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The ultimate guide to engagement letters: everything you need to know

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Learn everything you need to know about writing engagement letters with Bonsai.
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Updated on:
February 22, 2023
February 22, 2023
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Learn everything you need to know about writing engagement letters with Bonsai.
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To most consultants, it might seem obvious to put your client agreements in writing – but believe it or not, some consultant-client relationships are still conducted without any written documentation. Whether you’re a consultant, lawyer, or accountant, an engagement letter is essential to ensure that both parties are on the same page about expectations and fees.

An engagement letter is a document that specifies the terms of your client's agreement with you. It should include important details such as scope of services, fee structure, timeline for completion of work (if applicable), payment policies and more. In short: it establishes the framework for your relationship with the client – so make sure it’s done right!

Here, we'll go in-depth on why engagement letters are important, what they should include, and how to write one. You'll learn the common mistakes to avoid as well as top tips for crafting an effective engagement letter.

Let's dive in.

Part 1: Understanding Engagement Letters

You've heard of proposals and contracts, but what about engagement letters? Put simply, an engagement letter is a document that outlines the terms of your client's agreement with you. The main points you'll want to include in your engagement letter are the services being offered, fee structure, the timeline for the working relationship, payments, and any other expectations.

Engagement letters can be used in a variety of industries, including consultancy, law, accounting, and more. They serve as both a legally-binding agreement and a way to ensure that all parties are on the same page about expectations.

Why Engagement Letters Are Important

According to some surveys, organizations report an average litigation cost of $1.2 million per $1 billion in revenue. That's far too much money wasted on misunderstandings and conflicts that could have been avoided with better documentation and conflict resolution.

Engagement letters are part of your defense against litigation. They are a way to formalize the agreement between you and your client, ensuring that both parties understand their rights and obligations. Even if any disputes arise during or after completion of the project, having an engagement letter can help expedite resolution and avoid costly litigation down the line.

Not only that, but engagement letters outline exactly what you're offering, how much you'll be charging, and when payment is expected. You're more likely to meet the client's expectations if you are the one who sets them in the engagement letter.

What Should Be Included In Engagement Letters?

Engagement letters should be tailored to each specific client and project. However, there are some common elements that all engagement letters should include.

Executive Summary

Although you've already discussed the details of your agreement with the client, the executive summary puts it all in writing. It's basically a mini summary of the entire agreement.

Scope of Work

What services are you offering? This section should clearly define the scope of work that you'll be completing – and not just the services you offer in general, but the specific services you'll be providing to this particular client.

Project Timeline

Here, you'll outline the time frame of the working relationship. When will the project begin? When is it expected to be finished? How many hours per week do you plan on working on it? It's best not to leave this open-ended or up to interpretation; be as specific and clear as possible.

Payment Terms

Outline how much you'll be charging, how you will accept payment (such as through PayPal or wire transfer), and when payments are expected. This is something you can negotiate with the client or set yourself.

Confidentiality and Non-Disclosure Agreement

Regardless of whether or not you're working with sensitive information, it's always a good idea to include a confidentiality and non-disclosure agreement in your engagement letter. This ensures that the client agrees not to share any of the work's details or results outside of the project team.

Termination and Cancellation Policy

Never assume that a project will run smoothly for its entire duration. You should always include a clause in your engagement letter that outlines what happens if the client needs to terminate or cancel the project for any reason.

Governing Law and Jurisdiction

Depending on where you are located, and the client is located, you will be subject to different laws and regulations. This section should make it clear which law will govern the agreement and where any disputes will be heard if they arise.

Signatures

Of course, no engagement letter is complete without signatures from both you and the client acknowledging that they have read, understand, and agree to the terms outlined in the document. Signatures make your agreement legally binding.

Types of Engagement Letters

You'll find that engagement letters are used in a variety of contexts – not just for consulting work. Lawyers, accountants, coaches, and freelancers can all make use of them when formalizing client relationships and agreements.

Lawyers tend to have highly detailed engagement letters; they're dealing with more complex matters and need to cover a lot of specifics. The law firm will typically author the letter, but the client will also be required to sign off on it.

Accountants and bookkeepers may use engagement letters as well, although they tend to be less complex than legal ones. This is because their services are usually more straightforward and not as prone to disputes or disagreements.

Coaches, whether business or life-oriented, are often prone to scope creep; their services are open to interpretation unless spelled out in black and white, since 'coaching' is a malleable term. Engagement letters provide the opportunity to specify the expectations for both parties and ensure that there are no surprises down the road.

