A letter contract (also known as an undefinitized contract) is a temporary contract intended to “authorize immediate commencement of . . . work” prior to the execution of the final contract.
Letter contracts typically state that a formal contract will be executed at a later date and incorporate certain terms and conditions by reference.
Courts may or may not consider letter contracts to be legally binding, depending upon the language contained in the contracts. If, for example, the document contains a clear and unconditional acceptance of the offer, then the government will generally be found to have been bound as of the date it was issued. However, if the government’s acceptance is conditioned upon execution of a formal contract, the document will generally be found not to be legally binding.
The use of letter contracts in government transactions are of particular concern to Congress because of the potential for agencies to commit themselves to spending in excess of appropriations. Because letter contracts only contain general terms, many terms and conditions, including price, often have not been negotiated and agreed upon. As a result, the cost of the definite contract cannot easily be predicted.
- ↑ 2-19 Gov't Cont.: L., Admin. & Proc. §19.160; 48 C.F.R. §16.603-1.
- ↑ See Briggs & Turivas v. United States, 83 Ct. Cl. 664 (1936). The FAR requires contracting officers to include within the letter contract the standard contract clauses for the type of contract that is contemplated by the letter contract.
- ↑ See, e.g., Secretary of Navy, Comp. Gen. Dec. B-22324 (Dec. 15, 1941). So long as the letter is sufficiently clear that the vendor can proceed with the work and the government can make substantial payments on the account, courts will generally hold that a contract was created and therefore allow a vendor to sue, despite the absence of a formal contract. Bass & Assocs. v. United States, 205 F.2d 1386 (Ct. Cl. 1974). However, the FAR requires that vendors satisfy three requirements to recover pre-contract costs: (1) the costs must be incurred prior to definitization; (2) the costs must have been incurred directly pursuant to negotiations with the procuring activity; and (3) the costs would have been allowable if incurred after definitization. See Integrated Logistics Support Sys. v. United States, 47 Fed. Cl. 248, 256 (2000). The Government’s maximum liability for pre-contract costs is “the estimated amount necessary to cover the contractor’s requirements for funds before definitization” but cannot exceed 50% of the estimated costs of the definitized contract unless approved in advance by the authorizing official. See, e.g., General Servs. Admin., 33 Comp. Gen. 291 (1954).
- ↑ See, e.g., Secretary of Commerce, Comp. Gen. Dec. B-21873 (Dec. 22, 1941).
- ↑ For example, Congress has passed significant restrictions on the use of letter contracts in defense procurements. See 10 U.S.C. §2326.
- ↑ 2-19 Gov't Cont.: L., Admin. & Proc. §19.160.