an LOI phrase, so don’t be too mean to me. But if that’s kind of how my mind would be. So send them that LOI, they kind of go to work on the Monday under those work instruction, a couple of days later, lockdown happens. All those things happen. What’s the problem? Why are you worried as my legal expert?

Sarah Fox: Well, I’m partly worried because we don’t know when they were meant to finish, I partly worried, we don’t know who the contractor administrator is for these works. So we don’t know who can instruct them to stop and start works. I’m worried because we probably don’t have the right quality standards in place. I’m worried because your 10 grand limit is completely ineffective and if they spend a million quid and do a million quids worth of work, you could end up paying for it even if you no longer want it. I’m worried.

Paul Heming: Why is it ineffective?

Sarah Fox: Oh, well because the courts have said it’s ineffective. Only three cases after the 150 I’ve read that, would that cap actually work? One of them was a 10 million pound cap, but they were very, very strict about how they’d referred to it in all the correspondence or the invoicing and everything. So they’d really reinforced it. But generally speaking, caps and limits and letters of intent on your obligation to pay don’t work.

Paul Heming: So what you are saying, I hope I’m understanding this correctly is, that I could issue that letter of intent. They could start work, I could then issue my contract and we could argue over that contract or never sign that contract for years. The works all get executed, that contract never gets signed, they get paid everything and then I’m forcing them to sign this contract. They’re saying no and then it never gets signed. And all of a sudden my company is stuck with the limitations of the letter of intent as opposed to the benefits of the structuring the contract.

Sarah Fox: Completely. What’s your leverage? 

Paul Heming: The penny has dropped. 

Sarah Fox: What’s your leverage for getting them to sign the contract when they’re going to get paid and the basis on which you would pay them under a contract might be a lump sum for a fixed escapee? Under letter of intent, it’s almost always reasonable costs. Do you really want to pay their reasonable costs when the pandemic hits, reasonable cost of taxing people to work? Because there’s no public transport, reasonable cost of all the extra safety measures, reasonable costs of shutdowns, lockdowns, slow working. 

Paul Heming: Don’t remind me of those dark, dark… 

Sarah Fox: You’d have to pay all of that because that would be a reasonable cost incurred in carrying out the works.

Paul Heming: I think that’s a really interesting takeaway is that the limitation is just…

Sarah Fox: It’s completely ineffective. It’s completely ineffective. 

Paul Heming: Okay, I didn’t realize that.

Sarah Fox: So the real risk is that you have to pay for all the works they do and you don’t have the quality standards that says this is at the quality we expected. You don’t have the checks and balances for that money. But also the risk is that not only will you have to pay for all of it, but you’ll pay for it on a different basis. Reasonable costs as opposed to a lump sum fixed price. Now, if you’d done that 12 months later when energy costs or input costs were going through the roof at sometimes 60% over a couple of months, you’d have had to pay the additional cost. So you don’t have a fixed price, you don’t even have an estimate now, you just have an open checkbook. And what’s incentive now for your subcontractor to sign that main contract that you were going to offer them? They’re going to get paid anyway. They’re on the site.

Paul Heming: Yeah, definitely. I don’t think that all of them would necessarily understand that, but it’s a completely unnecessary risk to be taking, right? Yeah.

Sarah Fox: Yeah. So the real problem that we’ve had with letter of intent is that most people sending them believe that they are covered… 

Paul Heming: As large…

Sarah Fox: They believe they’re covered, they’re not at risk. They’ve got a limit or an expiry date and that will be fine. However, the case law says quite the opposite. The case law says that actually you are really at risk. Because the other thing that that subcontractor can do is walk off site at any point. They don’t have a contract for the whole scope of works. So once they’ve done the bit that you refer to in the letter of intent, they can go, they can skedaddle and you are left with part completed project, they’ve already fallen out with you, they don’t want to finish the job, you’ve now got to get someone else in to finish the job at a higher price in conditions that you weren’t expecting. You are now absolutely against the wall because you included their price in your own contract with your main contractor. You are now losing money hand over fist. You are not in a good position.

