Letter Contract

A letter contract is a preliminary contractual instrument that authorizes a contractor to begin work immediately when there is an urgent need, before a definitive contract can be fully negotiated and executed.

What is a Letter Contract?

Letter contracts (also called Undefinitized Contract Actions when used in DoD) are addressed in FAR 16.603. They are used in limited circumstances when the need to begin work is so urgent that delaying performance until a fully negotiated contract is finalized would cause unacceptable harm to the government's interests.

A letter contract includes:

• Authorization to begin work and incur costs up to a specified dollar ceiling
• Description of the work to be performed
• Initial definitization schedule, the timeline for negotiating the final contract terms
• Contract type designation (though final pricing is not yet established)
• FAR clauses incorporated by reference
• Limitation on government obligation (the not-to-exceed amount during the letter contract period)

Critical limitations on letter contracts under FAR 16.603-3:

• Letter contracts must be definitized as quickly as possible, within 180 days after issuance or before 40% of the work is complete, whichever comes first
• The total liability of the government must not exceed 50% of the estimated cost of the definitive contract
• Letter contracts may not be used if a firm-fixed-price or fixed-price incentive contract can be established

Letter contracts are an exception to good acquisition practice, they give the contractor immediate revenue and cost recovery while the government has limited pricing information. This creates negotiating leverage in the contractor's favor during definitization, because the work may already be substantially complete by the time final price is negotiated.

Why Letter Contracts matter for government contractors

Letter contracts are rare but important when they occur. Being awarded a letter contract typically signals high urgency, hurricane response, military contingency support, emergency system restoration. The financial benefit to the contractor is immediate cash flow for allowable costs. The risk is negotiating a fair final price after the work has already started, the government has less leverage once performance is underway, but it also has more actual cost data. Contractors should be cautious about incurring costs that exceed the letter contract ceiling without written authorization. Costs above the ceiling are at the contractor's risk.

Example

After a catastrophic hurricane, FEMA urgently needs logistics support for 50 distribution centers. Waiting 60 days for a full competitive solicitation is not viable. The contracting officer issues a letter contract to an established logistics firm with a $10M not-to-exceed ceiling, covering immediate deployment of staff and resources. The letter contract requires definitization within 90 days. Over the next two months, the firm incurs $7M in costs. During definitization, the parties negotiate a firm-fixed-price or T&M structure for the remaining work. The government has better pricing information; the contractor has documented actual costs as the basis for negotiations.

Frequently Asked Questions

What happens if definitization doesn't occur within the required timeframe?

If the contracting officer fails to definitize within the required period, the contractor may request an unilateral determination of price by the contracting officer, or the government may face protest-like remedies. In practice, late definitization is common in emergency contracts and is addressed through extensions documented in the contract file.

Can a contractor refuse to accept a letter contract and insist on a definitive contract?

Technically yes, but refusing in an emergency situation typically damages the contractor's relationship with the agency and may result in the government finding another supplier. In practice, contractors who want the business accept letter contracts in urgent situations and rely on the definitization process to establish fair final pricing.

What is the difference between a letter contract and an undefinitized contract action?

They are essentially the same thing. Undefinitized Contract Action (UCA) is the DoD-specific term defined in DFARS. FAR uses "letter contract." Both refer to preliminary contractual instruments that authorize work before all terms are finalized.

Are letter contract costs tracked differently?

Yes. Letter contract costs must be tracked separately and are subject to DCAA audit to ensure that only allowable, allocable, and reasonable costs are charged. Contractors must maintain detailed cost records from the moment work begins under the letter contract to support the definitization negotiation with actual cost data.