A letter of intent, commonly known as a LOI can be used by a purchasing manager to move a tender result forward. You are ready to take the next step with a vendor or supplier in respect to an offer which has been made and it is usually in response to a formal tender, request for quote or request for proposal your company previously issued. A LOI, Letter of Understanding (LOU) or Memorandum of Understanding (MOU) can be used in many different circumstances. A business acquisition, employment offer, supplier services, a contract award to note just a few. This post or letter of intent relates to procurement and how it can be used in the purchasing arena.
Why or when to issue a LOI? Sometimes these offers are complex by nature and involve large dollar spend so rather than stepping into a formal contract, a letter of intent will be issued to give both parties time to iron out all the little details. Another analogy is its purpose is to move the offer a step closer to a formal contract or even consider it as a bridge between any oral discussions, understandings from the tender and a future written binding contract agreement. You usually do not require a LOI for a general everyday purchase and this post is directed at a purchaser acquiring a commodity or service from a vendor which will hopefully result in a binding contract. Hope is the operative word as sometimes things go south once you get all the approving parties involved and certain conditions in place which must be met.
Back to the process, the way some purchasing agents use this letter is to advise the winning bidder / vendor that their offer has been accepted subject to the following conditions and they might decide to outline some basics or highlights of the offer. The small print is addressed in the formal written contract and draft your letter with care as if the stakes are high enough it can result in a legal challenge. 99% of the time a vendor will not risk losing a potential customer or creating a reputation as being a litigious supplier but if there is big dollars involved this can quickly go out the window and you will find yourself defending your text.
Once both parties complete due diligence and a contract has been drawn up the next step would be to sign off or execute the written contract.
If you are inclined to issue a LOI, LOU or MOU for a large dollar acquisition ALWAYS have legal counsel perform a review of your document before sending it out to the intended party.
Ref#6 is a sample Letter of Intent and it is being used to inform a vendor about potential long term supply of a major commodity.
Ref #34 – Letter of Understanding (LOU)