Hi there all, Jacob Austin here and welcome to episode 167 of the Subcontractors Blueprint, the show where subcontractors learn how to ensure profitability, improve cash flow and grow their business.
In today's episode, we're talking about working without a signed subcontract. This is kicking off one of a new 10-part mini-series on common mistakes that are made by subcontractors in construction industry, and this is right at the start of the contract, covering one of the biggest and most expensive mistakes. So, let's dig in.
Right, welcome to the Mistakes mini-series. Over the next 10 episodes we're going to take apart a typical job stage by stage and at every stage we're going to look at 10 mistakes that cost subcontractors the most money so that you can avoid them. And today we're starting at the very beginning. The phone call, the handshake, or the email that says crack on the paperwork's on the way.
Here's why it matters. When there's no signed subcontract, nobody can say for certain what the price is, what the programme is, who carries which risk, or how you'll get paid. And when nobody's certain, the party holding the money has got all the power. And let's face it, that isn't you in this situation.
Now this isn't a niche job. One of the leading cases on letters of intent is RTS Flexible Systems against Muller, the yoghurt company. That went all the way to the Supreme Court. A £1.68 million job started on a four-week letter of intent. The full contract was never signed. Whether there was a contract at all and on what terms, that was what the courts were deciding on and it went through three courts to get there.
The construction law firm Fenwick Elliott sums it up as nine judges and three different answers, so if the most senior judges in the country can't agree what's been signed up to, what chance does your site manager have, or your QS when it comes to getting paid?
The Supreme Court's message in that case was simple. Agree first, start work later.
In the real world, when there's piles of pressure, that might not always be possible. The main contractor defending his programme wants you to do the work, and you, seeing the big tasty turnover figures, want to do that work too. So this episode isn't about refusing to start. That would make it a pretty short episode. about the 10 mistakes that turn starting early from a calculated risk into money that you never get paid.
So what is a letter of intent?
Here's the first thing to set straight. It isn't a legal category, the courts have said so, and in a case in 2006, between ERDC against Brunel University, the judge made the point clear. A letter of intent isn't a defined term, it doesn't always mean the same thing. And what it depends on are the words in that letter, and what the parties do next.
In practice, there's one of three different flavours that that letter could be.
Firstly, a letter of comfort with some nice words. We intend to place an order with you, no obligation on anyone. If that's what you've got, you've got nothing to enforce.
Number two is a small contract of its own. Start these works or pay you up to this amount. Work up until this date whilst we sort out the full subcontract. Courts will often treat that as a binding contract in its own right which means you are bound by its limits too.
Three is the start of the full contract. You start work and the paperwork goes back and forth and at some point the court decides that the whole deal was done. Sometimes it might be on the exact same terms that you've been arguing about. That's what happened in the RTS case. The Supreme Court found a binding contract on the terms, the parties agreed by that July, as varied in the August, and the subject to contract label didn't stop it from being enforced. The court found that the parties had moved past that point.
And I suppose actually there is a fourth option which would be no contract at all. Then essentially you're being paid a reasonable sum for the work that you've done. But hang on to that thought because there's a big misconception about what reasonable means.
To add to that as well, since October 2011 the Construction Act also covers oral and partly written contracts not just contracts in writing. So your entitlement to regular payment and to adjudicate doesn't vanish just because nothing's been signed. The problem though is before an adjudicator can decide what you're owed they would have to work out what the contract says and if the contract's not written down that is a far harder thing to do. So it's going to be slower, more expensive, and probably less predictable than a straight payment dispute.
Right, let's get to the 10 mistakes. Three of them we're going to spend a bit more time on because they're big money items, and the other seven we're going to quickfire through for today.
Mistake one. Starting on the job with nothing in writing. You've probably all been there.
The call comes in on a Friday and you've got the job. Can you start Monday? Yes, you say, because that's what good, helpful subcontractors do.