Consultants usually don't have the protection of a larger organization; they're on their own and need to make sure that the terms of any agreement are spelled out in detail. Engagement letters allow them to do so.

When Should You Use An Engagement Letter?

In any instance where you need to formalize an agreement with a client, you should use an engagement letter. In other words – if you're at risk of being held liable for something, it's a good idea to have an engagement letter in place.

Engagement letters can be used for any type of business relationship – from one-time projects to long-term contracts. They help ensure that both parties are on the same page and understand what is expected of them throughout the duration of the project or contract.

Best Practices for Engagement Letter Drafting

Ready to draft your own engagement letter? Here are a few tips to keep in mind:

  • Keep it simple. Since this is a formal document, it's tempting to slip into jargon or legalese – but this will only make the letter less accessible. Try to use language that is easily understood by all parties involved.
  • Be specific. Outline exactly what services you're providing, how much you'll be charging, and when payments are expected. Vague statements can cause confusion down the line, so don't leave anything open to interpretation if possible.
  • Add a cancellation clause. Even if you're confident that the project will run its course, it's always a good idea to include a cancellation clause in your engagement letter. This ensures that both parties understand what happens should the client need to terminate or cancel the project for any reason.
  • Have your draft reviewed. If you're not a lawyer yourself, seek legal counsel to review your engagement letter and ensure that it meets all legal requirements.

Concerned that your engagement letter doesn't tick all the boxes? Sometimes, your best bet is to use a pre-written template and customize it to fit your specific situation.

In any case, an engagement letter is an important document – and one that you should never take lightly. Make sure to put the right time and effort into drafting a comprehensive agreement that meets all legal requirements and protects both parties involved.

FAQs

What is the difference between an engagement letter and a contract?

Both engagement letters and contracts can be legally binding documents, but contracts are typically longer and more technical than engagement letters.

Is an engagement letter legally binding?

Yes; if both parties sign off on an engagement letter, it can be just as legally binding as a contract.

Do I need an engagement letter for every client engagement?

It's a good idea to have an engagement letter in place whenever you're providing services to a client, even if it's a one-off project. This helps protect both parties and make sure that everyone is on the same page about expectations and payment terms.

What happens if I don't use an engagement letter?

If you don't use an engagement letter, you may be liable for anything that goes wrong – from scope creep to non-payment. Without a written agreement in place, it can be difficult to prove what was agreed upon and who is responsible for any issues or disputes.

Part 2: Key Elements of an Engagement Letter

Anyone can draw up an engagement letter, but not everyone is equipped to do it effectively. It's crucial that you understand the different elements that make up a quality engagement letter – and that these elements are included in the document.

Let's take a look at the key elements of an engagement letter and why they're important.

Executive Summary: Outline the Document Contents

Much like an essay introduction, your engagement letter should start with a summary of the document. The reason for this is simple: it sets the tone for the entire document and helps ensure that your reader is clear on what’s in the document. You'd be surprised at the difference a summary can make to a reader's understanding of the letter.

Summaries typically cover:

  • The purpose of the engagement letter and its expected outcomes.
  • Scope of services to be provided.
  • Fees, payment terms, and any other financial information.
  • Any potential conflicts of interest or confidentiality requirements.
  • Time frames and deadlines for delivery of services.

These aren't meant to be detailed – just a sentence or less per point.

Here's an example of an executive summary for a business coach:

"This engagement letter outlines the terms of the working relationship between myself, [Name], and my client, [Client Name]. I will serve as a business coach for [Client Name], providing guidance and support in the areas of business strategy, goal-setting, and financial management. The agreement covers fees, payment terms, potential conflicts of interest, confidentiality requirements, delivery timelines, and termination conditions."

Your exec summary is much easier to write once you've completed the other sections; after all, it's just a condensed version of the letter. Feel free to complete the document first and then return to the executive summary.

Scope of Work: Description of the Work Being Completed

The scope of work is the most important part of your engagement letter. This section should provide clear and detailed information about the services you’re providing and any expectations or requirements related to those services.

Your scope of work should answer questions such as:

  • What tasks will I be completing?
  • How much time will they take?
  • What type of deliverables can the client expect?
  • Are there any special requirements I need to be aware of?

Be as detailed as possible here. The more information you provide, the better chance you have of avoiding misunderstandings come crunch time. Here's an example of what a scope of work might look like for an IT consultant:

"I will provide IT consultancy services for [Client Name], including:

  • Developing a comprehensive technology strategy and roadmap.
  • Reviewing existing infrastructure, hardware, software, and security solutions.
  • Recommending and implementing cost-effective upgrades as required.
  • Providing ongoing support and maintenance of systems."

