The engagement letter is a legally binding agreement that establishes the terms of the business relationship between a company and its clients.
It helps the company communicate what the client should expect in terms of the service it will provide. It includes information such as the scope, costs, and responsibilities of both parties, among other details.
An engagement letter is often used by professional firms. These firms may provide accounting, legal representation, consulting, and auditing services, among others. In addition, the letter can be used when communicating with individual clients and corporations. The engagement letter helps ensure that the customer knows what to expect from the company.
Establishing expectations helps to reduce the risk of conflict that may lead to litigation by either party. It also helps protect the company’s payment by setting up a fee structure for the client. Companies must clearly understand when and how often they should use an engagement letter, what should be included in it, and its benefits.
These details will help ensure that companies utilize the document appropriately and include the right details. This article will help elaborate on these details while also providing templates and samples to help you create an effective engagement letter.
Free Letter Templates
When and How Often is the Engagement Letter Used?
A company should create an engagement letter before starting its business relationship with a new client. Though the engagement letter is less formal than a contract, it is a legally binding agreement. It plays an important role in ensuring that the company communicates appropriately to its client without using the legal jargon associated with a contact. An engagement letter contains the company’s services to its clients, its terms and conditions, cost, deadlines, and other details.
The information relayed in the engagement letter is effective for a long period. However, companies should review the document to make appropriate updates. This review can be done annually. Significant changes to pricing, terms, and conditions, the scope of service, or the services offered to the clients may warrant changes to the letter.
A new engagement letter or supplement letter can be created to outline the updates the company would like to make. The reviews and updates made to the engagement letter help the company maintain its professional standards. A termination clause that allows both parties to exit the engagement under certain applicable conditions should be indicated.
What to Include in an Engagement Letter
Companies must clearly understand what to include in their engagement letters. The components of the letter help ensure that information is appropriately conveyed to clients. It also helps ensure that key details are not left out of the agreement.
The following information should be contained in an engagement letter:
Parties identification
The engagement letter should begin by identifying the parties involved. It will help identify who the service provider is and who the client is. The document should specify whether the client is an individual, group, or partial entity.
For example:
James Smith
456 Main Street,
Atlanta, Georgia 14560
Service type
Secondly, the type of service that is being provided to the client by the company should be identified. It helps clarify what the client should expect from the company. The statement identifying the type of service the company will provide should be short and straightforward.
For example:
Dear James,
This is to confirm the legal services being provided by James and Jane LLP.
Specific service details
Thirdly the engagement letter should provide specific details about the services the client should expect to receive. A brief description of the services will help the company avoid misunderstandings with the client.
For example:
The services that will be provided under this letter are legal consultation services.
Scope of service
Next, the company should outline the scope of its services. It helps create an understanding of the work that needs to be done. It will also help reduce scope creep.
For example:
Our firm will consult on a business-related matter. Our services will include:
– Conducting legal analysis and researching legal matters
– Reviewing your legal documents
– Providing advice on legal matters
Period of engagement
The engagement letter should also outline when the engagement starts and ends. The company can go further by specifying the delivery date for specific deliverables if any. It will help highlight the due date and enable the client to follow up on the progress of the work.
For example:
The engagement will begin on March 6th,2021, and end on March 10th,2023.
Fee structure
A clear fee structure outlining the cost of the services provided to the clients should be indicated. The free structure should include information on how and when the payments will be expected. In addition, the company should establish how it will go about changing for extra services the client may request that have not been indicated in the engagement letter. A clause outlining what will happen in the event of late payment should also be included.
For example:
Our hourly rates are$ 62. This amount is based on the time spent consulting on issues that may be brought to us. An extra $170 for any additional services that are not indicated in this engagement letter.
Responsibilities of each party
A brief description of the responsibilities of each party throughout the engagement should be outlined. The client may be responsible for certain actions and providing specific information, among other responsibilities. It will help ensure that both parties are clear on what they need to do to ensure the engagement goes smoothly.
For example:
The client will be responsible for providing relevant information and documentation. Access to business documents should also be granted to aid in the provision of appropriate advice. The advice provided is simply an opinion, and the client is free to accept or decline it. On the other hand, we will provide informative, reliable advice to help the client. We are also responsible for maintaining our client’s confidentiality
Professional standards
The engagement letter should contain a statement assuring the client that professional standards will govern the engagement. The standard will depend on the location of the parties involved.
For example:
The engagement will be governed by the standards and requirements of The State Bar of Georgia. This, therefore, means that we are bound by state law to ensure the confidentiality of our client’s information and the provision of reliable information.