Paul Heming: This is not where I expected the conversation. I feel like I’m not in a very good position in this conversation. Like I said, I’ve going to scale back to what I said. So I thought I was going to get told off in this and I’ve been told off avenue, but… 

Sarah Fox: What can I say? So I, because I’ve run workshops with lots of different companies, one of the things I did was work with a main contractor and they issued letter of intents as a matter of practice to pretty much all their subcontractors. But they had a really good internal process in place, which basically said, we are giving you a letter of intent to stick to our program, but you have two weeks to sign the contract or you are off the job. So they still had leverage to get them to sign the contract, but also they were prepared to chuck people off the job after two weeks because in two weeks, hopefully not too much has happened. Yeah, March, 2020, things would’ve happened in two weeks, but most of the time two weeks is an enough time to get someone else in because they used a lot of subcontractors. They had a panel of people who could have replaced them, they weren’t left completely in the lurch and this was their practice, but they followed it up every single time. And it’s the failure to follow up a letter intent properly that really skippers them generally. So it’s not just a content, it’s how you behave once you’ve sent it.

Paul Heming: Okay, fantastic. And I think we have in that first half of the show fundamentally exposed the risk and that’s brilliant, because I don’t think I fully appreciate that risk for, hopefully I’m not alone in that regard. Maybe I am. And in the second half of the show, I think we’ll then start to touch on what you’ve kind of just been talking about, the tactics, the strategies and actually how to use a letter of intent. But we will do that after this break. I’m going to go and try and lie down somewhere now and just reflect on all of my mistakes in life.

Sarah, I have a question for you. I think I might know the answer, but I also think maybe, I don’t know the answer to this. Do you like letters of intent? 

Sarah Fox: Well, it depends whether you like, do I like them personally? Would I like to receive one? Should I recommend someone sends them? I think they have a purpose. I really think they do have a purpose because we try and cram too much into the tender stage in the construction sector. So actually when it comes to keeping a project on schedule, they’re actually not a bad solution. However…

Paul Heming: Hey, my Friday afternoon problem.

Sarah Fox: However, I am going to caveat that by saying, you should…

Paul Heming: Oh, such a lawyer. 

Sarah Fox: You should understand what you are doing. So go into it with your eyes open and you should process it quickly so that you move on. I think those people who use them strategically and use them, well, they’re a great tool. I think the reality is we go in pretty much blindfolded copying and pasting something that we have no idea whether it’s any good and just keeping our fingers crossed and everything else crossed and just hoping it works out. Okay. Now, I don’t like to tell you this, but when it comes to contracting hope is not an effective strategy.

Paul Heming: Isn’t it? Really? 

Sarah Fox: Not really. 

Paul Heming: That’s a bit of a shot to me. Fantastic. So that actually pleases me as an answer. It’s kind of like the answer I was hoping for because practically speaking, as someone who has, sometimes you feel like you’re down in the trenches, you’re working on multiple projects, everything’s going on and there’s so much going on and I really appreciate the fact that you come from a non-project background. But you recognize why people in the project space feel like they need something like the letter of intent to get them out of that proverbial hole on the Friday afternoon for the site on Monday. So that’s great because often you might speak to, people not involved in saying nope, they’re awful, forget them, right? But actually what you’re saying is you understand them, but they need to be managed far more effectively and there needs to be a process and a principle to why you are using them. Yes. So… 

Sarah Fox: There’s a really good process and in fact the courts will agree. So just for anyone who has issued 11-10 is feeling a little defensive [Cross talk 21:46 – 21:47], the courts have looked at this and they said to recommend a letter of intent is not negligent. So it’s not below, it’s not a stupid thing to do. However, to allow a client to continue under 11-10 without explaining the risks that they’ve got and how the letter of intent is not as good as the main contract is a negligent action. So go ahead and use them, but do it knowingly and explain the risk properly and process it quickly. But I think they have a place. I think. We are not going to solve all the problems of trying to do too much in too short of time. So let’s just use them, but let’s use them wisely.

