The Contents of an Engagement Letter
An engagement letter is a legally binding contract that describes the business relationship between two parties. It’s usually less formal than a standard contract and avoids legal jargon.
It should include the following essential information: the scope of work, a duration/period, a termination clause, fees and compensation, and the rights and obligations each party must uphold.
Scope of work
When conducting an assurance engagement, it is important to make sure the scope of work involved in the project is clearly documented. This will help reduce misunderstandings between the practitioner and client. The document also helps identify the type of work that will be performed and ensures that the product delivered meets the client’s expectations. The document is usually signed by a representative of each party and becomes legally binding upon signature.
An engagement letter is a form of contract that defines the terms of a business-client relationship. It contains several pieces of information, including the parties involved, the purpose and scope of the agreement, the obligations of each party, and the fee structure. It also includes specific information about how the agreement will be executed and payment methods. Depending on the nature of the services, the document may also include conditions related to extra fees, such as administrative charges. This will help to avoid what is known as “scope creep,” which can occur when the scope of the job grows unexpectedly over time.
Fees
If you are a business owner who works with clients on an ongoing basis, it is important to set clear expectations and ensure that the work done by your team meets client needs. An engagement letter can help you define critical details, including fees, scope of services and responsibilities.
It is often helpful to draft separate engagement letters for each type of service you provide, as this will prevent confusion and potential mishaps. Each letter should start with an executive summary, which is a condensed version of the other sections of the document.
You should also include a section that identifies any additional services that may be needed in the future. This will help to avoid what is known as scope creep, which can lead to confusion and disputes down the road. Finally, it is important to keep the language in your engagement letter simple and avoid jargon or legalese. Using a lawyer-reviewed template can help you get started quickly and avoid any miscommunications along the way. This can save you time and money down the line.
Responsibilities
When drafting an engagement letter, it’s important to identify your client’s responsibilities as well as your own. This helps reduce the likelihood of misunderstanding or misinterpretation between the two parties. It’s also a good idea to include your terms of business and any potential conflicts of interest.
Typically, an engagement letter also includes a list of deliverables. For example, if you are a CPA, you may specify an audit report or a memo summarizing your oral advice. This helps prevent misunderstandings between the client and practitioner and clarifies what services will be performed.
It’s also a good idea to clarify the length of your relationship with the client. For instance, you might state that the agreement is effective until terminated by either party. This allows the client to seek out other accounting professionals if they are not satisfied with your work. You can also include a clause that defines how records of your relationship will be stored or disposed of when the relationship ends. You should also identify a client point of contact for the duration of your relationship, to ensure that your communications with them are clear.
Timeline
The timeline of a business consulting engagement letter should include details about the start and end dates of the project. The letter should also include a clause regarding confidentiality and non-disclosure. This will protect your company from legal action if the client decides to share any confidential information with others outside of the project team. The letter should also specify how the work will be carried out and what will happen if the project is cancelled for any reason.
A good engagement letter should be simple and easy to read, without any complicated legal jargon. It should include an executive summary, which provides a condensed version of the entire agreement. This can be a great way to save time and make sure that all the key points are covered.
Although an engagement letter is less formal than a contract, it is still legally binding. It is often used by providers of professional services, such as lawyers and CPAs, to establish a relationship with clients and define their terms of service. This will help avoid the possibility of misunderstandings and prevent scope creep, which can lead to costly mistakes.
Termination
An engagement letter is an important legal document that should be used by any type of business that offers services to clients. It records significant terms that both parties agree to at the beginning of their professional relationship, such as the scope of work and costs. It also includes a termination clause that explains the circumstances under which either party may terminate the contract.
It’s important for a firm to clearly articulate the scope of its representation in an engagement letter, and to promptly draft termination letters closing the matter and ending the representation. A clear scope of representation reduces the likelihood of malpractice claims that are based on misunderstandings over what was and wasn’t included in the scope of the engagement.
In addition, it’s important to include a governing law and jurisdiction clause in the engagement letter, which stipulates which laws govern the contract. And finally, it’s a good idea for both parties to review the engagement letter on a regular basis, such as on an annual basis. This ensures that both parties are still in agreement on the terms of the contract and that any issues can be addressed immediately.