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To LOI, or not to LOI

Contracts can take time, a long time, to negotiate. And often, there is legitimate pressure to expedite, with diligence, the engagement of the Vendor. This is where the Letter of Intent (LOI) surfaces as an option.  An LOI is a type of letter issued to a Vendor to confirm the awarding of a contract and pending the signing of formal contract documents.  It is a commitment document. Note that permitting work to start before the contract is signed is not recommended as the Customer is without full protection at that point until the contract is signed. But frequently, work does start before the contract is signed. For this discussion, we assume the LOI is a legally binding document, to the extent that the Vendor incurs costs.

Do not assume the LOI can be completed faster than the contract itself. LOI authoring may expose risks that can only be resolved with a contract; hence its application may be limited. Let’s consider four IT related items for which contracts are regularly negotiated: consulting, software, hardware, and network.  The question to ask yourself prior to proceeding with an LOI – if we are unable later to reach a contract, what is the impact of unwinding any work already performed?  The previous order of IT products is significant – it is in increasing complexity of unwinding the work performed, which might occur as follows:

Consulting – Customer requests the Vendor to stop work immediately. Customer pays for work performed, Vendor delivers products produced to date. Assumption: this is for human resources effort only. An LOI is feasible.

Software – Customer immediately stops using the software, uninstalls the software, returns or destroys any materials received (CDs, manuals). Customer pays for any value received (training). LOI feasible.

Hardware – becomes a little stickier. Deconfigure and ship the hardware back to the Vendor. Potentially restocking and shipping charges. LOI feasible.

Network – to obtain the best rates, agreements are typically for several years. If the Vendor has committed several years worth of capital and expense resulting from the LOI, who owns the liability if a contract is not then completed? The LOI effort will likely stall at this realization, unless either the Vendor or Customer is willing to assume full liability for the network facilities if a Contract is not completed. LOI not highly recommended in this scenario – you might want to just proceed straight to the Contract negotiations.

There we have it – a few thoughts on whether to proceed with an LOI or not when the Customer is putting pressure on the PM to engage the Vendor more quickly.

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