Engagement Letter

An engagement letter is a written agreement that defines the working relationship between a service provider and a client. It outlines the scope of work, terms, fees, timelines, and other expectations to reduce ambiguity and limit liability. While usually less formal than a full contract, an engagement letter is legally binding once signed by all parties.

Key points
* Defines scope of services, deliverables, deadlines, compensation, and terms.
* Sets expectations to prevent misunderstandings and “scope creep.”
* Commonly used by attorneys, accountants, auditors, consultants, and other professionals.
* Legally binding when signed.

How it works

An engagement letter functions like a concise contract that communicates what will—and will not—be done. Typical elements include:
* Description of services to be provided
* Specific deliverables and deadlines
* Fee structure, billing terms, and any out-of-pocket costs
* Limitations of scope and exclusions
* Dispute-resolution provisions (e.g., mediation or arbitration)
* Signature lines for all parties

Example: if an attorney is hired to handle a land purchase, the letter will typically limit the attorney’s responsibility to that matter and not cover unrelated legal issues like family law.

Advantages

• Clarifies expectations: clients know what to expect, when, and at what cost.
• Prevents scope creep: clearly defined boundaries reduce unauthorized additional work.
• Reduces disputes: written terms provide evidence of agreed responsibilities.
• Protects both parties: can include clauses for dispute resolution and liability limitation.
• Facilitates project planning and resource allocation for the provider.

Special considerations

• Preparation: service providers usually draft the engagement letter, often with legal input, and present it to the client for signature.
• Timing: issue the letter before work begins.
• Updates: reissue or update the letter whenever the scope, services, or pricing change. Many firms require annual re-signing for ongoing relationships to reflect changes and strengthen legal standing.
• Formality: shorter and less jargon-heavy than a traditional contract, but still enforceable in court when properly executed.

Common questions

Q: Is an engagement letter the same as a contract?
A: It serves the same legal purpose but is typically briefer and less formal. Both can be legally binding.

Q: When does it become legally binding?
A: When signed by all parties.

Q: Who should draft it?
A: The service provider typically drafts the letter, often with legal counsel; the client reviews and signs.

Q: How often should it be updated?
A: Update when scope, fees, or terms change; many providers update annually for ongoing relationships.

Bottom line

An engagement letter is a practical, legally enforceable document that sets clear expectations between a client and a service provider. It reduces misunderstandings, limits liability, and provides a basis for resolving disputes, making it an essential tool for professional and business relationships.