The use of a letter contract must be approved, in writing, by the head of the contracting activity (HCA). This approval must include a finding that no other contract is suitable (see FAR 16.603-3). The letter contract must also include a NTE (not-to-exceed) price. Herein lies the risk for both the Government and contractor. If the Government does not have time to negotiate a contract, the contractor probably doesn't have sufficient time to prepare an adequate estimate of costs. Significant oversights could lead to unanticipated financial burden. On the other hand, since the contractor does not have sufficient time to prepare an adequate estimate, the tendency is to throw everything including the kitchen sink into the NTE price (defective pricing does not apply at this point in the contracting process). If any of those costs have been incurred at the time of contract definitization, the Government is hard -pressed to question them.
The Government and the contractor are required to definitize a letter contract (agree upon contractual terms, specifications, and price) by the earlier of
- 180 day period after the date of the letter contract, or
- The date on which the amount of funds obligated under the contract action is equal to more than 50 percent of the negotiated overall ceiling price for the contractual action.
Letter contracts do not obligate the Government to pay up to the amount of the NTE price. The maximum liability of the Government is the estimated amount necessary to cover the contractor's requirements for funds before definitization, but shall not exceed 50 percent of the estimated cost of the definitive contract unless approved in advance by the official who authorized the letter contract.
There are a few restrictions on the use of letter contracts. They cannot be used to
- Commit the Government to a definitive contract in excess of funds available at the time of contract.
- Be entered into without competition when required.
- Be amended to satisfy a new requirement unless that requirement is inseparable3 from the existing letter contract.