You can elaborate by mentioning certain tools, techniques, or programs, but only if you think it necessary to set expectations around those details.

Project Timeline: Delivery Schedule and Milestones

Unless you clearly state when you expect the work to be completed, there’s a good chance that your client will expect the deliverables to be completed sooner than you anticipated. You then risk disappointing your client, or worse – attracting a poor review.

Your project timeline should include both the start and end dates, as well as any milestones that need to be met along the way. Decide how much or little say the client will have in the timeline. If there are any external factors that could delay progress, make sure to mention them too so your client can plan accordingly.

Fees: Payment Structure and Terms

The fees section of your engagement letter should provide a concise breakdown of the services you’re providing and the associated costs. Make sure to include details such as payment schedule, any additional fees that may come up, and any discounts or incentives that you may have offered.

Answer the following questions unambiguously:

  • How much are your fees per hour or per project?
  • Do you require a deposit or advance payment?
  • When is the final balance due?
  • What form of payment do you accept?
  • Are there any discounts available for repeat clients or bulk orders?
  • What is the expected payment schedule?

When discussing fees, make sure to include a clause about payment terms. For example: “Payment is due within 30 days of the invoice date. Any and all late payments will be subject to a 5% late fee plus the applicable interest rate.”

A freelance video editor might write their payment structure something like this:

"I will provide video editing services for [Client Name]. The project fee is $1,500 and includes up to 10 hours of work. Additional hours beyond the initial 10 are billed at a rate of $150/hour. 50% of the total project fee is due upon signing this engagement letter, with the remaining balance due within 30 days of delivery."

Confidentiality and Non-Disclosure: Secure Sensitive Data

You may not realize it, but most client-consultant relationships involve the sharing of sensitive information. Payment details, company processes, and personal data are some of the things that you may come into contact with.

To protect both parties, include a confidentiality and non-disclosure clause in your engagement letter. It's there not just to protect your clients but also to ensure that you, as a freelancer or consultant, won't unwittingly become party to a breach of privacy.

You should include the following in your confidentiality and non-disclosure clause:

  • A description of what information needs to be kept confidential.
  • Any restrictions on how this information can be used or shared.
  • The duration of the restriction (e.g., five years).

For example:

"I agree to keep all information related to [Client Name] and its business confidential. This includes, but is not limited to: payment details, customer data, company processes and strategies. I understand that non-sensitive project-related information must remain private for a period of five years after the completion of services."

Termination and Cancellation Policy

On the off-chance that the collaboration does not work out, you need to include a termination and cancellation policy in your engagement letter. This should specify the conditions under which either party can terminate or cancel the contract.

For instance:

"Either party may terminate this engagement letter with two weeks’ written notice. Upon termination, both parties shall be released from any further obligations stated in the contract. All services rendered thus far will be billed according to the agreed-upon payment schedule."

Governing Law and Jurisdiction: Legal Framework

The governing law and jurisdiction clause in your engagement letter stipulates which laws will apply to the contract. In other words, it outlines what should happen if something goes awry – it specifies who is liable for any damages or losses that may occur as a result of non-compliance with the agreement.

Yours will read something like this:

"This engagement letter shall be governed by and construed in accordance with the laws of [state/country]. In the event that any dispute arises out of or relating to this agreement, both parties agree to submit to jurisdiction in [city], [state/country] and hereby waive their right to a jury trial."

Signatures: Make it Official

Wrap up your engagement letter with the signature section. This should include both parties’ names, titles, and contact information.

Once both you and your client have signed the agreement, it will be legally binding. Make sure to keep a copy for yourself so that you can refer back to it if needed in the future.

FAQs

Can I change the scope of services after sending the engagement letter?

Yes, the scope of services can be changed after sending the engagement letter. However, any changes to the agreement should be agreed upon by both parties in writing before being implemented.

How should I determine my fees and billing arrangements?

Your fees and billing arrangements should be discussed and agreed upon by both parties before signing the engagement letter. It’s important to determine a fee structure that is fair for both parties, as well as a payment schedule that works for you.

Can I waive confidentiality for specific reasons?

Yes, you can waive confidentiality in certain circumstances. However, discuss this with your client before doing so, as well as outline the conditions of the waiver in writing.

How do I terminate an engagement if necessary?

If you need to terminate an engagement, you should give two weeks’ written notice and follow the conditions as outlined in your termination and cancellation policy.

