How to Write an Engagement Letter
The first step to drafting an engagement letter is to gather all of the information and details that will be included in the document. This will help to prevent misunderstandings that may lead to legal disputes or financial losses.
The key sections to include in your engagement letter are: identification, scope of work, fees and payment terms, and termination.
Introduction
Regardless of the industry, it’s important for professionals to document key components of their service agreements with clients. This ensures that both parties have a clear understanding of the terms of the agreement, and it protects both parties in case of a dispute or disagreement.
An engagement letter — or engagement agreement — is a form of contract that establishes mutual obligations that are enforceable by law. It outlines the services that will be rendered by the professional and defines the scope of work and associated costs. It also specifies the responsibilities of both parties, including the timeline for completion and any limitations or restrictions on the work.
It’s a good idea to include a termination clause in the engagement letter and specify how disputes will be resolved, such as through fair discussions or arbitration. This will help prevent misunderstandings and protect the professional’s reputation.
An engagement letter should be tailored to the specific project or client and should not be used as a sales tool. For example, lawyers should be cautious about describing their chances of success in a case. While it’s tempting to highlight the likelihood of winning a lawsuit, it’s important for attorneys to remember that even if they win their case, they still have a two-in-10 chance of losing the case. It’s also a good idea to include in the engagement letter whether or not any fees are contingent upon a certain outcome and if there are any additional expenses that could be incurred.
Scope of work
A good engagement letter provides clarity for both parties. It sets expectations about how the project will work and when it is expected to be delivered. This helps reduce what is known as scope creep. It also clarifies any potential fees and payment terms. It also includes any provisions regarding confidentiality or other issues that could come up during the course of the project.
The document should clearly identify the client and your firm as well as include an overview of the company. A brief description of the scope of services is helpful, as is an indication of whether or not a retainer will be required.
You should also outline any potential services that may be available in the future, with an estimate of how much those additional services will cost. Including this information prevents your clients from requesting additional services that are outside of the scope of what you originally discussed, which can cause conflicts and confusion down the road.
Finally, an engagement letter should always contain a termination clause. Even if you are confident that your project will run its course, it is important to protect yourself against situations in which the client may need to terminate the contract for any reason.
Fees and payment terms
The fees and payment terms portion of an engagement letter should include a clear breakdown of how much your firm charges for each service, as well as any additional services that may be required. It should also include a payment schedule and any terms related to late payments. It’s a good idea to have this section reviewed by a legal professional before including it in your engagement letters.
It’s also a good idea to have an executive summary for your engagement letter. This can be as simple as a paragraph or two that quickly documents the key elements of the engagement, such as scope and pricing. This allows your clients to easily review and understand the document without reading every detail.
In addition to outlining the types of services you offer, your engagement letter should also clearly state any limits to liability or disclaimer of warranties. This can help avoid misunderstandings that could lead to a legal dispute or monetary loss.
Regardless of the type of business you run, an engagement letter is a must-have for all clients. It’s a great way to clarify expectations and reduce confusion, and it helps protect your firm from potential litigation. You should always have a lawyer review any agreement or contract that has the potential to impact your business legally.
Termination
Whether you work in the consulting, law or accounting fields, it’s important to use an engagement letter to set expectations and prevent misunderstandings. Without one, it’s easy for either party to take advantage of the other, leading to expensive legal battles.
A well-written engagement letter can help you save time and money while giving your clients peace of mind. The document will clarify what services are included, establish deadlines and fees, and cite the terms of your record retention policy. The letter should also include information about how the firm will handle conflicts of interest and potential violations of professional standards.
The final section of the engagement letter should clearly outline any possible damages or fees that may occur as a result of failure to meet expectations. This includes any fees for a late payment or the need to retain an outside consultant to perform additional work to complete the project. It should also include any indemnification clauses in case the client sues for negligence or breach of contract.
The final step is to have both parties sign the engagement letter. This makes it legally binding. It’s also a good idea to have the client initial next to each of the sections of the document to indicate that they agree with the terms and conditions. Using an engagement letter template can make this process even easier and faster.