What Is an Engagement Letter?
An engagement letter is a formal agreement that defines a professional relationship between a company or firm and a new client. It describes the scope of work, outlines the payment structure, and includes key terms like effective date, termination clauses, and confidential information protection.
An engagement letter is less complex than a contract and becomes binding once both parties sign it. It prevents misunderstandings and sets clear expectations, especially in professional services like accounting, consulting, legal work, and more.
When to Use an Engagement Letter
You should use an engagement whenever a business relationship involves the exchange of services, especially when:
- You’re onboarding a new client and need to outline the expectations upfront
- You’re entering an ongoing or project-based engagement and want to clarify the scope, fees, obligations, and end date
- You want a record of what was agreed upon, including how to terminate the agreement or handle dispute resolution
For creative or one-time work, consider using a freelance contract.
How Does an Engagement Letter Work?
Here’s how the engagement letter process works:
- The company or client drafts the letter template, including all necessary information
- The engagement letter outlines terms such as confidential information, termination conditions, liability, and what happens in the event of a dispute
- The draft is sent to the service provider via mail or email, who reviews it and may request changes
- Both parties sign the letter, making it a legally binding document
Engagement Letter vs. Contract: What’s the Difference?
While both documents outline the terms of a business relationship, an engagement letter is less formal and more focused on the specific services being provided. A contract is more comprehensive and detailed and is often used when a higher level of legal enforceability is required. Engagement letters are for simpler service arrangements, while business contracts are for complex or long-term agreements.
| Feature | Engagement Letter | Contract |
|---|---|---|
| Formality | Less formal | More formal |
| Purpose | Defines services, scope, and terms | Establishes detailed legal obligations |
| Length & Complexity | Short and straightforward | Often longer with more legal language |
| Legal Binding | Becomes binding when signed | Legally binding once accepted |
| Amendments | Easier to update or modify | Formal amendments or addendums usually required |
| Use Case | One-time or straightforward service engagements | Long-term, complex, or high-risk agreements |
How to Write an Engagement Letter
To write an engagement letter, you need to include essential information such as contact information, the purpose of the letter, and the details about the scope of services provided. Follow these steps to write a clear engagement letter:
- Include Contact Details: List the full names, titles, addresses, phone numbers, and emails of both the company representative and the contractor.
- State the Purpose of the Letter: Begin with a short paragraph confirming the engagement and describing the nature of the relationship.
- Detail the Scope of Services: Clearly outline the work the contractor will perform. Be specific about deliverables and responsibilities.
- Define the Contract Term: Provide a start date and end date for the engagement or note if the arrangement is ongoing.
- Specify Compensation: Detail how the contractor will be paid, including rates, payment schedule and any invoicing requirements.
- Clarify Contractor Status: Note that the contractor is not an employee and is responsible for their own taxes, insurance, and benefits.
- Add a Confidentiality Clause: Include a section stating that the contractor must protect any confidential or proprietary information.
- Outline Termination Terms: Explain how either party can end the agreement, including any required notice period or grounds for immediate termination.
- Finalize with Signatures: Include space for both parties to sign and date the letter to confirm mutual agreement.
Sample Engagement Letter
Below, you can see an engagement letter sample. You can customize this template to meet your needs and download it in PDF or Word format.
