Overview
A letter contract is a preliminary written instrument that authorizes a contractor to begin work immediately when the government's needs are urgent and a definitive contract cannot be negotiated in time. It serves as a binding commitment that must be transitioned into a finalized ("definitized") contract within a strictly defined timeframe.
Key Rules
- Approval Requirement: May only be used after the Head of Contracting Activity (HCA) determines in writing that no other contract type is suitable.
- Definitization Timeline: The contract must be definitized within 180 days of the award or before 40% of the work is completed, whichever occurs first.
- Liability Limits: Government liability is typically capped at 50% of the total estimated cost of the definitive contract unless a higher amount is specifically approved.
- Mandatory Clauses: Must include specific FAR clauses regarding the definitization schedule (52.216-25) and the limitation of government liability (52.216-24).
- Funding and Competition: It cannot commit the government to spending more than currently available funds and must be competed unless a valid exception to FAR Part 6 exists.
- Price Ceiling: A firm price ceiling is required if the letter contract is awarded based on price competition.
Practical Implications
- Urgency vs. Risk: While letter contracts allow for immediate performance in emergencies, they are considered high-risk "Undefinitized Contract Actions" (UCAs) because the government loses significant price-negotiating leverage once work has already begun.
- Administrative Burden: Both the government and the contractor face intense pressure to meet the 180-day definitization window, requiring rapid submission of certified cost or pricing data and aggressive negotiation schedules.