Engagement Letter Template

An engagement letter is a written agreement that records the business relationship that a client and independent contractor (service provider) will soon enter.

The client and service provider use this document to set expectations in their business arrangement, ensure both parties have a mutual understanding, and create a reference point for the terms of their agreement. It can also help avoid the legal jargon associated with traditional contracts and allow for simpler updates/corrections.

How an Engagement Letter Works

Here’s how an engagement letter typically works:

1. The client prepares and writes the letter, addressing the independent contractor and proposing a work offer. They typically use this agreement for services like financial advisory, consulting, law, and accounting, but it can encompass a more extensive range of professional services.
2. The client lists essential details relating to the potential arrangement, including the scope of services provided, terms and conditions, payment schedule, client responsibilities, and confidentiality/privacy standards.
3. The client sends the letter to the independent contractor. The independent contractor can review the letter and propose changes as they deem necessary.
4. The independent contractor signs the letter, and the service provider’s signature indicates that they agree with the proposed terms. While an engagement letter isn’t legally binding at first, it becomes legally binding when both parties sign, indicating a mutual acceptance of the terms with acceptable consideration.

When to Use an Engagement Letter

Here are some scenarios when using an engagement letter could be useful:

• New Client Engagements: It’s best practice to use an engagement letter at the beginning of the business arrangement before the independent contractor initiates any work. In doing so, you ensure the client and the independent contractor know what they are getting into and can discuss any changes before starting work.
• Ongoing Arrangements: This letter can be used to record an ongoing arrangement between a contractor and a client. It lets you record the scope of work for the independent contractor over the extended period and the quality you’d like them to uphold in future services.
• Project-Based Services: This letter can also document the details of one-time projects or specific tasks, ensuring independent contractors and clients are aligned in their expectations.

Is an Engagement Letter the Same as a Contract?

No. While an engagement letter and a business contract are documents that an independent contractor and a client review prior to the commencement of service, they have key differences:

• Purpose:
  • Engagement Letter: Defines the scope of services, expectations, and responsibilities of each party.
  • Contract: Establishes legally binding obligations, including recourse for breaches, written notice requirements for termination, and who assumes responsibility for administrative fees.
• Formality:
  • Engagement Letter: Less formal but can become a written contract if the independent contractor signs the document, signaling their acceptance of the terms.
  • Contract: More formal and comprehensive.
• Scope:
  • Engagement Letter: Documents the services the contractor will perform, the fees the client will pay, and the timelines for the work.
  • Contract: Records the broader aspects of the business relationship, including dispute resolution, work delivery, indemnification, and warranties.
• Revisions:
  • Engagement Letter: Allows for amendments and modifications to the scope of services if both parties agree.
  • Contract: Requires more formal amendments or addendums to modify the agreement’s terms.
• Legal Implications
  • Engagement Letter: Clarifies expectations but usually doesn’t create legal obligations unless the independent contractor signs it.
  • Contract: Establishes legally enforceable rights and obligations after both parties accept the terms and is subject to legal enforcement and interpretation.

Which Should You Choose?

Deciding between an engagement letter and a business contract depends on the professional relationship’s circumstances and the level of legal enforceability and formality that the parties desire.

It may be helpful to begin a professional arrangement with an engagement letter. Later, the parties can transition to using a more formal business contract when the relationship evolves or when they want more detailed legal protections in place.

Sample Engagement Letter