Creating An Engagement Letter for Your Small Business
What Is An Engagement Letter?
An engagement letter is essentially a contract in the form of a letter. Sometimes the legalities of entering a business relationship can be intimidating, which an engagement letter can alleviate. It briefly — but accurately — describes the project or services to be delivered, deadlines, compensation and more and is legally binding in any business deal.
What Is the Purpose of an Engagement Letter?
It’s important to set expectations before beginning any business deal. The client will know how a service will be completed, how much it will cost and when it will be completed while also assuring you will be paid fairly for your work.
An engagement letter also covers you and the client in case mediation is needed for any disputes that come up or if the project is terminated early. Engagement letters serve a bigger purpose than contracts because they:
- Help set expectations between you and your clients so everything is clear and transparent from the start.
- Reduce scope creep by identifying how you and the client will proceed if more work is needed.
- Reduce liability and risk especially in terms of professional liability insurance.
For longer-term projects, you’ll likely need to update your engagement letter as time goes on and get it resigned as-needed. This also gives room for any changes you need to make in the letter, such as hourly rate, mandated hours, scope of work and more.
How to Write Your Engagement Letter
- A Good Introduction
Open with a grateful greeting thanking your clients for their business. Identify yourself, your position and your proposal of work (i.e. “I, John Doe, a certified financial adviser in the State of Georgia, propose to complete the following project for ABC Productions.”).
- Identify the Scope of Work
Make sure you’re specifying what you promised to deliver, what the payment process is like, when your invoices will be sent, etc. Your client should be able to fully understand what you will and will not do based on previous discussion. A good idea to make things clear is using a bulleted list of tasks.
- Identify How Long It Will Take
It’s important to note how long the project will take so your client knows when to expect it by. Highlight the due date so everyone can mark it in their calendars and follow up if needed throughout the project.
- Write Out the Payment Terms
For this section, be very specific on how and when you want to be paid. Give your hourly rate and highlight the project costs if you charge a flat rate. Let your client know how often you’d like to get paid or if you’d rather get paid in one lump sum, so they’ll keep an eye out for the invoice(s). Spell out any late payments fees, early termination fees or even discounts/reimbursements in case you’re late delivering the project. Looking for simple invoicing tools that allow online credit card payments? Try Kabbage Payments! With Kabbage Payments, you can easily and quickly send an invoice as soon as you’ve finished your work
- Include What You Need from the Client
Before you can start working, make sure you have everything you need. Evaluate the project you’re working on and list out what you need from the client and by when. This can include access to key accounts, contact information for any important points of contact, payment dates, kickoff meeting dates, etc.
- Include What the Client Needs from You
You’ll also need to know what the client needs from you. Discuss this before creating the engagement letter, and be sure to include what they need and when once you draft it up. This can include access to software, reports, presentations, etc. If you’ve discussed a non-compete clause, request them to send it your way in the letter.
- Obtain Signatures from Both Parties
This one is self-explanatory, but make sure both parties read through the engagement letter thoroughly, agree with it or any changes that come up and sign the document before work can begin.
- A Good Introduction
Engagement letters are important tools service businesses need to grow. Without them, you run the risk of missing out on payments, getting late payments, being tasked outside of the scope you discussed with the client and more. Make sure you follow the best practices and include each of these in your letter to ensure you begin your work with the best foot forward.