Disclaimer
The company should also include a disclaimer to help establish the limitations of the service. It helps avoid confusion and complaints that may be brought about by a lack of understanding of the company’s services.
For example:
The firm will only provide the services listed for the period indicated. The client will need to seek legal representation elsewhere for any matters that must be brought before a court. The client shall also be informed of any updates or changes to the firm’s services that may occur within the set period.
Validity and termination
A brief statement should be indicated highlighting that the engagement letter is valid until the due date or till the complete delivery of the service. It helps reassure the client of the company’s commitment to the terms they have laid out. The engagement letter should also contain a termination clause. The clause provides information on why the engagement may be terminated. It also outlines how the relationship can be ended.
For example:
The agreement is valid for four years. At which point it can be terminated. It can also be terminated without notice by either party.
Related: Contract Termination Letter
Confirmation of term
Lastly, the engagement letter should end with confirming the terms laid out within it. The statement is used to verify that the client fully understands the document. Both parties must review and sign the document against their names to show that the terms are agreeable to them.
For example;
We hereby accept the terms outlined in the engagement letter.
Signed:
Full name:
Engagement Letter Template
[Client’s name]
[Company]
[Address]
Dear [Client’s First name],
Thank you for choosing [name of the company/service provider] to assist you with [ the kind of service that will be provided]. This engagement letter is to verify the terms of our engagement and outline the nature of the service that we will provide.
[Name of service provider] will be providing the following services [outline or list the scope of the service]. These services will be provided for [period of engagement]. These charges for the services are [indicate a fee structure]. In addition, you will charge an extra fee of [indicate amount] for services not outlined in this document].
You shall be responsible for[highlight the client’s responsibilities]. On the other hand, we are responsible for [highlight the service provider’s responsibilities]. The engagement will be governed by [indicate ruling body]. [Outline circumstance that may warrant termination and how it will take place]
We hereby aspect the terms and conditions outlined in this engagement letter:
Clint’s Name:                                    Service provider’s Name:
Signature:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Signature:
Types of Engagement Letters
The kind of engagement letter created will depend on the company’s services. However, understanding a few types will aid in easing the creation of the letter. The following are three types of engagement letters that you may need:
Accountant (CPA) / bookkeeper engagement letter
An accountant (CPA ) engagement letter describes the overall relationship that will be shared with the client regarding the accounting services a company will provide. It is used primarily by service providers who file taxes or provide auditing services. Both parties must sign an accountant engagement letter for it to be legally binding.
Attorney engagement letter
An attorney engagement letter is used by legal professionals who provide legal services to clients. This type of engagement letter must be clear on specific services that will be provided as a wide range of services can be provided. Often advance payment or a fee retainer may be among the terms outlined by the service provider.
Consultant engagement letter
A consultant engagement letter is issued by a service provider who provides advice or knowledge for a fee. The individual is usually an expert with vast experience and extensive knowledge on the matter. The engagement letter may indicate that the service provider charges per hour or project.
Benefits of Using an Engagement Letter
There are a few advantages associated with using an engagement letter. Understanding the benefits of the letter helps in the creation of a document that communicates more effectively.
The benefits include the following:
- Helps reduce misunderstandings: Using an engagement letter helps reduce misunderstandings by outlining the terms of engagement. The details indicated in the letter helps ensure that both parties are clear on issues like the scope of the service, deadlines, and the type of service that will be provided, among other details.
- Reduces exposure to potential litigation: The engagement letter reduces the risk of litigation by ensuring that both parties are bound to the agreement. Therefore, both the company and the customer must fulfill the terms outlined in the document. Either party can seek damages if the other does not meet its obligation.
- Helps set expectations: The letter helps ensure that both parties will be satisfied with the outcome. Setting expectation also shows the professionalism of the company. It facilities a successful business engagement between the company and its client by encouraging open and honest communication.
- Reduces scope fright: A clear engagement letter helps reduce scope fright by allowing the company to lay out what will be included in the service. It also allows the company to plan how it will engage with the client if more work needs to be done.
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Frequently Asked Questions
A retainer is a fee paid by the client upfront to secure the services by a company or services provider. It is commonly used by professionals such as attorneys and consultants, among others. The retainer signifies the client’s commitment to work with the company.
Reviewing an engagement letter sample can help a company obtain an engagement letter. A quick web search will provide an individual with different samples to aid them in creating their own letter.
Yes, an engagement letter is legally binding, even though it is less formal than a contract. However, both parties must sign it for it to be considered legally binding.
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