Intent letters fraught with problems, institute warns

31 January 2002
More legal news

31 January 2002 | David Arminas

Purchasers have been warned to avoid using letters of intent for suppliers to carry out pre-contract work unless absolutely necessary, as they often cause more trouble than they are worth.

The best outcome is to resist pressure from managers to use the letters, according to a new CIPS policy document. It is one of nine practice policy documents laying out the institute positions on good practice.

The institute urges purchasing professionals actively to discourage employers from issuing letters of intent, more correctly called an "instruction to proceed". The letters, used in the construction sector among others, allow suppliers to carry out essential work before a contract is awarded but pose dangers for buyers.

Suppliers may see the letter as an indication they will win a contract in the future. The CIPS policy document points to problems with the standard and cost of any work done.

Melinda Johnson, head of policy at CIPS, said: "Instead of a letter of intent, the best way to avoid any trouble is to ask the supplier to submit a bid for the limited amount of pre-contract work that needs to be done."

The letter of intent should stipulate that it is not intended as a legally binding contract for anything other than the work set out, and includes the exact amount of payment, the policy document says.

Purchasers should be wary if a contractor's sales team pushes for a letter of intent. They may claim that a letter is essential as timescales may be under threat from looming supplier shortages or a need to source and recruit labour.

Purchasers told CIPS they sometimes used letters of intent if the business case for the main contract had not been approved, funds had not been secured and timescales were short because of an emergency or poor planning.

Peter Marsh, a former member of the CIPS legal committee and a retired contracts consultant, agreed that letters of intent must be carefully written but said in certain circumstances they can motivate a supplier.

"It may encourage a contractor to take more of an interest in the full contract," he said.

"A letter of intent should always include a time frame for work to be completed and a financial limit."

• The policy document is available on the CIPS website, at www.cips.org

Six of the best

CIPS has also published policy documents on six other important topics in purchasing. They are:

• Risk management: purchasers need to develop a "what if" attitude that should be integral to all strategic purchasing. They should take a disciplined approach in three key areas: analysis, assessment and mitigation of risk. The purchaser should always assess a significant new supplier's financial standing.

• Knowledge management & document management: purchasers should capture not only "explicit" knowledge, but also "tacit" information gained through experience. CIPS urges purchasing departments to share their failures as well as successes in a no-blame environment. However, it should not affect the need for personal accountability.

• Letters of credit: these are more common as global sourcing increases. But purchasers should always seek advice from colleagues who specialise in finance and international logistics, or from their organisation's bank.

• Countertrade: research has shown that senior management often turns to a purchaser only after they have agreed to a deal where payment is made with something other than cash. This can be too late for the company to benefit. A purchaser's knowledge of a market and product quality may have shown the deal held few advantages for the company in the first place.

• Developing and implementing a strategic sourcing strategy: purchasers should understand the distinctions between strategic, tactical and reactive sourcing. CIPS advocates the formation of a sourcing board or panel in their organisation to discuss strategies and help decision-making.

• Incentivisation: purchasers should be very clear about the benefits of giving an incentive to a supplier. Careful analysis may prove that little is to be gained. Any supplier monitoring programme should be based on performance indicators.

SMjan2002

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