Now you've got a gang on site with no price committed to contract, no scope, no programme, no payment dates, and you're giving away the one moment where you've got real bargaining power before you actually mobilise. If all you get is a call or an email, then reply or confirm back in writing the same day. Confirm the price, referring back to your quotation. Confirm the scope and the documents your tender was based upon. If they disagree, make them disagree in writing before you start. You need to know where you stand.
Mistake two. Accepting a letter of intent with no cap, no expiry date, no clear basis for payment.
This is the first biggie. A well-written letter of intent does four jobs. It says what you're authorised to do. It says how that work gets valued. It sets a maximum, the cap, and it sets an end date. Most letters a subcontractor receives do one or two of those jobs. And some of them don't even do those well. Here's why the cap matters more than you think.
In Diamond Build against Clapham Park Homes back in 2008, a contractor started refurbishment off the back of a letter of intent, and the letter said the client would pay the contractor's reasonable costs up to £250,000 if no formal contract was signed. And of course, no formal contract was ever signed. The contractor argued that the cap shouldn't hold, but the court disagreed. The letter was the contract, and the £250,000 limit applied. That was a main contractor and its client, and the same logic runs straight down to you. If you have a letter that gives a 50 grand cap, then 50 grand is your ceiling, however much work you've actually done.
So flip it round. A letter with no cap and no basis of payment sounds better, doesn't it? No ceiling. But it also means no agreed rates, and that means no agreed payment cycle, no way of valuing your work. You're now relying on an argument about what a reasonable sum is months later, with the contractor's quantity surveyor holding the pen.
So before you start, check four things. What's the scope? How will it be valued? What's the cap? And when does the letter expire? If any of those four things is missing, ask for it in writing before you mobilise. Not after.
Mistake three. You're working under a letter of intent and you carry on past the cap or the expiry date. This one can empty your bank account. Letters of intent can get extended. It can be formally added to or revised by a superseding letter. Say that happens over an email. You get too close to the cap. The contractor emails you to confirm. Yep, I'm happy that you proceed. This is the revised cap and this is the revised date. But then the email stop but the work carries on and nobody notices that your authority has run out now weeks ago.
A case in point on this is CLS Civil Engineering against WJG Evans decided in 2024. Work started on a letter of intent and the cap was raised several times eventually to 1.1 million pounds. But the full contract was never agreed. The contractor's final application came to more than 1.4 million, but the court held that the 1.1 million cap was binding, and part of the reason was that the contractor accepted it was working within the cap on at least six occasions, including by asking for that cap to be raised. So clearly, in this instance, the contractor carried on and is now at risk of not being able to recover around £300,000.
Think about that. Every time you write asking for the cap to be increased, you're also confirming your intent to work within the cap and that it exists.
And that leads on to a similar but different misconception because a lot of subcontractors think that if a letter's expired and there's no contract, then I'll be paid my costs plus a reasonable margin. Cost plus. Lovely. But that's not how it works.
In ERDC against Brunel University, the contractor carried on working after the letter of intent expired and then it refused to sign the contract and argued it should be paid a reasonable sum, which in practice means cost plus. Its cost-based account was around £2 million. The court agreed that the work after expiry should be paid as a reasonable sum, but then it went back to the basis that it had been agreed, and it applied the same rates and prices to the full scope of work as the work before expiry.
That would seem quite reasonable, Building Magazine's summary of the case put the moral in five words, quantum meruit is not cost plus, and for those of you that don't know because I didn't know for long enough, quantum meruit is a Latin phrase meaning as much as you've earned or as much as one has earned. So if a judge were to decide a case and decided that quantum meruit was the outcome, the next question is how that is valued. And what we can take from that is that expiry of the letter of intent doesn't release you from your tendered rates. It just takes away the rest of your protection.
So the cap and the expiry date need to be in your diary the day the letter arrives so that you can track it. Track your valuation against the cap every month and before you hit it get the increase in writing or make a proper decision about whether you carry on or not.
Mistake four. Missing the words subject to contract. Subject to contract in plain English means nobody's bound yet. Sometimes that protects you, sometimes it means the letter you're working under isn't a contract at all, so there's nothing to protect you and nothing to enforce. As the RTS case shows, the label can be set aside by how the parties behave.
