How to Draft an Engagement Letter (With Benefits and Template)

By Indeed Editorial Team

Published 16 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

An engagement letter is a legal document that specifies the interaction between a company providing services and its clients. It establishes the conditions of a two-party agreement and provides details such as the scope, obligations and costs involved. Learning to draft a letter of engagement can help you enhance your service quality by providing clients with clear and accurate information about what services you're providing them on behalf of your employer. In this article, we explore what an engagement letter is, describe its benefits and share the format to use when creating one.

What's an engagement letter?

An engagement letter is a commitment in which a company agrees to deliver services to a client. The letter is a condensed contract that briefly defines the services being offered and the compensation expected in return for these services. Letters of engagement are often necessary for businesses that provide accounting, consulting and legal services.

It's necessary for both parties to have their authorised representatives sign a letter of engagement for it to be legally binding. The letter addresses the responsibilities of the parties involved in the agreement. These responsibilities include the specific services expected by a service provider, including any deadlines and performance requirements, the precise amount and timing of payments expected from the client, any performance guarantees and how either party may cancel the contract.

Related: How to Write a Business Letter (With Tips and an Example)

What are the benefits of a letter of engagement?

The key benefit of employing an engagement letter is that it informs customers about the level of service they may anticipate from a firm. Businesses of all types may use letters of engagement to initiate interactions with their clients at the start of a service or transaction arrangement. Here are various benefits of using letters of engagement:

  • Establishes expectations: When clients and service providers understand what to expect from the other party during a project, both parties can better execute and cooperate towards achieving set goals within a timeline.

  • Assists with project management: A written document outlining the scope of a project can help the involved parties track duties, assign resources and set milestones.

  • Prevents confusion: A letter of engagement ensures both parties are aware of and have agreed to the terms of an arrangement. This can help ensure both parties contribute their required duties under an arrangement.

  • Decreases business risk: Letters of engagement are usually legally binding, so if one party violates the conditions of the signed agreement, the offended party can use the letter as supporting evidence in legal proceedings.

  • Establishes trust: Communicating expectations and limits with clients in writing helps with the establishment of long-term trust.

Related: How to Head a Letter for Professional Correspondence

What to include in a letter of engagement?

Here are various components found in letters of engagement:

Client information

Professional firms normally include the contact information of the client and their representative at the top of the letter. The representative of a client is often someone in an executive position, such as a director. Adding a representative helps increase their sense of responsibility, which reduces the risk of a breach of terms for the service provider.

Introduction

The opening to a letter of engagement informs the client of the letter's objective and establishes the tone of the letter. It's important to keep the introduction clear and concise. Briefly explain that the letter aims to record significant terms of a business engagement, such as the scope and cost of services to be provided.

Scope of engagement

Defining the extent of services to be provided is one of the most important objectives of a letter of engagement. Ensure that the client fully understands what services are to be performed under the existing payment terms. A bulleted list of tasks is a common method of outlining the scope of a project. A letter of engagement may include the following information:

  • Services to be provided: Use this section of the letter to describe the services being offered to the client. There are often provisions for extra services that require additional costs from the client.

  • Duration of engagement: This section informs a client how long the services under an engagement are going to be provided for. You can set exact dates or it can be based on milestones, such as setting the duration of an engagement to last until you achieve a certain goal.

  • A disclaimer: A disclaimer outlines what a service provider isn't responsible or liable for under an engagement. This helps protect service providers from responsibility in situations that aren't within their control.

Fees

Service providers usually clearly outline their fee structure in a letter of engagement and may use a single lump sum or provide a formula for fee calculation, such as on an hourly basis. A letter of engagement often includes the following details regarding fees:

  • total fee

  • fee calculations

  • upfront payment

  • penalties for breaches of terms, such as late payment

  • any discounts provided

  • additional fees for any auxiliary services

  • reimbursement for overtime

Related: 16 Types of Business Letters to Boost Your Written Communication

Client's responsibilities

When a service provider and client negotiate terms of an engagement, a client may agree to contribute resources to assist the service provider in performing their task more efficiently. You can include this responsibility in a letter of engagement to ensure a client provides support. For example, a client may agree to offer office space for a service provider to establish a team within a company's office. This can help protect the service provider in case the client doesn't provide the agreed-upon resources.

Clauses governing termination and refunds

A letter of engagement usually specifies a termination clause, as it's common for agreements to be cancelled early. Termination clauses allow for parties to end an agreement on more applicable terms without initiating any legal action. These terms often include situations where a refund by a service provider or compensation by a client is required.

Confirmation of terms and signing

A letter of engagement usually concludes with the signatures of the representatives of the client and the service provider. This shows that both parties have agreed to accept legal responsibility under the terms outlined in a letter of engagement. An engagement usually starts immediately after the parties sign and date a letter, unless there are specific provisions stating otherwise.

Related: Professional Business Letter Format (with Examples)

Template for letter of engagement

Below is a template for a letter of engagement:

[Client name]
[Client address]
[Client contact information]

[Subject]

Dear [Client name],

The purpose of this letter is to confirm that [name of service provider] is being appointed as [role of service provider] for the [name of project] project based on our discussions on [date of initial engagement discussions]. Under this engagement, we're going to provide the following services:

  • [Services to be provided]

  • [Services to be provided]

  • [Services to be provided]

Please find a detailed breakdown of our billing and reporting methods attached for your convenience. The fees for services rendered by our team are:

  • [Position]: [Rate per hour]

  • [Position]: [Rate per hour]

  • [Position]: [Rate per hour]

[Name of service provider] may also charge fees for expenses incurred on your behalf for the [name of project] project.
Our expectations of you are:

  • [List any expectations]

  • [List any expectations]

  • [List any expectations]

[Name of service provider] bills for fees and expenses on a monthly basis and requires payment within 30 days of receipt of an invoice. Failure to make timely payments may result [name of company] withdrawing from its role as [role of service provider] for the [Name of project] project, without notice. Your primary contact is [name of service provider's representative]. Please contact them directly if you have any questions regarding this project.
[Name of company] is not being appointed to deliver the following services:

  • [services that are outside the scope of the representation]

  • [services that are outside the scope of the representation]

  • [services that are outside the scope of the representation]

Here's the approximate timeline expected for the [name of project] project:

  • [milestone with expected date of completion]

  • [milestone with expected date of completion]

  • [milestone with expected date of completion]

I have sent a copy of the initial meeting minutes for your records. Please notify [name of service provider's representative] promptly if any of the information is inaccurate.
If you have any questions, please contact [name of service provider's representative]. On behalf of [name of service provider], we're happy to be appointed as [role of service provider] for the [name of project] project.

Yours Sincerely,
[Signature of service provider's representative]
[Name of service provider's representative]
[Name of service provider]
[Date of signing]

[Client name] agrees to all of the terms and conditions as outlined in this letter of engagement.
[Signature of client's representative]
[Name of client's representative]
[Name of client]
[Date of signing]

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