Getting started with client engagement letters in the United States
Client engagement letters are not just a great tool for managing client expectations.
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Client engagement refers to a variety of interactions between a professional service provider and their customers. Interactions can take the shape of email communications or an impromptu chat, Instagram posts or a formal contract – anything that constitutes communication, passive or direct. The formal contract component of this in an engagement letter is not only a great tool to manage the expectations of your client relationships, but as an accountant or bookkeeper they are likely a vital step in staying compliant.
What should my letter include?
Your engagement letter should detail the services that you are expected to provide and how frequently you will provide them.
While the engagement is a vital step in onboarding new clients, it is a process that should not be confined to the beginning of a relationship. To continue to build strong and transparent relationships you need to implement a system of regular re-engagement, repricing, and rescoping, with most accounting regulators and member bodies advocating for a minimum of annual reengagement.
A regular re-engagement process not only creates an opportunity for you to assess your current services and fees, it is an ideal opportunity to discuss with your clients changes in their business or situation which may require a need for different or additional ongoing services. It’s one more way that you can continue to build your client relationships and at the same time increase your service revenue and manage your scope.
In fact, it is nearly impossible to manage scope and mitigate scope creep if your engagements are not kept up to date and regularly reviewed. Without a process of re-engagement when services and client situations change, your baseline to determine if something is in scope, or out of scope, will be wrong. You will find yourself consistently undertaking work with both parties (yourself and your client) unsure if it is “included” in your current agreement or if there will be an extra cost, and potentially extra responsibilities. Whenever you undertake new work without a signed engagement you not only run the risk of not getting paid for unapproved works, but you create a situation where you and your clients' understanding of services can become misaligned potentially leading to a dispute.
While the engagement is a vital step in onboarding new clients, it is a process that should not be confined to the beginning of a relationship. To continue to build strong and transparent relationships you need to implement a system of regular re-engagement, repricing, and rescoping, with most accounting regulators and member bodies advocating for a minimum of annual reengagement.
A regular re-engagement process not only creates an opportunity for you to assess your current services and fees, it is an ideal opportunity to discuss with your clients changes in their business or situation which may require a need for different or additional ongoing services. It’s one more way that you can continue to build your client relationships and at the same time increase your service revenue and manage your scope.
In fact, it is nearly impossible to manage scope and mitigate scope creep if your engagements are not kept up to date and regularly reviewed. Without a process of re-engagement when services and client situations change, your baseline to determine if something is in scope, or out of scope, will be wrong. You will find yourself consistently undertaking work with both parties (yourself and your client) unsure if it is “included” in your current agreement or if there will be an extra cost, and potentially extra responsibilities. Whenever you undertake new work without a signed engagement you not only run the risk of not getting paid for unapproved works, but you create a situation where you and your clients' understanding of services can become misaligned potentially leading to a dispute.
Who governs and guides the contents of my engagement letter in the US?
Guidance will vary based on your registration but broadly speaking, accountants in public practice are guided by (take a deep breath) the American Institute of Certified Public Accountants Code of Professional Conduct, Statements on Standards for Tax Services, Statements on Standards of Accounting and Reviewing Services, Statements on Standards for Accounting and Review Services on Auditing Statements and Circular 230.
Individual states may also provide guidance regarding engagement letters. Moreover, some providers may solicit guidance from non-government-organizations, such as their professional liability insurance carrier. In reality, there is little meaningful difference between sources of guidance
In summary, engagement letters are required for all attest services. Other standards do not require a service letter by name and instead require the CPA to establish an understanding with the client encapsulating the services to be performed.
Who do I need to engage?
Broadly speaking, you should aim to engage all of your clients. Engagement letters should be signed by both the service recipient and/or a responsible party designated to sign on behalf of the company.
In some cases, you may also be required to send multiple engagement letters to the same client. For example, accounting practice is governed by a separate set of standards to tax services. Again, taking the time to detail your service offering will illuminate the relevant governing bodies and standards.
How often do I need to engage my clients?
Engagement letters can encapsulate a specific period of time – annually, for example – or be recurring. The AICPA recommends service providers operate within a specific period of time, in order to trigger the Statute of Limitations. This limits the potential establishment of liability resulting from client’s allegations of continuous representation by a firm.
Annually reviewing your engagements also gives you the opportunity to assess the finer points of your service relationship. This could mean reassessing fees, reviewing the scope of your work or even offering new services to existing clients. While it might seem exhaustive, try to envision how much time you could stand to gain by adopting this practice. Imagine how situations where clients raised fee disputes or voiced issues with your service could be remedied by a clear, binding engagement that explains the responsibilities of all parties involved.
Annually reviewing your engagements also gives you the opportunity to assess the finer points of your service relationship. This could mean reassessing fees, reviewing the scope of your work or even offering new services to existing clients. While it might seem exhaustive, try to envision how much time you could stand to gain by adopting this practice. Imagine how situations where clients raised fee disputes or voiced issues with your service could be remedied by a clear, binding engagement that explains the responsibilities of all parties involved.
Pricing reviews and annual engagements
The beauty of implementing a process of a minimum of annual re-engagements is the opportunity to review your pricing on at least an annual basis. A pricing review is more than undertaking a basis rollover of existing engagements. It occurs when a practice reviews the basis of their pricing in great detail. This process will include adjusting your pricing to reflect:
- Any changes in the cost of firm operations such as staffing, occupancy and general office expenses.
