What Is an LOI? Letter of Intent

Quick Answer

A Letter of Intent (LOI) is a written communication from a buyer to a vendor confirming the intent to issue a purchase order. The LOI authorizes the vendor to begin procurement of raw materials, reserve production capacity, or start engineering—before the formal PO is finalized. LOIs are used in EPC projects when PO approval is delayed but the project schedule cannot absorb the wait.

Why LOIs Are Used

Purchase orders in large EPC projects require multiple internal approvals: engineering sign-off, budget authorization, legal review, and client consent. This process can take 4-8 weeks. For long-lead items—alloy pipes, large-bore valves, specialty flanges—the manufacturing lead time is 16-24 weeks. Without an LOI, the vendor will not start production, and the project schedule slips.

Scenario	PO Delay	Manufacturing Lead Time	LOI Benefit
Duplex steel pipes (ASTM A790)	6 weeks for PO approval	20 weeks	Saves 6 weeks on critical path
24” Class 600 gate valves (API 600)	4 weeks for PO approval	18 weeks	Saves 4 weeks; vendor orders castings immediately
Inconel 625 fittings	5 weeks for PO approval	24 weeks	Saves 5 weeks; vendor secures raw material

Standard LOI Contents

Element	Description
Reference	MRQ number, RFQ number, vendor quotation reference
Scope	Description of materials covered (quantities, specs)
Price	Agreed price basis or reference to vendor quotation
Authorization limit	Maximum value the vendor may commit (e.g., raw material purchase only)
Delivery schedule	Required delivery date or preliminary schedule
Conditions	LOI validity period, obligation to issue PO within stated timeframe
Cancellation terms	Buyer’s liability if PO is not issued (reimbursement for committed costs)
Governing terms	Reference to project general terms and conditions

Legal Implications

LOIs occupy a gray area between non-binding correspondence and binding contract. The legal effect depends on the wording and jurisdiction.

LOI Type	Legal Effect	Risk
Non-binding LOI	States intent only; no obligation on either party	Vendor may not act on it
Partially binding LOI	Authorizes specific work (e.g., raw material procurement) with capped liability	Buyer liable for authorized costs if PO is not issued
Binding LOI	Functions as a preliminary contract with defined scope and price	Treated as a contract; full obligations may apply

Most EPC LOIs are partially binding. They authorize the vendor to procure raw materials (steel billets, forgings, castings) up to a specified dollar amount. If the buyer cancels, the buyer reimburses the vendor for committed costs.

Common Mistake

Issuing an LOI without specifying a cancellation cap or termination clause. If the vendor interprets the LOI as authorization to begin full manufacturing, the buyer may face liability for the entire order value. Always include: (a) the maximum committed value, (b) the activities authorized, and (c) the cancellation reimbursement terms.

LOI vs PO

Aspect	LOI	Purchase Order
Purpose	Bridge the gap until PO is issued	Formal, binding procurement contract
Binding?	Partially (depends on wording)	Fully binding
Scope	Limited (raw material procurement, engineering start)	Full scope of supply
Duration	Temporary (30-90 days typical)	Until order completion
Detail level	Summary terms	Complete commercial and technical terms
Legal standing	Varies by jurisdiction	Clear contractual obligation

LOIs are a practical tool for protecting project schedules but must be drafted carefully. For procurement documents and the complete RFQ-to-PO workflow, see the detailed guide. Delivery terms referenced in the LOI should specify Incoterms to avoid ambiguity.

Read the full guide to pipe classes and specifications