Paul Heming: I agree with that. I really, really agree with that. And so I want to talk to you now about, you talked about there’s a main contract that you’ve worked with and they’ve got a really good strategy around it. I don’t want to know their strategy. I want to know your strategy. So me and you are setting up a subcontracting, we’re setting up a contracting business, right? I’m going to be your commercial manager, you are going to trust me to make the right decisions. I know this seems tough for you, Sarah, but you’re going to have to trust me, but you don’t trust me enough with the contracts for all of the reasons that we’ve just previously identified. What is the system that you are going to give me with regards to letters of intent?

Sarah Fox: So I’m going to first of all set you out a proper process so that you know how you would get your average subcontractor into contract before they start works. But then you’re going to have a backup, you’re going to have a, if we can’t do that… 

Paul Heming: Its plan B. 

Sarah Fox: Then you can have a letter intent. But I’m going to have a letter intent on two basis. One is that we write it properly. So it is temporary, it has a discrete scope of works, some related to that scope that we can identify rather than just randomly picking a figure out of the air. And it’ll have a program for that scope of work. So it’ll be a mini contract for a particular scope of works. And you will always have to identify what that is rather than the wording we see in so many letters of intent. Any works necessary to keep the project on program? Well, that’s everything. So we’re going to have a really well drafted letter of intent and you’re going to have two weeks in order to sort out the main contract after that you need to be able to get rid of your subby. So you’re going to have to have balls of steel. 

Paul Heming: Oh God, I thought that might be the case working with you Sarah, but that all makes sense to me. So I’m going to go back to my example, in the previous example, what I was probably doing was, and I’ve never done this by the way, I’ve never ever done this. I’ve been an angel. But what I would probably be doing this theoretical example would be, like I said, knowing that this contract sums a million for the overall works. Not having all the T’s crossed and I’s dotted and giving them a letter which says, look, we’re going to give you a contract for a million. That’s pretty much agreed. The terms and conditions of that contract will be finalized ASAP and I need you to go on site on Monday, whatever to do X, Y, and Z. And I’m going to give you a 10 grand buffer to do that. So that’s what I’m doing and that’s making you very uncomfortable. So I want to, you’ve told me you want it to be a temporary, you want a discrete scope of works, you want the sum, you want program. I think I’m touching some of those but I’m doing it in the wrong way, right? So let’s take my example so that people can picture this for their project. Take my example and tell me how I hit your success metrics.

Sarah Fox: So first of all, I’m not going to talk about the contract you want to get signed in the future in this letter because that is a separate agreement. It either will or won’t happen. And they’re two interested in each other but not linked. If you see what I mean… 

Paul Heming: We’re going to reference it at all.

Sarah Fox: We might reference it, but we’re not going to reference the amount because that might still be up for grabs. But the second thing I’m going to do is make sure that we can kind of say what do we need them to do in the next two weeks and how do we identify that scope clearly. And then rather than just pick a figure and say, well, that could be up to 10 grounds worth of work, we’re going to actually take the contract sum analysis that we’ve got or the rates or whatever and identify how much they’ve bid for that element of work and put that in as a contract price, a proper price. Not a provisional firm, not a guess, not a maximum, an actual contract price. 

Paul Heming: Yeah. So I want them to do site setup as I said before. I want them to do item 12, 14, and 16 on the agreed million pound buildup. And that actually comes to, I don’t know, 12,300. So my 10 grand number was already stupid or already wrong. So what you’re saying is right, you want it to be a discreet scope of works. So that scope of works is going to say whatever it says in item 12, whatever it says in item 14, whatever it says in item 16, you’ve said you want a sum for that discrete scope of works. So I’m going to say 12,423 pounds or whatever it is. She’s getting impressed now and I’m going to say, I’m expecting you to deliver that in a week or two weeks or whatever.

