Business consultants often use an engagement letter to facilitate a working relationship with their clients. Dating back to the Renaissance era, this type of letter was initially used by musicians to show their patrons that they were interested in an ongoing business relationship.
An engagement letter may be used when the parties are unsure whether a contract will be formed. It is also used when there is uncertainty in the minds of the parties on how the contract should be structured. For example, an engagement letter in business sales might describe terms by which an intermediary facilitates business transactions between two individuals or organizations.
What is an Engagement Letter?
An engagement letter is a contract that initializes the commercial relationship between a client and a company. An engagement letter specifies the company’s work for the client and at what price. The agreement also explains how much money will be paid in the event of a breach of contract or bankruptcy of one party.
The importance of an engagement letter
Let’s take a look at the importance of a letter of engagement and how it can help you build your business.
It binds the relationship or partnership legally.
The document is signed by both parties and establishes an enforceable contract between them. The agreement will specify what tasks will be done, who will do them, when they must be completed and how much it will cost. This helps avoid misunderstandings about what needs to be done and when it needs to be done by. It also ensures that both parties understand their responsibilities under the agreement.
It sets the expectations.
Engagement letters define what both parties expect from each other and how they will work together to deliver on those expectations. This helps avoid any misunderstandings that may arise during the course of working together. In addition, clearly understanding what is expected from each party helps you determine whether you want to continue working with them. You can also use this opportunity to discuss any issues that might arise during your collaboration so that there are no surprises later on when it comes time for payment or delivery.
It prevents miscommunication
When you are working with a client, there is always the chance of miscommunication between you and them. This could lead to serious problems later on in your business relationship. By having an engagement letter template, you will be able to prevent this from happening, as it clearly outlines what both sides expect from each other. You can use it as a reference point if any dispute arises between the two parties involved in this contract.
What to include in your engagement letter?
The following information should be included in your letter of engagement template:
Your company name and address should be included at the beginning of the letter.
Scope of services
List all the services you will provide as part of your agreement with your client. For example, if you are an accounting firm and you have been engaged to perform an audit on behalf of a company, then it is appropriate to list all types of services that the auditing firm provides. This includes tax compliance, accounting services, financial management, etc.
Specify the period for which you will provide services to your client. This will help both parties know when their agreement ends by indicating how many months or years have passed since their initial meeting or signing a contract together.
The fee structure section should set out the hourly rate, any additional charges, and whether or not there is an initial consultation fee. You may also want to include any travel or accommodation costs incurred during the engagement.
In this section, you can outline what you will be doing for your client and how much time it will take. This can help you avoid misunderstandings and give them peace of mind that they are getting what they paid for. It also helps to prevent overbilling and ensures that both parties have clarity on what is expected from each other throughout the engagement period.
From the start, you should make it clear what professional standards are expected from you and your client. This prevents any confusion about work quality later down the line regarding deliverables such as reports or presentations.
Confirmation of terms
This section should confirm the terms you and your client agreed upon during your initial meeting or correspondence. It should also include any changes that have been made from the original agreement. For example, if you agreed to provide a certain service at a certain price, you are now increasing the price due to recent market conditions. This section will allow you to do so without having to rewrite the entire document from scratch.
How to prepare an engagement letter?
An engagement letter is a formal document that all consulting companies and audit firms use to confirm their work with a client. It is not legally binding, but it does assure that both parties understand the terms of engagement and will follow them throughout the project.
In fact, it’s unwise to conduct an audit when you only have a verbal agreement. A written engagement letter can be used as evidence in case of disputes or misunderstandings.
An engagement letter should include all the necessary details about the engagement and its purpose, such as:
- The name of your firm and its address;
- The name and contact details of your client (if applicable);
- The date on which you started working with this client;
- The date on which you plan to finish working with him/her.
Creating an engagement letter can be confusing and tedious, but it doesn’t have to be if you use the right steps. Given the amount of paperwork to be managed, business contracts are tools that are highly exploited even by small businesses. After completing all these stages, let’s move on to writing an effective engagement letter:
Think about the objectives of your letter
The objective of your engagement letter should be to state clearly what you intend to achieve and how much it will cost your client. If there is more than one engagement letter, each one should specify its own objectives and its relationship with other letters.
State the responsibilities of management
Make sure that management understands their responsibilities for carrying out audits compliant with local regulations, such as Sarbanes-Oxley Act 2002 in the US or European IFRSs. In addition, make sure they understand their obligations under any contracts they might have entered into with their auditors (e.g., confidentiality agreements). Finally, confirm that management has been appointed.
State your responsibilities as an auditor, such as reviewing the client’s financial statements, preparing reports based on your findings, and advising management on how they can improve their financial position.
Any limitations of your engagement
Indicate that you may not be able to perform certain tasks due to time or other restrictions (e.g., if there are no records available). Also, mention whether there are any restrictions regarding confidentiality or information sharing with other parties involved in the audit process (e.g., attorneys).
State hiring restrictions
If possible, include a clause stating that hiring another company to perform work related to your engagement will not violate any contractual obligations held by both parties.
How does an engagement letter work?
Engagement letters can be used for all types of services, including accounting and auditing. They are commonly used by auditors of public companies who provide their service under an engagement letter.
The short note can be used in various matters like a construction contract to specifically state the role of an individual. It may also state whether or not compensation is required for the service. In some cases, an engagement letter might also serve to define the scope of services to be provided. A well-written letter can save time and money for both parties and avoid a lot of complications that would occur due to misinterpretation later.
It helps manage expectations by setting clear policies and guidelines for your business.
Clients are less likely to request changes after signing an engagement letter.
You don’t have to worry about having unexpected surprises with pricing or scope creep because you’ve already laid out everything in advance.
The engagement letter ensures that all parties know what to expect from one another going forward, which should reduce stress and help maintain goodwill between everyone involved.
Here are some examples of situations where it’s useful to have an engagement letter:
When you’re working as a contractor for an agency or company, in this case, the letter should outline what services you’ll be providing, your timeline for completing them, and deadlines for submitting invoices. It should also specify how much money you’ll be paid for each task and the total amount owed to you at the end of each month.
When you’re starting your own business (or hiring employees), if you’re starting a new business or hiring employees, it can be very beneficial to create an engagement letter that explains what tasks will be covered by each person on staff so that everyone knows what they’re responsible for doing. This can help avoid misunderstandings when one employee isn’t doing their share of work or is failing to meet deadlines.