- Movements in the Consumer Price Index (CPI) which reflects overall costs of living
This process is relevant to all practices regardless of billing model. Both fixed fee and hourly rate firms should undertake this process to keep up with the global increases in the cost of delivering your services, ensuring ongoing profitability.
- Any changes in the cost of firm operations such as staffing, occupancy and general office expenses.
- Movements in the Consumer Price Index (CPI) which reflects overall costs of living
This process is relevant to all practices regardless of billing model. Both fixed fee and hourly rate firms should undertake this process to keep up with the global increases in the cost of delivering your services, ensuring ongoing profitability.
The role engagements play in cashflow
Accountants and bookkeepers understand that part of running any business includes cash flow management, however they often don't spend enough time doing this for their own business. Luckily Ignition and an effective engagement strategy can assist. For service providers, a key item for healthy cash flow is keeping your receivables as low as possible, and within terms.
Engagement Letters are the best way to both safeguard your position and cash flow without damaging client relationships, especially when combined with regular invoicing and taking control of payments.
Your engagement letter should include your regularity of invoicing. The more often you invoice and take payments the better, which is why monthly recurring billing arrangements are becoming more popular. If your clients are on a monthly fixed fee arrangement, you are only ever at risk for that one month’s work.
If you find you have underquoted a job, then you should also communicate this quickly with your clients, so there is no surprise if an invoice is higher than expected. Ensure there is a mechanism to do this in your engagement letter and you have the ability to vary the fee if during the engagement additional information comes to light or circumstances change. Surprise invoices often hang around longer in the debtor ledger, as clients were not prepared to pay for them.
Engagement Letters are the best way to both safeguard your position and cash flow without damaging client relationships, especially when combined with regular invoicing and taking control of payments.
Your engagement letter should include your regularity of invoicing. The more often you invoice and take payments the better, which is why monthly recurring billing arrangements are becoming more popular. If your clients are on a monthly fixed fee arrangement, you are only ever at risk for that one month’s work.
If you find you have underquoted a job, then you should also communicate this quickly with your clients, so there is no surprise if an invoice is higher than expected. Ensure there is a mechanism to do this in your engagement letter and you have the ability to vary the fee if during the engagement additional information comes to light or circumstances change. Surprise invoices often hang around longer in the debtor ledger, as clients were not prepared to pay for them.
Take payment details upfront
If you provide your clients with a clear engagement and payment terms there are very few reasons why they cannot also provide their payments details. By implementing upfront payment, you’ll eliminate late payments – thereby increasing your cash flow.
The way you introduce this to your clients will differ depending on your billing practices. You can do this whether you invoice a set amount each month for all annual services or if you bill on task and job completion.
If you operate on a monthly recurring fees basis, it is simple to take control of your payments, as your client has already agreed to the pricing structure. By taking your clients’ payment details upfront and automatically processing their payments each month, you’ll ensure that your cash flow never suffers. Plus, you can also avoid the unpleasant situation of having to temporarily put a halt on work when your latest invoice hasn’t been paid.
Taking payment details upfront is a similarly useful strategy for clients who operate on a bill on completion basis, whether fixed fee or time billing. For fixed fees the process is quite simple as you have already agreed on a price. If you operate using time-based billing you can still do this. Simply provide your clients with a price range or an hourly rate, all of which can then be billed on completion once the work has been finalized.
You can also eliminate push back from your clients on this by implementing a policy of taking payment on the due date of the invoice as opposed to the date you raise the invoice. This will allow your clients to raise any questions that have between the job completion date and the due date of the invoice, which should keep everybody happy.
The way you introduce this to your clients will differ depending on your billing practices. You can do this whether you invoice a set amount each month for all annual services or if you bill on task and job completion.
If you operate on a monthly recurring fees basis, it is simple to take control of your payments, as your client has already agreed to the pricing structure. By taking your clients’ payment details upfront and automatically processing their payments each month, you’ll ensure that your cash flow never suffers. Plus, you can also avoid the unpleasant situation of having to temporarily put a halt on work when your latest invoice hasn’t been paid.
Taking payment details upfront is a similarly useful strategy for clients who operate on a bill on completion basis, whether fixed fee or time billing. For fixed fees the process is quite simple as you have already agreed on a price. If you operate using time-based billing you can still do this. Simply provide your clients with a price range or an hourly rate, all of which can then be billed on completion once the work has been finalized.
You can also eliminate push back from your clients on this by implementing a policy of taking payment on the due date of the invoice as opposed to the date you raise the invoice. This will allow your clients to raise any questions that have between the job completion date and the due date of the invoice, which should keep everybody happy.
Find out more by reading our expert guide on 'How to take control of client relationships with engagement letters'.
Ignition is here to help
The most successful client relationships are built on trust, open communication, and realistic expectation-setting. Understanding your client's needs, pain points, and objectives is key to determining the solution you can offer.
Further, keeping the feedback loop open indicates your commitment to improve and grow with them. Clients appreciate an openness to feedback and a willingness to learn and improve. Follow the steps mentioned above to build lasting relationships with your clients and to keep your professional services business thriving.
To that end, Ignition helps you create exceptional client experiences and foster win-win relationships. With features that facilitate proposals, billing, and client management, Ignition’s client engagement and commerce platform makes doing business a breeze. Start a free trial today.