Sarah Fox: You’re going to put a date in when you want them to finish. Because the total irony of letters of intent is we use them because we want to stick to the contract program. And I have never ever read one that says the works under this letter of intent must be finished by a specific date.

Paul Heming: That’s hilarious. You’re absolutely right that I’ve never drafted one which says that I don’t think or which really pushes, okay, so I’m going to say going back to it. So these are the works. This is the money for it. It’s going to take you 10 days. That’s what I want. You also said you want me to make sure that it’s temporary. The letter of intent. How do I do that? 

Sarah Fox: And you’re going to say at the end of it, once these works are completed, if we do not have a contract for the full project, you will leave site, leave it in a clean and tighter condition and that is the end of our liabilities to you. No further work is guaranteed.

Paul Heming: Do you think I should be saying under the guise of this letter of intent, we expect to be able to agree to the full contract and would want, like could you use it as leverage to get it sorted? Say look, this is a two week window to get things signed up and we want to get it signed up, but if we don’t, it’s over. Could that be a scope item?

Sarah Fox: Well you could put it in, but what happens if they don’t agree, you’ve ended up in the same, it’s kind of self-evident that if they haven’t got the contract by the end of this scope, you going to either need a new letter. I advise you don’t do that or to check them offsite. So if you haven’t agreed your contract, you don’t need to say, by the way, if we’ve not agreed your contract this terminates you, it won’t explode. Like some sort of spy thing. It’ll just be clear because the scope is really short. The price is really low. The period of time they’ve got to do the works is low. Once they’ve done that, unless they’ve got another contract, they’re off the job. 

Paul Heming: Yeah, I’m thinking more culturally because to the… 

Sarah Fox: I think if you send something like that, you’d probably want to ring them up and go, by the way, I’ve got a bit of a different letter of intent for you. Let me just run you through this.

Paul Heming: Yeah, no, but I mean, culturally operating in a space, if I was writing a letter of intent tomorrow, the way that, I’m now drafting it, which makes perfect sense, don’t get me wrong, might not appear to the contracts that I’ve worked with before. Because I’m usually pulling stuff. 

Sarah Fox: What you saying? Is it might freak them out somewhat?

Paul Heming: I don’t necessarily think it would freak them out. I don’t think that, but I think that it would be important to clarify that the reason why I’m doing this is because it’s only for that. My expectation is that by this date we’ve actually signed the full contract, otherwise you’re off. And I might not put that in the letter itself. 

Sarah Fox: I think that’s a covering letter or email or a telephone call, isn’t it? 

Paul Heming: Exactly. 

Sarah Fox: Because it’s not a legal obligation. It’s just to explain the background and the context as to why you’ve decided to do something different. And I’ve often said to my clients, I said, look, if it helps, you can say that you’ve got a new procurement manager or a new financial director, whatever, who’s a bit of a pay. I’ve got a bit of a stick. 

Paul Heming: I’ve head legal. She is a real pain. 

Sarah Fox: Yeah, I’ve got a new head of legal and she’s a real stickler for getting this right. So we’ve had to change the way we do this. I hope that’s okay with you because it makes sense that this is how we’re going to approach letters of intent in the future. We continue to want to work with you. You’re a trusted supplier. I hope that this is not too much of a sea change for you.

Paul Heming: But it shouldn’t be though, should it either, right? Because all you’re doing is trying to get them on site for that, for those three items that we needed to get done. So they’re not, I think I’m with you. It’s just always important to create that context and that’s if you want to get same with anything. 

Sarah Fox: We want the trust to continue. That’s a whole purpose of having in trust in enhancing contracts because we’ve got trust. We don’t want the contracts that we send, whether it’s a letter of intent or warranty consultant, whatever to ruin it. So we have to keep that trust going and that’s a relationship building thing. But I think, at least it’s better than a sort of, we’re going to send you something and nobody really knows what it means but we all like it because it’s like familiar. So let’s just work on that one. Shall we just cross our fingers and pray?

