A subcontractor letter of intent is a short preliminary agreement that a general contractor issues to a subcontractor to lock in the basic deal while the full subcontract is still being negotiated. It lets the sub start ordering long-lead materials and reserving crews, and it gives the GC assurance the sub won’t drift to another project. The document sits in a legally awkward middle ground, though, and the wrong wording can either leave you with nothing enforceable or quietly bind you to a deal you thought you were still negotiating.
Say Whether the Letter Is Binding
The single most consequential decision in drafting one of these letters is whether it creates a legally enforceable obligation. A binding letter exposes both parties to breach-of-contract claims if either backs out. Most general contractors prefer non-binding letters and include a clear statement that the document is “subject to execution of a formal subcontract agreement.” That phrase signals to a court that the parties intended a roadmap, not a finished deal.
Leaving the question ambiguous is where things get expensive. Without an explicit non-binding disclaimer, a court may look at the overall conduct of the parties and decide the letter was a contract. If the subcontractor mobilized crews, bought materials, or turned down other work based on the letter, the case for enforceability gets stronger. Put a one-sentence declaration near the top of the document stating whether the letter is binding or non-binding. Burying it in fine print at the end invites the argument that the other side never saw it.
When a Non-Binding Letter Becomes Binding Anyway
Even a clearly non-binding letter can be enforced if a court finds promissory estoppel applies. The test runs like this: the general contractor made a clear promise, knew the subcontractor would rely on it, and the subcontractor actually did rely on it to their financial detriment. If all three are present, the promise can be enforced regardless of what the document says about binding status. The classic scenario is a GC who uses a sub’s bid to win the prime contract, issues a letter of intent, then shops the work to a cheaper competitor after the sub has already committed resources.
When promissory estoppel applies, damages are usually limited to costs the subcontractor spent preparing for the job. Lost profits and the cost of missed opportunities elsewhere are harder to recover. The practical lesson for general contractors: don’t issue a letter of intent unless you genuinely intend to follow through. The non-binding label won’t protect you if the sub can show reliance and loss.
Terms the Letter Needs to Cover
A vague letter of intent is barely better than a handshake. The more specific the terms, the smoother the transition to the formal subcontract and the fewer disputes along the way.
Parties and Project
Use the full legal names of both companies as they appear on their business registrations. A trade name or DBA isn’t enough if the letter ever needs to be enforced. Include the project name, any internal project number used for accounting, and the physical street address of the job site. If the project spans multiple parcels, reference the legal descriptions or site plan drawing numbers so there is no confusion about which locations the subcontractor is authorized to access.
Scope of Work
Define exactly what the sub will do by referencing specific drawings, specification sections, or bid packages from the architect. “All electrical work” is a dispute waiting to happen. “Division 26 electrical work per drawings E-101 through E-412 and specifications sections 260100 through 265600, dated March 15, 2026” leaves far less room for argument. Where the scope is still being finalized, say so, and limit the authorized pre-contract activity to defined tasks like submittals or material procurement.
Price and a Not-to-Exceed Cap
State the agreed price, whether it is a lump sum, unit prices, or time-and-materials with a rate schedule. If the number is still tentative, include a not-to-exceed cap so both parties know the financial ceiling during the LOI period. That cap protects the GC from open-ended spending while giving the sub enough room to begin meaningful work. Without one, a subcontractor who orders $200,000 in materials under a loosely worded LOI has a strong argument that the GC authorized those purchases.
Spell out payment terms as well: invoice frequency, the payment cycle (net 30 is standard in most commercial construction), and whether retainage applies during the LOI period. If the sub needs to mobilize equipment or secure specialty labor before the full contract is signed, address who bears those costs if the deal falls apart.
Dates and an Expiration
Include the anticipated start date, the substantial completion deadline, and the date the letter of intent itself expires. The expiration date is easy to overlook and critically important. Without one, the parties can drift for months under a preliminary agreement that was never meant to govern long-term work. A typical LOI gives 30 to 60 days to execute the formal subcontract. If that deadline passes without a signed contract, the letter should say what happens: automatic termination, conversion to a month-to-month arrangement, or a right for either side to walk away with written notice.
Build in a termination provision while you’re at it. Either party should be able to end the LOI with a defined notice period if negotiations stall. The provision should address how the sub gets paid for work already completed and who owns materials already purchased.
Flow-Down Clauses and the Prime Contract
Flow-down clauses bind the subcontractor to the same obligations the general contractor owes the owner under the prime contract. In a full subcontract these clauses are negotiated line by line. In a letter of intent they’re often handled with a single sentence incorporating the prime contract by reference. That shortcut can create serious problems for subs who haven’t actually read the prime contract.
A blanket flow-down can pull in obligations the sub never anticipated: indemnification requirements, arbitration in a distant jurisdiction, liquidated damages for delay, or pay-when-paid provisions that tie the sub’s payment to whether the owner pays the GC. Subcontractors should ask for a copy of the prime contract before signing any LOI that references it, and push back on provisions that shift disproportionate risk downward.
Where the prime contract doesn’t exist yet because the GC is still negotiating with the owner, the LOI should acknowledge that and specify which prime contract terms will flow down once the document is finalized. A well-drafted letter also includes a precedence clause stating which document controls if the LOI and the later subcontract conflict on a particular term.
