An engagement letter is an agreement for a services firm to provide services to a client. The letter is essentially an abbreviated contract that defines the services to be performed, and the amount of compensation to be paid. Engagement letters are commonly required by services firms engaged in tax, audit, finance, consulting, and legal advice.
An engagement letter must be signed by authorized representatives of both parties before it is considered to be a legally binding arrangement. Since this letter is treated as a contract, it should address the obligations of both parties, including the following issues:
- The exact services to be provided, including any due dates
- Performance criteria
- The exact amount and timing of payments to be made by the client
- Any warranties of performance
- How either party can terminate the contract
An engagement letter can be used when one or both parties are not willing to enter into a more detailed contractual arrangement.