Part 3: Common Mistakes to Avoid

At this point in the article, we know that getting your engagement letter right is crucial for both your legal safety and the health of your working relationship. Unfortunately, it's all too easy to get it wrong if you don't know what the potential pitfalls are.

That's why we've put together this list of common mistakes to avoid when drafting your engagement letter. Take a look through and keep these in mind as you get started.

1. Not being specific enough about the scope of work.

An inadequate scope of services is devastating to both parties involved. It makes it difficult to understand the expectations and obligations of each party, as well as leaving you open to potential legal disputes down the line.

For instance – imagine you are a freelance writer, and you've been hired to ghostwrite a book. Your engagement letter includes 'full manuscript writing' and 'editing' but doesn't specify whether revisions are included in the editing process.

You might interpret the agreement to include copyedits only, while the client might expect the editing process to also include extensive repeat revisions. If you don't spell out your expectations clearly in the engagement letter, disputes about who is responsible for what can arise.

2. Unclear fees and billing arrangements.

Never assume that providing an hourly rate is enough to cover all fees and billing arrangements. You ideally want to include as much detail about the payment structure as you can.

For example, if you are a lawyer, include information such as whether or not there is an upfront retainer fee and when payments need to be made. If you're a life coach, clarify whether you offer packages or discounts, and the surcharge for exceeding the allocated duration of sessions.

In short: if you don't get the fee in writing, the client is not obligated to pay.

3. Failure to define responsibilities.

Within your scope of work section, you have the opportunity to define each party's responsibilities – which is essential for a successful working relationship.

Are you a business coach? Make sure you clarify that you're not responsible for the client's decisions, nor are you accountable for the outcomes of those decisions. Are you a web developer? Include that your job is to provide the development services, not to teach the client how to use the website once it's finished.

4. Insufficient confidentiality clause.

As a coach or consultant, you might provide your clients with certain tools, frameworks, and strategies that are exclusive to your practice. In order to protect the integrity of your intellectual property, it's essential that you include a confidentiality clause in your engagement letter.

This should be worded as explicitly as possible – for example, prohibiting the client from sharing confidential information with third parties or using it for their own commercial gain.

5. Failure to include a termination clause.

No one wants to face the reality that their business relationship could end. Clients are not long-time friends, however, and you can't confidently predict their next steps.

A termination clause is there to ensure that both parties have a clear understanding of what will happen in the event that one party decides to terminate the relationship. Will you get paid for services rendered up to that point? Will the client have to pay for any materials produced before the termination date?

If you don't answer these questions upfront, they'll be answered for you (and in a way that you might not like) when the time comes.

6. Overly technical or legalese jargon.

Resist the temptation to fill your engagement letter with legal jargon and lengthy phrases. Remember that the client is likely not a lawyer; the document should be easy to read and understand, so they know exactly what their rights are.

Contracts tend to be more detailed because your client will likely have legal representation to help them understand the terms. Your engagement letter should be short, simple, and straight to the point – not a 10-page document full of complex clauses.

FAQs

What should I do if I make a mistake in the engagement letter?

If you make a mistake in the engagement letter, your first step should be to contact your client and clarify the issue as soon as possible. Depending on how substantial the mistake is, you may need to draft a new engagement letter or amendment that both parties agree to.

How can I prevent mistakes in the future?

There are two ways to prevent mistakes in the future. The first is to review your engagement letter with a lawyer before sending it off to your client. This can help you avoid any potential legal issues and ensure that the document meets both parties' expectations.

The second is to be as thorough as possible when drafting your first engagement letter, and then use that letter as a template after having it reviewed.

What are the consequences of making mistakes in the engagement letter?

The consequences of making mistakes in the engagement letter can be severe. If a mistake goes unnoticed, it could lead to legal disputes or financial losses. It may also damage your relationship with your client if you're not able to come to an agreement about who is responsible for what.

Part 4: Tips for Writing Effective Engagement Letters

It's time to write your own engagement letter. But, before you start putting pen to paper (or fingers to keyboard), there are a few key tips and tricks that you need to keep in mind.

Writing an effective engagement letter can help ensure all parties involved remain on the same page throughout the duration of the project, eliminating questions and miscommunications along the way. Here's a list of our top tips for writing an effective engagement letter.

Start With A Template

Templates are your ticket to faster, more accurate documentation. A well-written and lawyer-reviewed engagement letter template saves you time and provides a legal basis for the agreement.

Make sure to read through the template thoroughly, adjusting it as needed for your specific situation. Be sure to include all necessary terms, such as payment schedule details, timeline expectations, deliverables, and deadlines.

