What is an engagement letter? (Plus purpose and benefits)

By Indeed Editorial Team

Published 14 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Engagement letters are one of many types of documentation used by businesses. Understanding what each document is and what circumstances require a particular type of documentation is integral to the daily running and long-term growth of a company. Engagement letters are among the most commonly used types of business letters, so it's vital that you know what an engagement letter is and what it's used for. In this article, we answer, 'What is an engagement letter?', describe how an engagement letter works and list the benefits of using engagement letters.

What is an engagement letter?

An engagement letter is a type of formal written agreement. It's a type of documentation that depicts a business relationship that is entered into by both a company and a client. The purpose of an engagement letter is to set out in writing the terms of the agreement in full, including any stipulations, costs and expectations of both parties.

An important element to note about engagement letters is that they're often regarded as less formal than a contract. Despite this, most people still consider engagement letters to be legally binding. Take them seriously. Engagement letters are viable and likely to uphold in a court of law.

Related: What is a non-compete agreement? (A comprehensive guide)

What is the purpose of an engagement letter?

An engagement letter serves the same purpose as a contract in most instances. An engagement letter functions as a legal document that confirms the relationship between two parties and defines the terms set out between the two parties in order for the relationship to be active. Engagement letters work by avoiding any legal jargon and instead, setting out an agreement in simple and brief terms. In the world of business, parties that exchange and sign an engagement letter consider that as closing the deal. A formal contract may or may not follow the engagement letter to expand on the terms.

Related: What is an employee contract? (Plus types and benefits)

What to include in an engagement letter

Though it varies depending on the agreement being set out, engagement letters have the same set of information. This information includes:

  • terms and conditions

  • deliverables

  • compensation

  • deadlines

Engagement letters often have secondary purposes, such as limiting a company's scope to define exactly what products or services you are offering to the client. This allows clients to know exactly what they can and can't expect from the business; this is especially crucial if the company provides multiple services but is only offering one within the agreement.

Related: How to negotiate successfully (plus tips and its importance)

What are the benefits of an engagement letter?

Engagement letters have many benefits. When written well, engagement letters are concise and straightforward depictions of a newly entered business deal between a company and a client. Knowing the advantages of an engagement letter is useful for understanding which engagement letter is necessary. Here are some benefits:

Helps to set expectations

One of the most appealing factors of an engagement letter is that it clearly and resolutely sets out the expectations of everyone involved. This helps to minimise any confusion in the future if questions arise. Setting expectations either as a company or client is essential as it improves communication, which leads to a healthier and more productive relationship.

Provides reassurance to both parties

As with any legally binding documentation, engagement letters provide great levels of reassurance. If something within the agreement requires clarification, both parties can have confidence that their sides of the partnership are clearly and explicitly outlined in writing. This can also act as a protective measure if relations between the two parties sour or dissolve.

Defines boundaries

When working with clients, many businesses require confidence that both parties have clearly defined boundaries in place. Whether they're providing services or products, companies benefit from communicating to clients exactly what an agreement does and doesn't entail. This is because some clients may try to gain more than what both parties agreed to or some companies may try to do less than what both parties agreed to. By having both expectations and boundaries in place, businesses can efficiently and swiftly resolve matters.

Proves to be legally binding in court

If one party is taking another party to court over a matter relating to the relationship between both parties, engagement letters are essential documents. As they're legally binding pieces of documentation, engagement letters offer concrete evidence regarding the agreement. This is because they outline all the terms and conditions relating to the agreement, thus showing exactly what all those involved agreed to.

Outlines each of the costs

Alongside communicating each of the terms and conditions and any additional stipulations, engagement letters often additionally outline the costs relating to a project or service. This is useful because it prevents any unexpected costs, which neither the company nor the client wishes to encounter. Engagement letters provide a dry cut of each of the costs, ensuring that both parties have confidence in their deal.

Provides guidance regarding disputes

If a company or client encounters a dispute with the other party, engagement letters are incredibly useful. This is because they often contain guidance regarding what to do in the event of a dispute. Depending on the agreement, many scenarios of conflict have pre-written resolutions. This provides everyone involved with a clear set of instructions that hopefully leads to a swift and mutually beneficial resolution.

Related: How to mediate conflicts (with definitions and steps)

How to write an engagement letter

Writing an engagement letter is a straightforward process. This is because of several reasons, including the fact that engagement letters don't include legal jargon, unlike contracts. As long as you know what to include in an engagement letter and can write in a formal and professional tone, writing one can be simple. Here is how to write an engagement letter:

1. Start with a clear introduction

All engagement letters begin with a clear introduction. This introduction opens with a greeting to the other party, whether that is the client or a company. The next step is to identify both your name and position of work and relevance to the agreement at hand.

2. Define the scope of work

The next step is to define the scope of work. This means that you succinctly define what the promise and where the boundaries sit on what isn't on offer. One of the most effective ways to outline the scope of work is by using a list of bullet points identifying each of the tasks up for completion. Clear points help to avoid any chance of misinterpretation.

3. Set out a timeline

Following on from the scope of work, a timeline is next to outline in writing. This timeline includes the expected deadlines for the delivery of each service or product. It may also include any important milestones and when you forecast the partnership to end based on the conclusion of a service or an alternative agreement.

4. List the payment terms

When writing out the payment terms relating to a partnership, be as specific as possible. This is a protective measure that maximises the chance of receiving payment if the agreement dissolves for any reason. It is also important to include the terms regarding late fees, termination costs and any other financial elements.

Related: How to write a proposal with a successful structure

5. Describe expectations of the other party

This is the section where you describe what each party takes responsibility for. As engagement letters are most commonly written by companies, this likely entails what you expect the client o deliver. Most often, this is payment for goods or services. You may choose to include other expectations, such as supplementary materials or timelines necessary to provide the product or service.

6. Describe what the other party can expect from you

Following on from this, you now describe what you're providing and what the other party can expect from you. In most situations, this is the provision of a service or products; they may expect multiple deliverables or just a single one. Aim to be as clear as possible when stating what you intend to deliver.

7. Obtain signatures from all involved

Once you have drafted the engagement letter, the final step is to proofread the letter to ensure that you have included all relevant information for both parties. From there, it requires signatures of those involved from both parties. This makes the engagement letter legally binding and usable in court.

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