If a letter of intent says subject to contract, then ask the contractor straight. Is this letter binding, yes or no? And get the answer in writing. Again, know where you stand before you start.
Mistake five, letting the negotiation drift once you're mobilised. Before you start, you're the trade that they need. You're the person who can save their programme. You've got a lot of leverage in that position. But three weeks in, you're just another trade that they've got on site. Your bargaining power is disappearing and your labour and plant are committed. So you need to try and maintain that pressure. Get a date for the letter of intent to expire and for the subcontract to be agreed and chase that every week until you've got it in your hand.
Mistake six. Assuming your tender qualifications and exclusions will apply. This is another big hitter and it matters most for specialists whose work carry a long liability. So you price the job on your quotation and your quotation had your terms, maybe a limit on your liability, maybe exclusions for things outside your control. You assume they're in, because the contractor has accepted your price.
But now look at Balfour Beatty against Vanell decided in 2021. Vanell, the piling contractor, sent a quotation in May 2012 that brought in its own standard terms which it said limited its liability. Balfour Beatty then issued a letter of intent. That letter didn't mention Vanell's terms, but Vanell accepted it. A large part of the piling was done before a formal subcontract was signed. This was on an amended JCT Design and Build subcontract the following year. Problems with the piling later led to a claim against Vanell, and Vanell argued that the early work was governed by its own quotation with its limit in place. The court, though, no. The signed subcontract governed all of the piling, including the work done before it was signed. The limit of liability in Vanell's own terms then didn't apply.
And the lesson is simple on this. If you want your own terms to apply or a limit to liability to apply under a letter of intent, then the letter needs to set it out in words.
So if you receive a letter of intent and it doesn't say that, don't just sign it and send it back. Write a clear covering reply. and include something like our acceptance is on the basis of our tender, our qualifications and exclusions, plus our terms of trading as listed here until our subcontract is agreed. Then, if they want to argue about it, they have the argument with you upfront before you spend a penny and before either of you have got any meaningful liability.
Mistake seven. Not confirming which set of terms you're working on Your quotation has your terms, but their order has theirs. Their letter of intent might even mention a third set, there is a battle of forms in there somewhere, and the traditional rule is that the last set of terms put forward by either party before work starts tends to win. The reality is, that is rarely yours. So whenever new terms land, reply in writing and say which terms you're working to. Nothing and carrying on can be treated as accepting theirs.
Mistake eight. Ordering long lead-in materials that the letter of intent doesn't cover. Say it's plant, bespoke glazing, steel, I don't know, even some specialist ironmongering. You might well be doing everything with the right intent to protect the contractor's programme by ordering it early, but if the letter of intent only authorises site work up to a cap and your offsite orders sit outside of that. If the job's pulled, you're holding stock that nobody's agreed to pay for and it might be useless for your next or another job. So my advice on this one is to get written authority for special long lead orders. Be clear about the value and request that that value is stated on a revised letter of intent before you place the order.
Mistake nine. Having no agreed programme and no completion date. No agreed dates means no clear starting point, and if the job runs late, it's your word against theirs who's caused the delay. The main contractor still has a completion date in its own contract, and it will still want to pass delay costs down to somebody if they go past that. So you need to get your start date, duration, and your key access dates into the letter of intent, even if the overall programme comes later.
Mistake ten: not recording what's agreed as you go. Negotiations happen in meetings and calls. Two months later, nobody might remember who gave away what and what the latest current position is.
My advice on this one is to keep a one-page terms tracker. Mark what's agreed, what's not agreed, what's still open. Circulate the latest comments on it, with a short email, confirming what's changed after each call or meeting. If a court or an adjudicator ever has to decide what your contract says, and you never quite got to one, then that trail is your evidence. In RTS, the court looked at what had been agreed by a particular date and what the parties did afterwards. Your emails and your records of what's been agreed are what's going to tell that story.
