Why An Engagement Letter Is Critical To Your Practice

Why An Engagement Letter Is Critical To Your Practice

An engagement letter helps professionals and service providers clarify the nature of their mandate with their clients in a legally binding contract.

Letters of engagement are crucial to protect professionals from malpractice claims or professional liability claims.

You can use an engagement letter to clarify the terms of your mandate, set client expectations and define mutual responsibilities to help you succeed in executing your mandate.

In this article, we will look at the purpose of an engagement letter, why it’s important, what to include in it and more.

You will get to know the essential elements you need to know about an engagement letter.

Are you ready?

Let’s get started…

What is an engagement letter

An engagement letter is a general term referring to a document outlining the relationship between a professional service provider or firm and a client.

The professional or firm can be a lawyer, accountant, CPA, audit firm, tax services, real estate agency, banking firm, investment firm, consulting firm or any other professional services organization.

Engagement letters are typically signed when a client hires a lawyer, accountant or a professional for certain services.

For example, a lawyer will sign an attorney engagement letter or letter of representation with a client to define the scope of legal services he or she will render, how much the services will cost and what are the main terms and conditions related to the mandate.

At the end of the day, the engagement letter is the contract or legally binding document between a professional and the client providing clarity as to each party’s legal obligations and expectations.

What are different types of engagement letters

Generally speaking, the content of an engagement letter follows a standard format across different industries.

In every industry, professionals and firms will adapt their engagement letters to reflect the realities of their industry and the complexities of their services. 

You can have different types of letters of engagement per firm within the same industry or different types per industry. 

To name a few, here are different types of engagement letters:

  1. Audit engagement letter
  2. Bookkeeping engagement letter
  3. CPA engagement letter
  4. Consulting engagement letter
  5. Accounting engagement letter
  6. Tax engagement letter
  7. Business consulting engagement letter
  8. Attorney engagement letter
  9. Real estate engagement letter
  10. Due diligence engagement letter

As you can see, engagement letters are used in different industries by different types of professionals rendering services to their clients.

The engagement letter can be general or specific depending on the mandate given to the professional.

Let’s understand the difference between a general and a specific letter of engagement.

What is a general engagement letter

A general engagement letter is when a client requires the services of a professional services firm such as an accounting firm or law firm for general or ongoing services.

In other words, the client does not have a specific mandate in mind but requires ongoing professional services support.

In this case, the engagement letter will be set up in such a way that it will be general in scope and define the fees for general and non-specialized services. 

We often see professional firms provide a rate card outlining different rates charged by different professionals based on their level of seniority.

For example, a business hires a law firm to provide general legal services from time to time whenever they have general and varying questions.

With a general mandate, the law firm will provide day-to-day legal support to the business on an as-needed basis.

What is a specific engagement letter

A specific engagement letter is when the professional and the client define a specific mandate.

In this case, the client has a specific objective or specific need and wishes to hire a professional for those specific reasons.

Often, when there is a specific mandate, the professional designated to handle the mandate will have a specific specialization as well.

For example, a company may hire an audit firm for a very specific audit engagement.

Another example is that a law firm is engaged for an intellectual property rights claim or patent litigation.

These are very specific mandates requiring the services of specialized professionals.

Once the specific mandate is completed, the relationship between the professional firm and client will be terminated.

The specific engagement letter has a clearly defined scope along with terms and conditions specifically designed for the specific mandate.

Is an engagement letter required

A letter of engagement is required the same way it is strongly recommended to have a contract in business or complex relationships.

Having a letter of engagement makes the professional relationship with the client crystal clear.

Often, clients may not have the same understanding of a mandate as a lawyer or an accountant.

Some clients may have unrealistic expectations as to what a professional can accomplish and others underestimate the complexity and overall difficulty of a mandate.

To ensure the client understands the nature of the work to be performed, the fees that may be charged and other important aspects of the mandate, an engagement letter is required to put all these terms in writing.

It’s also worth noting that some professional regulatory bodies will require that the professional document the reason why they may have decided to work for a client without a letter of engagement.

When you don’t have a letter of engagement with a client, you may be exposed to a higher level of risk in case the client does not understand the mandate the same way you had initially understood it.

It’s crucial to have a written and signed engagement letter so the relationship between the professional and client is clear at all times.

When should an engagement letter be sent to the client

The engagement letter should be signed right from the beginning of the relationship and before any work is done for a client.

For example, a potential client contacts a lawyer for legal services as they have just been served with a lawsuit.

The prospective client and the lawyer set up an initial preliminary interview at the lawyer’s office to go over the client’s needs.

The lawyer agrees to take accept the mandate and represent the client in court.

Before the lawyer does any work, asks the client to communicate any further confidential information or details about the case, the lawyer should draft an engagement letter defining the scope of the mandate.

