An engagement letter is a combination of items – it’s a proposal, contract and listing of services to be provided. It formalizes the relationships between a customer (you or the person needing the services) and service provider (e.g., a consultant). Key items included in an engagement letter include the work to be performed, project deliverables (e.g., presentation, written work) and timing / structure of any payments. Engagement letters are important in several different cases – whether you are trying to buy or sell a business, hiring consultants to evaluate your industry, conduct customer surveys, evaluate new product lines, etc.

In all of these terms, it’s important to be reasonable and compromising. You need to think of what’s fair and be willing to give on points. Part of negotiating is compromising on points you don’t really need nor want, which helps to create good faith. Understanding and negotiating an engagement letter is good practice for someone looking at a businesses for sale. It could be viewed as good prep for negotiating to buy a business.

• Scope of Work
  • This is a description of the work that a provider is going to perform for you. Key items discussed are deliverables and how much of the providers time is required and/or expected.
    • This should include the specific deliverables the provider needs to have for you. For example, does the provider need to provide a written report? an oral presentation? both? Including these include details helps to ensure that the provider and you are on the same page. In other words, defining the deliverables helps to set expectations appropriately.
    • Again, in order to set expectations for both sides, it’s important for the provider to be aware what you expect from a time perspective. For example, do you need the consultant full-time for three weeks?
• Timeframe
  • Engagement letters typically reference a timeline that provides an outline of when the work will begin and any key milestones. In general, a good engagement letter outlines the following:
    • When will the work start?
    • When will it be completed?
    • Are parts due at different time? If you want key datapoints or summaries during the project, you should be sure to include that in the engagement letter. First, it helps to make sure you are receiving good information and a good check that the provider is doing good work.
    • What are you expecting from the provider in terms of response times to your requests? What happens if the provider is late in responding to requests, etc.? these should be clearly outlined in the agreement, particularly the penalty for lack of response.
• Fees
  • It is important to outline the fee structure for the project since you don’t want any misunderstanding over how provider is compensated. Key concepts defined in the fees section include:
    • What’s the billing methodology – hourly, fixed fee, daily, contingent? Is it some combination? Is it something completely different?
    • How much does the project cost? Or, how much is it estimated to cost? It’s important to get an estimate for the number of hours the provider expects the project to take.
      • In addition, it’s a good idea to include language that requires the provider to alert you if it expects to exceed the estimated time (especially if the provider’s compensation is based on hourly rates).
• Travel Expenses
  • Are travel expenses included or billed separately? For example, is travel time included in the billable hours (if methodology is hourly)? Again, you want to be sure you are on the same page with the provider so be precise is outlining what is included / billable.
  • Will the provider receive any reimbursement for out-of-pocket expenses (e.g., special equipment, industry consultants, supplies, etc.)? Again, be specific as this will help to ensure that everyone is on the same page.
• Payment Terms
  • Providers want to know how and when they are going to get paid. Key points addressed typically include:
    • Is a deposit required before the provider will start work?
    • What’s the timing of payments? Are there any key milestones or project deliverables that must be met before a certain payment is made to the provider?
      • Examples include (i) completion of project milestones, (ii) fixed time schedule, (iii) end of project?
    • Do you receive any discount for early payments? It cannot hurt to inquire when trying to negotiate and engagement letter. Some providers may provide a discount because you are paying ahead of schedule.
    • Additional fees assessed for missed / late payments? Obviously, providers want to get paid in prompt fashion so they will want to include a fee for missed or late payments. It’s up to you to make sure the late fees are reasonable.