An engagement letter is a written contract between a professional services firm (attorney, CPA, consultant) and a client that defines the scope of work, fees, responsibilities, and limitations of liability before work begins — the binding starting point of a professional service relationship.
An engagement letter is the professional services equivalent of a construction contract or vendor agreement. Before any work commences, it establishes: (1) scope of services — what is included and explicitly what is excluded; (2) fee structure — hourly rate, flat fee, retainer amount, billing cadence; (3) client responsibilities — documents to provide, decisions to make, timelines to meet; (4) limitation of liability — most professional engagement letters cap the firm's liability at fees paid; (5) dispute resolution — arbitration or jurisdiction provisions; (6) engagement termination — how either party ends the relationship. For CPAs, engagement letters are a professional standard required by AICPA standards (AU-C 210 for audit; AT-C 105 for attestation; CS 100 for compilation/review). For attorneys, most state bar rules require written fee agreements for most representations, particularly contingency and flat-fee arrangements. For business consultants and financial advisors, engagement letters are best practice even when not legally required — they protect both parties from scope creep disputes. For small business owners applying for financing: lenders often request copies of attorney or CPA engagement letters to verify the professional relationships claimed in loan applications. An engagement letter from a CPA also clarifies who prepared and who is responsible for financial statements — relevant when assessing the quality of audited, reviewed, or compiled financials.
Yes — an engagement letter is a contract when it has offer, acceptance, and consideration (the fee). Most engagement letters include signature blocks for both parties. Even unsigned engagement letters can be binding if the client proceeded with the work and paid fees, establishing acceptance by conduct. Dispute the terms before work begins, not after.
An engagement letter defines the scope and terms of a specific engagement. A retainer agreement funds that engagement in advance — the client deposits money (the retainer) that the professional draws down as work is performed. Many engagements combine both in one document: the engagement letter also contains the retainer deposit terms. For ongoing relationships, a general retainer may cover a monthly block of hours without a specific project scope.
Key review points: (1) Is the scope specific — what exactly is included and excluded? (2) Fee cap or not-to-exceed limit? (3) Hourly vs. flat vs. contingency — understand what triggers additional billing. (4) Liability limitation — is it reasonable relative to the fee? (5) Termination clause — can you exit if unsatisfied? (6) Ownership of work product — who owns deliverables after the engagement ends? Get clarification in writing before signing.