If there are important considerations or disclaimers to be made, the lawyer must ensure the clearly outline them in the engagement letter.

In practice, the lawyer will also request that the client pay an initial retainer fee as a condition to start the mandate.

Who prepares an engagement letter

The purpose of engagement letters is to clarify the relationship between the professional and the client.

So who prepares the engagement letter?

In nearly all instances, the engagement letter is prepared by the professional.

This is the case as each law firm, accounting firm, real estate agency or other firm knows their business, understands what needs to be done, knows how much to charge etc.

As a result, when the professional and a client agree on a mandate in principle, the professional service provider will have the engagement letter prepared and sent to the prospective client. 

For example, a law firm will prepare the law firm engagement letter and send that to the client for review and signature before the law firm actively pursues the matter.

What is included in an engagement letter

Engagement letters generally include the following:

  1. Name and contact information of the firm or professional preparing the engagement letter
  2. Outline of the services to be rendered
  3. The period of engagement 
  4. Outline of the professional’s obligations and responsibilities 
  5. Outline of the client’s obligations and responsibilities 
  6. Assumptions based on which the mandate is accepted 
  7. Milestones or deadlines for the accomplishment of certain tasks
  8. Type of professionals and resources that can be used to execute the mandate
  9. Outline of important services required by third-parties or other professionals
  10. Details about the fees, charges and fee structure
  11. Disclaimers about the services to be rendered 

Depending on the type of engagement letter, you may have additional terms and conditions.

For example, an attorney engagement letter will be different than an audit engagement letter.

However, the essential components of the letter of engagement will be similar.

What is the purpose of an engagement letter

The engagement letter is a crucial document outlining the relationship between a professional and a client.

The main purpose is to define what the customer is to expect from the professional.

Often, customers do not have the professional expertise or knowledge to understand the complexities of a mandate.

As a result, a client may underestimate the effort required to accomplish the mandate, the level of difficulty or specialization needed to execute the mandate and may not understand their responsibilities in allowing the mandate to be performed on time.

The purpose of the engagement letter is to protect the professional service provider, on the one hand, but to clarify the essential terms of the mandate for the client.

It’s important to be clear as to the nature of the services that will be rendered, the scope, the fees, the assumptions, the client responsibilities and any important deadline or timelines.

Once these terms are in writing and approved by the client, then the professional service provider will have the assurance that there will be no misunderstanding potentially leading to a complaint or even a malpractice claim.

Engagement letter sample

There are many engagement letter samples you can find online if you are looking at how to write an engagement letter.

Most of the samples or templates are generic and high-level though.

If you are looking to draft an engagement letter for your practice, using a sample may be a good place to start.

Keep in mind that using a sample engagement letter or a template online may cover you for the basics only.

It’s up to you to identify the areas of risk in a mandate and include terms and conditions addressing them.

You should also include terms and conditions to protect you against clients particularly when it relates to:

  1. Clients requiring to collaborate so you can succeed in your mandate
  2. Client responsibilities 
  3. Actions or tasks required to be completed by the client by a specific deadline
  4. Collaboration by your client to help make important decisions

Remember, you need to adapt the sample engagement letter into a document that is going to protect you against potential professional liability claims.

Takeaways

In this article, we discussed all there is to know about engagement letters.

An engagement letter is a document outlining the terms and conditions based on which a professional service provider, such as a lawyer, accounting or consultant, will render services for a client.

The importance of engagement letters cannot be underestimated.

The engagement letter is a legally binding document, essentially a contract, between a professional and his or her client.

It is important to have a written engagement letter before the commencement of the work for the following reasons:

  1. It is the contract defining the legal relationship between a professional and a client
  2. It’s a document that ensures your client appreciates the effort required, complexities and sets expectations
  3. It’s a document that allows you to ensure you keep the client within the parameters of the scoped mandate and avoid any scope-creep scenarios at the professional’s expense

Clients are likely to file a complaint against a professional service provider because the fee structure was not clear or they do not believe the professional rendered the services properly or based on the mandate given.

However, to successfully execute a mandate, often, clients need to collaborate with the professional, make important decisions in a timely fashion, provide information before certain deadlines and stay within the parameters of the initial mandate.

If the client’s responsibilities and obligations are not clear, you have fertile grounds leading to potential complaints and claims.

Once the client engagement letter is in writing and signed right from the outset, chances of professional liability claims, malpractice claims or other types of claims or complaints can be minimized.

Both parties know exactly what is the mandate, what they must do, the deadlines and how much it will cost.

If you put in place a well-documented engagement letter, you have taken the first important step to the successful execution of your mandate for your client.

We hope this article was useful and helped you better understand letters of engagement.

Did you ever enter into a complex letter of engagement with a professional?

What was your experience?

We would love to hear from you, drop us a comment!