Building Blocks: What is a Pre-Construction Services Agreement (PCSA) and a Letter of Intent (LOI)?

As the name suggests, a Pre-Construction Services Agreement is a contract to perform services before a formal building contract is entered into to. Usually, the main contractor who enters into the building contract is the same as the one who has entered into the PCSA, although this is not always the case.

What is a Pre-Construction Services Agreement?

A Pre-Construction Services Agreement (“PCSA”) enables an employer to employ a contractor before the main contract for the construction works is entered into. Typically, a PCSA is used during the second stage of a two-stage tendering process to enable a design and build contractor to commence design work before the main contract has been agreed and executed by the parties. This early contractor involvement is seen in design and build projects.

What is a Letter of Intent?

A letter of intent (“LOI") is another form of early contractor involvement, unlike a PCSA this is an agreement to carry out works prior to the formal building contract being entered into. The nature of the drafting of a LOI can differ, meaning not all LOIs create a legally binding contract. A well drafted LOI should contain legal rights or obligations such as:

• an end date on which the letter will expire (explaining how the parties will progress if the end date is reached and the building contract is not signed);
• specification of the amount of work to be carried out under the LOI;
• payment provisions limiting the amount of money the contractor can be paid under the LOI; and
• an acknowledgment that any work carried out under the LOI will be incorporated into the building contract (once entered into).

In incorporating the above provisions, it allows the contractor to become engaged on site and progress with the works. It is in the best interests of both parties to enter into a legally binding LOI to create certainty.