Application
Letter contracts allow urgent work to begin before full contract negotiation, but require strict limits, schedules, and controls to manage risk and ensure timely definitization.
Overview
FAR 16.603-2 outlines the specific conditions and requirements for the use of letter contracts in federal procurement. Letter contracts are used when urgent circumstances require immediate contractor commitment, but there is insufficient time to negotiate a definitive contract. The regulation mandates that letter contracts be as complete as possible, include a price ceiling when awarded based on price competition, and contain a detailed definitization schedule. The schedule must ensure contract definitization within 180 days or before 40% of the work is completed, whichever comes first, unless an extension is justified. The regulation also limits the government's maximum liability to 50% of the estimated contract cost unless higher authority approval is obtained, and requires assignment of a priority rating when appropriate. These provisions are designed to balance the need for speed with prudent risk management and compliance.