So what do you do to protect yourself against all of these mistakes in five easy steps?
Step one, before you mobilise, if it's clear you're not going to get a full subcontract then get a letter of intent that make sure it does its four jobs. It needs to define the scope, how the work is valued, to give you a cap that covers the work that you'll actually do in the period and a clear expiry date. Those are absolute musts, But practically on top of that, we need to see a payment cycle too, with application dates, due dates, so that you've got a clear route to cashflow whilst the subcontract gets argued over.
Step two, remembering to the Vanell situation. When you accept it, accept it in writing. If you're willing to accept the terms set out in the letter, then do that. But if you're not, state your basis of accepting. name in your acceptance, your letter, your qualifications, your exclusions, and any limit on liability that you've priced on.
Step three, there are two alarms to set. First is the expiry date that needs to go into your diary. You need to be chasing the full contract, preferably on a weekly basis, but when you get a week or two out from that expiry date, you need to chase a revised letter of intent as well.
The cap needs to go on your cost report. When your valuation for the job reaches about 70% of the cap, allowing for probably another month's worth of progress, you need to write in, and you need to ask for an increase. In addition of course to chasing the subcontract, and give a date by which you need it.
Step four. Run the terms tracker. One page. What's agreed? What isn't? What's still open? Update it with comments every meeting. Confirm key changes by email and issue that schedule to keep a track on where things are at.
Step five. Decide your red lines before you start. As you negotiate the subcontract, preparation is everything. I discuss this at length in episode 135 on negotiation. There's some real good pointers on how to prepare and how to win in negotiation. And we're not talking banging fists on tables like you see in the movies. real, proper strategies. The biggest key point is preparation, so you're not deciding under pressure in week 9 of your subcontract whilst there's live work happening, and whilst your head needs to be in two places at once. You're always in a stronger position if you decide upfront.
Now, you'll occasionally get some kickback from the contractor. The first one is one I've heard myself from an electrical subcontractor, and the contractor was telling them that they don't raise the cap on the letter of intent until the subcontract signed trying to hold them to ransom and basically force them to work beyond the cap. The simple answer to that is if you don't want to extend the limit you're not going to work beyond your authority. Maybe it's coming from somebody at the main contractor who doesn't know what they're talking about but the legal arguments that we've discussed today make what your position should be crystal clear. Either the subcontract needs agreeing by the date in the letter, or the cap needs moving to match the programme. Either is fine, but carrying on unpaid isn't an option.
Secondly, I've heard this one from a client myself. Everyone else works on letters of intent. You're the only one making a fuss about it. And maybe that's so. But everybody else isn't carrying your cash flow, isn't holding the risk of not being paid if the cap expires, or if there's no real basis for valuation. It's quite reasonable and it's the minimum any business would ask for to know what you'll be paid, up to when, and on what terms.
Right, I'm going to wrap it up there for today. Just remember a letter of intent, if you've been sent one, is often the only contract you'll ever have on that particular job, so you need to read it as if that's going to be the case. The cap and expiry dates are very likely going to be your ceiling, beyond which you simply won't be paid. An expired letter of intent doesn't put you in a cost plus scenario. Even if a court decides that there's been some mutual agreement to work beyond the cap, expect that work to be valued at your tender rates. Your quotation terms don't form part of it unless the letter of intent says they do. And remember your bargaining power peaks the day before you mobilise. Use it then.
Now next time in the mistake series we'll be continuing with another stage of the job where subcontractors lose money sometimes without even realising. So come back for that next week.
And as ever I hope you've got something useful out of today's episode. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode then I really need your help to share the show and pass that value on to somebody else who'd benefit from hearing it so that I can help as many people as possible.
And thanks for tuning in. If you like what you've heard and you want to learn more then please do find us at www.subcontractorsblueprint.uk. We're also on all your favourite socials again at Subcontractors Blueprint, and remember, miss the contract detail and the commercial risk falls on you. Thanks all, I've been Jacob Austin, and you've been awesome.