Paul Heming: Yeah. No, I mean completely and utterly. And the fifth point I had written down is that you were kind of saying I’ve only the process, so that’s the template almost for the document. But that you were, so going back to this, you’ve come in and you’re setting up, this is out how we’re going to work as a business. The process that you are enforcing is that you can only ever have an LOI, if I’m right, where it’s in place for no more than two weeks ever.

Sarah Fox: No, I mean two weeks is a good, it focuses mind. The thing is, if you can put one in place for two months or six months. But the problem is you’ll forget because we are busy people. By the time a letter of intent is sent, we are now busy getting on with the project. So all the mental and mental energy that we had, all the bandwidth, whether or not that’s time, cost, quality, whatever in terms of us is now focused on doing something else, not the paperwork. So the longer the period we give, the harder it is to want to get rid of the subcontractor. But also the harder it is for us to focus on that as a time period. It’s like saying by the time you’re 75, you’re going to have done this, that and the other. Well, I don’t know about you, but 75 looks like decades away. I’m not even going to start focusing on that stuff. And it’s the same with everything. If we can give a short time period, the chance are we can actually focus on it and remember it. If we give a long time period, it’s just going to ramble and ramble and ramble and that’s not a good place to be.

Paul Heming: You are going to laugh at this I reckon. But, so we’ve talked now about down the chain, we’ve talked about me doing my procurement. I’m doing my subcontracting. Now, I hadn’t remembered this coming into the meeting, but I’m now remembering a project where a main contractor gave us as a subcontractor, I reckon almost 10 iterations of a letter of intent. Like we rolled for months, I think it was one a month for at least 6, 7, 8 months. It went on for ages. It was almost like a PCSA. It could have been a PCSA, it was actually a letter. Anyway, I’m now thinking the other way around. So we’ve talked a lot about me using a letter of intent down. If I am somebody receiving a letter of intent, what should I be doing? Because it’s a completely different experience, right?

Sarah Fox: Yeah. So generally speaking the risk is not so much with you except for the fact you don’t have a contract for the whole scope of works. So the letter intent, if it is a properly limited scope, you may be starting to do the bits of the works which aren’t that profitable, but the big chunk of profitable work is not yet yours. You have to worry about that because you are now doing just the cheap stuff and you want the whole of the scope. You need a contract for the whole of the scope. Otherwise you could just end up not making very much money or losing money on this project.

Paul Heming: There’s not limit on my, it’s limited to 12, it’s not limited to 12 grand… 

Sarah Fox: It’s not limited to 12 grand. But it might be if they’ve defined a scope well, it may be that you’re not able to do that X, the bits of work that you want to do. And also they could at any point terminate for spurious reasons and it depends how it’s drafted as to whether or not they have a right to get chuck you off the project. But really until you’ve got the full contract, you’ve kind of got a bit of a double-edged sword because you are going to get paid, you probably don’t have quite as many obligations as you would have under a standard form JCT as we said 50,000. However, you also don’t have a right or an obligation to carry out the whole scope and it’s a right to carry out the whole scope that you’d be interested in. So you kind of, they’re waiting to see whether or not they keep you on or chuck you off. Now it’s not that common to Chuck contractors off who are working under 11-10, but you don’t want to be the contractor that happens to.

Paul Heming: Yeah, I agree. And I’m guessing that, I feel like my example where I went through 6, 7, 8, however many iterations of the letter of intents that on that project is a peculiar one. Perhaps, it might not be. 

Sarah Fox: Oh well no. 

Paul Heming: Oh right. Perhaps not. Okay.

