Table of Contents
- What Is an Engagement Letter?
- Key Takeaways
- How an Engagement Letter Works
- Advantages of an Engagement Letter
- Special Considerations
- Who Prepares a Letter of Engagement?
- Is an Engagement Letter the Same As a Contract?
- When Should an Engagement Letter Be Sent?
- How Often Should Engagement Letters Be Updated?
- The Bottom Line
What Is an Engagement Letter?
Let me explain what an engagement letter is. It's a written agreement that lays out the business relationship you're entering into with a company as a client. This letter spells out the scope of the agreement, its terms, and the costs involved. The main goal here is to set clear expectations for both you and the company.
Key Takeaways
You should know that an engagement letter defines the business relationship between two parties. It limits the company's responsibilities, either directly or by implication. A variety of businesses, including attorneys, auditors, accountants, and consultants, use these letters regularly. They work for individuals or large corporations alike.
How an Engagement Letter Works
Think of a letter of engagement as serving the same purpose as a contract between two parties, but it's less formal and skips most of the legal jargon. The letter is meant to briefly and accurately describe the services to be delivered, the terms and conditions, any deadlines, and the compensation.
This is a legal document, binding in a business deal. Remember, it's less formal than a contract but still legally binding and usable in court. It also limits the scope of the company's services. For instance, if you hire an attorney for a specific purpose, like a land purchase, you can't later ask for divorce advice under the same agreement. The letter specifies the scope, making that clear.
An engagement letter doesn't become legally binding until all parties sign it.
Advantages of an Engagement Letter
Setting expectations is crucial in any business relationship, and an engagement letter makes them clear for both sides. As a client, you get reassurance about when the service will be completed, how much it will cost, and the exact scope of work. It also highlights any additional costs not covered, like software you might need to buy separately.
For the business, it establishes clear boundaries on the work from the start, preventing scope creep—that dreaded expansion of tasks that every tax accountant and attorney fears. The letter might even mention potential future services outside the current agreement, with cost estimates.
In case of disputes, the engagement letter protects both parties. It could include clauses for mediation or arbitration before jumping to legal action.
Special Considerations
If the relationship is long-term, many companies require you to update and sign the engagement letter annually. This accounts for changes in the business relationship over time and bolsters the document's legal standing. It also restates the scope, which might evolve, and notes any new costs or fees from service changes.
Who Prepares a Letter of Engagement?
The company providing the service drafts the engagement letter, often with a lawyer's help. They present it to you, the client, and both parties must sign for it to be legally binding.
Is an Engagement Letter the Same As a Contract?
Engagement letters are less formal and usually shorter than traditional contracts. That said, they share key traits like being legally binding and reducing liability. Any size business can use them, from sole proprietors to large corporations.
When Should an Engagement Letter Be Sent?
You need to present engagement letters to the client at the beginning of the relationship, before any work starts. Reissue them periodically, especially if the scope of services changes or if prices are adjusted.
How Often Should Engagement Letters Be Updated?
Many companies require updates and signatures on an annual basis. Always issue a new one if services change. Even if nothing changes, redrafting can strengthen the document's legal standing and prevent miscommunications or disputes by reminding everyone of the agreed work.
The Bottom Line
If you're a company offering services, you can run into all kinds of issues without laying out expectations and boundaries in a written, legally binding contract. An engagement letter is like a contract but shorter and less formal, yet equally binding. It protects firms from lawsuits and gives customers clarity on services, timelines, and costs. Overall, it helps avoid misunderstandings, legal disputes, and scope creep, keeping everyone on the same page.
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