Letter contract

Definition
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.

Overview
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.