Sarah Fox: So, there have been cases where I think there were nearly 12 letters of intent and certainly before my first son was born, I was working with a big educational institution on the letter of intent. By the time I went back after maternity leave, my son was walking and they were on their 10th letter of intent. They had exposure in the millions. So it’s not that unusual because it becomes easier in some respect to continue to just extend something you’ve already got, then sit down and just bash heads together. 

Paul Heming: Bash it out. Yeah. Okay, so I think one of my final questions then is, so in the example where I’m receiving, I’m now in letter of intent, three or four as, and I’m the person receiving. Well, full stop. What should I do? What are my tactics? What best benefits me as a person receiving the letter of intent? How should I act? 

Sarah Fox: Well, to be honest, I think the best way to behave is to say thank you for your fourth letter intent. I think it would be much more productive if we sat, if we called a meeting, sat down and didn’t leave until that contract is signed. If there’s any other reason why they’re not signing the contract other than the fact they can’t get everybody in the room to sign it, then you’ve got to start getting twitched. You’ve got to say, well, we don’t have a contract for the whole works. We don’t want to continue on this project on this basis. Can we regularize, I suppose this word some people say, can we regularize this as a matter of policy and you could just say we’ve got a new procurement manager or a legal in-house legal, she doesn’t like us working under a letter intent.

Paul Heming: She’s a tough guy.

Sarah Fox: Yes, our governance doesn’t allow us to continue to work on this basis. So, there are ways of taking some of the heat out of it, but also just saying this is a matter of good process. Let’s get this right. Let’s not just keep our fingers crossed on hope. Let’s actually sit down and sort this out because it’s much better to have a good contract than to hope the letter of intent works in your favor. That’s kind of like an each way bet.

Paul Heming: Okay. No, I’m completely with you. So, I’m going to kind of summarize what I have learned from this conversation and you can add to it, you can tweak it by all means after. So my takeaways are that letters of intent are not a bad thing. They are a plan B, they are something that you have in your pocket when you have to use it. It shouldn’t be your plan A. Your plan A is the contract, your plan B is the letter of intent, but it’s not a bad thing if you have to use one. However, if you are going to use one, you should use it in very prescriptive terms. And those terms are, it should be temporary. You should outline that it’s a temporary document and that it covers a temporary period of time. You should be clear in the scope. So going back to my example, it’s for line 12, 14, and 16. That’s what I’m paying you to do. And you should be clear in the amount. It’s not 10 grandish, its 12,300 and whatever. And you should be clear in program, I’m doing this, so we get ahead by 10 days or however you described that. And the final thing being that it’s about like almost a process and culture around it. So if you are going for plan B, we want to get back to plan A. Plan A is our plan. So plan B is around for a set period of time, two weeks, four weeks, whatever it is. And then we’re getting off it. You cannot roll and roll and roll and roll. Like you said, we want a contract that works and covers all parties as best as it can. So let’s get back to plan A.

Sarah Fox: Absolutely. Letters of intent are just a diversion from the main plan, not actually a new plan. So I summarize this as you should use letters of intent sparingly and wisely. So wisely means not just process, it means content. And that summarizes everything that we’ve discussed.

Paul Heming: Okay, fantastic. And for everybody listening, I hope that has been highly informative because it certainly has been for me. I’ve got away with a slap wrist, but I’m actually feeling good about myself because I now think, I know exactly how I would utilize letters of intent to the benefit of my project business, et cetera. So Sarah, as always, the hat trick is complete, but I am certain there’ll be many, many more. I will share the usual links to you and your business. I’ll share the links to the books that you have written around this topic and others and guys simple digestible. It’s you understand how much Sarah cares about this from the conversation that we’ve had. And I can only recommend that you go and download those. Sarah, thank you for coming on the show for a certain time. 

Sarah Fox: You are more than welcome. Anytime you want to talk letters of intent or short contracts or… 

Paul Heming: I think we’ve done letters of intent now. I will speak to you soon Sarah and everybody, I will speak to you next week. Have a great weekend. Cheers.