Insurance and Safety Before Site Access
The letter should specify the minimum insurance coverage the subcontractor must carry before setting foot on the site. Commercial general liability of $1,000,000 per occurrence is the baseline on most commercial projects, and many owners require $2,000,000 or more. Workers’ compensation at statutory limits is non-negotiable everywhere state law requires it. The sub should be prepared to name the general contractor and the project owner as additional insureds.
These aren’t just paperwork items. On many jobs, a sub without compliant insurance certificates simply won’t be allowed on site, and the GC may withhold payments until the issue is resolved. Certificates and endorsements take time, so the LOI acts as the trigger that lets the sub’s broker get the documentation moving while the formal contract is being finalized.
On the safety side, the LOI should reference the project’s site-specific safety plan and require the subcontractor to comply with it. General contractors carry safety liability for the entire site under OSHA’s multi-employer citation policy, which allows a controlling employer to be cited for hazards created by a subcontractor if the GC failed to exercise reasonable care in detecting and correcting them.1OSHA. OSHA Directive CPL 02-00.124 – Multi-Employer Citation Policy A general safety compliance clause in the LOI gives the GC a contractual basis for enforcing site rules from day one, rather than waiting for the full subcontract.
Authorizing Long-Lead Material Purchases
One of the main reasons letters of intent exist in construction is to let subs order long-lead materials before the contract is finalized. Electrical switchgear, structural steel, custom HVAC units, and specialty glass can take months to fabricate. Waiting for the full subcontract means the schedule slips.
The LOI should identify which materials the sub is authorized to purchase, set a dollar cap on pre-contract procurement, and state who bears the cost if the formal contract never materializes. This is where the not-to-exceed amount earns its keep. Without one, the GC has little control over what the sub orders, and the sub has little assurance of reimbursement for materials sitting in a warehouse if the deal falls through. Require the subcontractor to provide copies of purchase orders and delivery schedules so the GC can track lead times against the overall project schedule.
Tax Classification and 1099 Reporting
Calling someone a subcontractor in a letter doesn’t settle their status with the IRS. Classification turns on the actual working relationship across three categories: behavioral control (does the GC direct how the work is done?), financial control (does the sub invest in their own equipment, bear profit-and-loss risk, and serve multiple clients?), and the nature of the relationship (is there a written contract, and does the sub receive employee-type benefits?). No single factor decides it.2Internal Revenue Service. Independent Contractor (Self-Employed) or Employee
Getting it wrong is expensive. A GC who misclassifies an employee as a subcontractor owes back employment taxes, penalties, and interest. If a worker’s status is genuinely unclear, either party can file IRS Form SS-8 to request a formal determination from the agency.3Internal Revenue Service. Completing Form SS-8
Starting with payments made in 2026, the reporting threshold for Form 1099-NEC (the form used to report payments to subcontractors) rose from $600 to $2,000. The same threshold applies to backup withholding. If a subcontractor fails to provide a valid taxpayer identification number, the GC must withhold 24% of each payment until the issue is corrected.4Internal Revenue Service. 2026 Publication 1099 Collect a completed W-9 from every sub before issuing the first payment under the LOI. Chasing down tax ID numbers months later is a headache no project manager needs.
Signing, Delivering, and Tracking the Deadline
Both parties should sign the letter, and electronic signatures through platforms like DocuSign are widely accepted. Deliver the signed document in a way that creates a verifiable record: certified mail with return receipt, email with delivery confirmation, or the e-signature platform’s built-in audit trail. Keep a copy of the delivery confirmation alongside the signed letter.
Once both signatures are in place, two clocks start running: the subcontractor’s authority to begin pre-contract work and the deadline for executing the formal subcontract. Don’t let the LOI period drift. Every week spent under a letter of intent instead of a full subcontract is a week where both parties have less legal protection than they think. Calendar the expiration date and open subcontract negotiations well before it arrives.
Federal Projects: Miller Act Deadlines Still Run
If the job is a federal construction project over $100,000, the prime contractor is required to post a payment bond under the Miller Act. First-tier subcontractors with a direct contract with the prime can claim against the bond if they haven’t been paid in full within 90 days after their last day of work.5Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material
Second-tier subcontractors and suppliers, who have a contract with a first-tier sub but no direct relationship with the prime, face an extra requirement: written notice to the prime within 90 days of their last furnishing of labor or materials, identifying the amount claimed and the party they worked for. Any lawsuit on the bond must be filed within one year of the claimant’s last day of work or material delivery.5Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material
These deadlines run regardless of whether the parties are still negotiating the formal subcontract. A sub working under a letter of intent on a federal project should track notice deadlines from the first day of work, not from the date the full contract eventually gets signed. Missing the 90-day notice window can eliminate your bond rights entirely.
Keeping the Records
Keep the signed letter, all correspondence related to it, delivery confirmations, purchase orders authorized under it, and any amendments for the life of the project and well beyond. On federal contracts, contractors must retain contract-related records for at least three years after final payment, and financial and cost accounting records carry a four-year retention measured from the end of the fiscal year the cost was charged. If a dispute, investigation, or litigation is pending, records must be kept until the matter is fully resolved, regardless of any shorter retention period.6Acquisition.GOV. 48 CFR 4.703 – Policy
Private-sector projects have no single federal retention rule, but the statute of limitations for breach of contract claims in most jurisdictions runs four to six years. Six years after final payment is a reasonable baseline. Store digital copies in a searchable format alongside the formal subcontract file so they’re accessible if a dispute surfaces years later.