Engagement Letter
An engagement letter is a formal document that defines the terms of a professional relationship between a service provider and a client. It specifies the scope of services, responsibilities of each party, fee structure, payment terms, timeline, and conditions for termination. Engagement letters are standard in accounting, legal, consulting, and other professional services where the nature of the relationship needs to be documented before work begins. Unlike a proposal, which is a sales document designed to win work, an engagement letter is an operational agreement that governs how the work will be performed. It functions as a lightweight contract, and in many professional service firms, a signed engagement letter is the binding agreement between the parties. Key elements include a clear description of services to be provided, what is excluded, the fee basis (hourly, fixed, or retainer), billing and payment terms, confidentiality obligations, and provisions for ending the engagement. Engagement letters protect both parties by setting clear expectations and providing a written reference if disputes arise about what was agreed.
Example
An accounting firm sends an engagement letter to a new client before beginning annual tax preparation, specifying that the scope covers federal and state returns for one entity at a fixed fee of $2,500, with advisory services excluded.
Frequently asked questions
- What is the difference between an engagement letter and a contract?
- An engagement letter is a type of contract, but it is typically shorter and less formal than a full service agreement. It covers the essential terms of the engagement without the extensive legal clauses found in a master services agreement. In many professional service industries, the engagement letter is the only written agreement between the parties.
- When should you send an engagement letter?
- Send an engagement letter before beginning any work. It should be signed by both parties before the service provider starts delivering services. This ensures that the scope, fees, and responsibilities are documented and agreed upon, preventing misunderstandings once the engagement is underway.
- What happens if the scope of work changes after the engagement letter is signed?
- The engagement letter should include a clause explaining how scope changes are handled, typically through a written amendment or a new engagement letter for the additional services. Any modification to the original terms should be documented and signed by both parties before the additional work begins.