Tip: Don't forget to leverage our extensive library of reviewed document templates! We've got contracts, proposals, engagement letters, and more.

Customize For Each Engagement

Depending on the business you operate, each client situation is likely to have unique aspects that need to be addressed. Be sure to customize your engagement letter for each specific client and project, rather than using the same generic copy.

If you choose to use templates for your engagement letters, make sure you leave blank fields in all the places that will be unique to each engagement. That way, you can quickly and easily fill in the details specific to that project before sending it out.

Be Clear and Concise

Clarity is the golden standard when writing an engagement letter. Your client should be able to quickly and easily understand what is expected of them, as well as what they can expect from you. Keep your language simple and avoid legal jargon or overly technical terms.

Also, make sure the document is concise and to the point – don't include any unnecessary information. Client testimonials and other marketing materials should be saved for value propositions.

Provide Sufficient Detail

Though you want to be as concise as possible, this doesn't mean that you should leave out important details. Be sure to include all key information, such as any payment terms, the scope of work, timeline expectations, and more. Explicitly state the consequences for failing to meet the agreed-upon expectations or deadlines.

There's a simple rule of thumb you can follow here: keep filler words and statements to a minimum but make sure that the important stuff is clearly laid out.

Be Specific About Responsibilities

Engagement letters shouldn't leave a single detail to chance. You don't want to find yourself in a situation where one party doesn't know what's expected of them. To avoid any such confusion, be sure to provide as much detail as possible about the responsibilities each party has in relation to the project.

The key here is to set limits on your services. If you're an HR consultant, what do you really mean by 'recruiting assistance'? Does that involve searching for candidates, screening resumes, and conducting interviews? Do you draw the line at industry research, or will you be providing HR advice as well?

These are all questions that need to be answered and written into the engagement letter so there's no room for misinterpretation.

Get Legal Assistance

Any document that has the potential to impact you legally should be reviewed by a lawyer. Your engagement letter might be the most important document in your working relationship with your client (other than the contract), so make sure it's reviewed by an attorney to ensure that you are fully protected.

Engagement letters should be viewed as a legal document, not just a way to start off your relationship on the right foot. You can never be too careful when it comes to protecting yourself and your business!

FAQs

How can I find a good engagement letter template?

You can find excellent, lawyer-reviewed templates here on our website. Bonsai users have free access to an enriched library of templates – and not just engagement letters, but contracts, proposals, and more.

Otherwise, you can draft your own template or hire a lawyer to draft one for you.

Should I use a lawyer to review my engagement letter?

Yes. An engagement letter is a legally binding document, so you'll want to have it reviewed by an attorney before sending it out to your clients. This will help ensure that all parties involved are on the same page and that you're fully protected in case of any disputes.

What should I do if a client wants to negotiate the engagement letter?

Negotiations are a normal part of any contract or agreement. If you feel comfortable doing so, you can negotiate certain aspects of the engagement letter with your client. However, keep in mind that any changes should still be reviewed by an attorney to ensure they don't conflict with existing laws or put you at legal risk.

The Bottom Line

Engagement letters are an important part of any business relationship. They set the tone for your working relationship and provide clarity on expectations, responsibilities, and deliverables.

Be sure to follow our tips for writing effective engagement letters – from leveraging templates to getting legal help when needed.

By taking the time to craft an effective engagement letter, you'll create a strong foundation for your working relationship and protect yourself when it matters most.

FAQs

What is the purpose of an engagement letter?

Much like a contract, an engagement letter is a document that outlines the specifics of your working relationship. It typically includes information such as the scope of the project, timeline, payment terms, and other important details.

What should be included in an engagement letter?

Your engagement letter should include an executive summary, scope of services, timeline, payment terms, termination conditions, a non-disclosure agreement, and the relevant legal framework.

How do I write an effective engagement letter?

When writing an effective engagement letter, it’s important to be as detailed and specific as possible. Provide clear expectations for both parties, outline any risks or contingencies, and make sure all of the relevant information is included. Additionally, you should consider leveraging a template if available – this can help speed up the process and ensure that you don’t miss any important details.

What are the consequences of not using an engagement letter?

If you don’t use an engagement letter, it can be difficult to resolve any disputes that may arise during your working relationship. Not having a formal agreement means that one party could take advantage of the other, leading to costly legal battles down the line.

Can I use a generic engagement letter for all clients?

It’s not recommended to use a generic engagement letter for all clients. Every client and project is different, and your document should reflect that. Take the time to customize your engagement letter based on the specific needs of each client or project.

Learn everything you need to know about writing engagement letters with Bonsai.
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