Letter Contract (Undefinitized Contract Action)
What It Is
A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin performing work immediately, before the parties have negotiated a definitive contract. It is used when the government's interest demands that work start at once but there is not enough time to negotiate a complete contract first. Letter contracts are undefinitized contract actions: they must be definitized (converted to a final contract with agreed terms and price) within a set schedule, typically within 180 days or before more than a stated percentage of the work is completed, whichever is earlier. They are tightly controlled because the contractor begins work before price is fixed.
Who Carries the Risk
Front-loaded risk for both sides — the contractor performs before price is settled, while the government commits before terms are final; the definitization schedule and a not-to-exceed limit bound the exposure.
When the Government Uses It
- Emergencies or urgent needs where work must begin before a definitive contract can be negotiated.
- Situations where the government's interest demands an immediate start (e.g. urgent operational requirements).
- Only with required approvals and a definitization schedule — they are tightly limited by FAR 16.603.
Key Features
| Feature | What It Means |
|---|---|
| Immediate authorization | Authorizes the contractor to start work right away, before the final contract is negotiated. |
| Definitization schedule | Must be converted to a definitive contract on a set schedule (commonly within 180 days or before a stated percentage of work is done). |
| Not-to-exceed limit | The government's liability before definitization is capped at a stated maximum. |
| Controlled use | Requires specific approvals because the contractor performs before price is agreed — used sparingly. |
What It Means for an SDVOSB
Letter contracts are uncommon on routine small-business set-asides, but an SDVOSB supporting an urgent or emergency requirement may encounter one. The key cautions are practical: you are performing before the price is fixed, so track costs carefully and push to definitize on schedule — an unfavorable definitization can squeeze margins on work you have already done. Limitations on subcontracting apply to the definitized contract by its eventual work category and pricing type.
Common Pitfalls
- Performing extensively before definitization and losing negotiating leverage on the final price.
- Exceeding the not-to-exceed limit, beyond which the government is not obligated to pay.
- Letting the definitization deadline slip, which can trigger reduced fee or unilateral government action.
Frequently Asked
Why would the government use a letter contract?
When its interest demands that work begin immediately but there is not enough time to negotiate a complete, definitive contract first — for example, an urgent or emergency requirement. FAR 16.603 lets the contracting officer issue a preliminary instrument that authorizes performance now, with the final terms and price to be definitized on a set schedule.
What does it mean to 'definitize' a letter contract?
Definitizing means converting the preliminary letter contract into a definitive contract with all terms agreed, including a final negotiated price. FAR 16.603 requires this on a schedule — commonly within 180 days of the letter contract or before more than a stated percentage of the work is completed, whichever is earlier. Until then it is an undefinitized contract action with a not-to-exceed liability limit.
Primary Sources
Plain-English reference, not legal advice. Contract-type selection is a contracting-officer judgment and the FAR is periodically amended — always confirm the contract type, clauses, and how the limitations on subcontracting are measured against the solicitation and your contracting officer before relying on this.
Change log (1)
- LaunchedPublished the federal contract types reference covering the pricing and delivery arrangements an SDVOSB encounters on set-asides — firm-fixed-price (FFP), fixed-price with economic price adjustment (FP-EPA), fixed-price incentive (FPIF), the cost-reimbursement family (CPFF, CPIF, CPAF), time-and-materials and labor-hour, the indefinite-delivery vehicles (IDIQ, requirements, definite-quantity), and letter contracts — each with a who-carries-the-risk callout, a key-features table, an SDVOSB-specific angle tying the type to the limitations on subcontracting, common pitfalls, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR Part 16 citations, and cross-links into the glossary, regulation explainers, how-to guides, FAQ, and the limitations-on-subcontracting and price-to-win calculators.