Why Your Business Needs a Legally-Binding Engagement Letter

Often businesses kick off a new relationship with a client using a contract. But contracts can be wordy and overly formal. An engagement letter can outline everything much more succinctly than a contract while also serving as a protection throughout your time working together. Here are a few reasons to put an engagement letter in place for every working relationship, as well as what you need to include as you write one.

Outline Expectations

Perhaps the most important job the engagement letter does is fully outline the scope of the work, as well as the expectations all parties have. Include a list of the services you’ll provide and the timeline for any deliverables. It should include your hourly rate and the expected maximum number of days after invoicing that you expect payment. 

By doing this from the outset, you’ll be able to avoid unpleasant surprises. Chances are, your client will request a change or two before signing the engagement letter, serving as the perfect jumping-off point for important conversations.

Legal Protection

Ideally, every client relationship will go smoothly. However, on the off chance that things go awry, having an engagement letter will provide the legal backing you need if legal counsel does get involved. Even knowing you have a written agreement in place could lead the client to avoid scope creep and pay all bills in a timely manner.

But one reason many businesses put an engagement letter in place from the start is that some insurers require it. If you have errors and omissions insurance, you may be required to keep an engagement letter on file for each client.

Providing an “Out”

What happens if you realize a client relationship isn’t working out? If you’ve signed a legal document like an engagement letter, that can be complicated, especially if you’re being paid based on milestones rather than based on an hourly rate. An engagement letter can include a termination clause that specifies the terms under which the agreement can be severed.

In addition to outlining the conditions under which either party can terminate your relationship, make sure you specify how payment will be handled. If you required a deposit, account for how the portion of that deposit will be refunded based on the stage at which things ended. 

An engagement letter is a great way to put legal protections in place without bogging yourself and your clients down with paperwork. With the right wording, you’ll have an engagement letter that will help you create winning business relationships. You can start with a good template and customize it to meet your own needs.

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