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The business has set boundaries on the work that is expected to be performed. This is intended to prevent “scope creep,” something that every tax accountant and attorney dreads. The letter may also cite services that lie outside the current agreement but may be added in the future as needed, with an estimate of the costs of these additions. An engagement letter may include a clause regarding mediation or binding arbitration for the relationship. This clause provides guidance for managing any disputes arising between the parties. Special Considerations. If the relationship is long-term, many companies require their engagement letter to be updated and signed again by the client annually. This allows for any changes in the business relationship over time and strengthens the legal standing of the document. It also reminds the client of the scope of the agreement, perhaps forestalling “scope creep.”

What Is an Engagement Letter?

An engagement letter is a written agreement that describes the business relationship to be entered into by a client and a company. The letter details the scope of the agreement, its terms, and costs. The purpose of an engagement letter is to set expectations on both sides of the agreement.

KEY TAKEAWAYS
  • An engagement letter defines a business relationship between two parties.
  • A letter of engagement limits the responsibilities of the company, directly or by inference.
  • A wide range of businesses including attorneys, auditors, accountants, and consultants use engagement letters routinely, whether their clients are individuals or large corporations.

How an Engagement Letter Works

A letter of engagement serves the same purpose as a contract between two parties. However, its format is less formal than a contract and it generally avoids legal jargon.1

The letter is intended to briefly but accurately describe the services to be delivered, the terms and conditions, the deadline or deadlines, and the compensation. A letter of engagement is a legal document binding in a business deal.