On the 10/15 episode of QB Power Hour, Michelle Long, CPA, and I talk about a VERY important subject to us: Engagement Letters (By the way, if you call them “Service Contract” or Fixed-Price Agreement,” that is ok. We refer to those terms, too). And, the area of focus is not so much to “nail” the perfect generic language of the Engagement Letter itself, but rather, to focus on personalizing them in such a way that you (the accounting professional) actually wrote it from scratch*.

The first step is to identify all the Internal and External factors that affect the client’s impression of your firm, and truly understand who/what you represent as your firm:

The second step is to identify your pricing methodology, whether it is Hourly Fees or Value Pricing. It’s important to think about BOTH sides of the equation here, not just what your strategic goals are as a firm, but also how you want to ultimately use pricing as the driver of both profit and customer satisfaction:

Why some accountants prefer Value Pricing:

  • Not penalized as staff members get increasingly better and faster at doing their job
  • No burden of timesheets and time logging
  • Can justify a higher overall billing as client is willing to pay more for a guaranteed outcome

Why some accountants prefer Hourly Fee:

  • Afraid of changing the traditional systems
  • Harder to calculate job by job “profitability” based on time inputs
  • Afraid of getting “burned” by a poorly priced engagement (Downside protection)

Why clients prefer Value Pricing:

  • Guaranteed outcome or performance based on specific expectation
  • Perception that an accounting professional is 100% aligned with a client’s needs
  • Upside protection (knowing the maximum costs of services)

Why some clients prefer Hourly Fee:

  • Clients are used to paying professional fees in hourly (or even 6-minute) increments
  • Perception of lower overcall cost because there is always a chance the job will take less time than expected

The third step is to have a detail conversation with your new potential client about the following topics before drafting the letter:

  • Marketing & Branding: sets the expectations about what you and your firm represent, in terms of the quality/price* scale. What is your new client’s perception of the value you bring to the table, before you start your on-boarding process?
  • Presentation of Services: expectations about skills, capabilities and outcome. Does the client know or understand everything you can, or will, do for them? And, what you will not or cannot do?
  • Timeframe: setting expectations about capacity. Does the client know or understand how long will it take for work to be completed and service to be delivered?
  • Client Involvement and/or Requirementsset the expectation of a tradeoff. Does the client know or understand what their role is in the engagement, and what they need to bring or deliver before the work starts and ends? What time/staff commitments does the client need to set aside?
  • Disclaimers: set the expectations for the unknown and potential risk. Does the client have a clear understanding of what your work may or may not cause in the future? AVOID IMPLICIT ASSURANCES!
  • Pricing & Payment Terms: clear pricing and definite payment terms sets the expectations of priority.

During this stage, ask your client what they perceive to be a HIGH QUALITY accounting service, and do not be surprised to get a generic answer like “accurate” or “compliant:”

But, when you shift that conversation to “what is a highly VALUABLE accounting service to you?,” you tend to get really interesting answers, and, at that point, you really begin your relationship with your client. All these topics help you manage the potential “Expectations Gap,” which is often due to implicit assumptions that both parties make about what the service actually is and the roles that both sides of the transaction play, in order to allow for the proper completion of the project.

Lastly, drafting the Engagement Letter, service contract or Fixed-Price Agreement will generally have this structure:

  • Define the parties involved
  • Define scope of work and/or outcomes, as well as specific exclusions (such as audit representation, etc.)
  • Specify work, time, effort and/or documentation that is required from the client and due dates – ramifications if you miss deadlines
  • Define price or pricing scheme & payment terms
  • Disclaim the inexplicit potential expectations the client may have
  • Constraints or potential causes for timing and/or quality shortfalls
  • Ability to cancel or withdraw from the contract by either party. Or, if there is service guarantee

My favorite format/style of writing is the “What we do” style. I call it ”The Why/What/When/How/Who technique,” which replaces the typical legalese with Lamen/understandable language, titling each section as the following:

  • Why are we doing this? It is good to recap the conversations, pain points, and how and under what circumstances someone came to you for help. For example: “After revising your QuickBooks Online file at out office on 10/16/2015, you stated that you had a low level of confidence on the completeness and accuracy of your books that the previous part-time bookkeeper had entered. You want us to take over the outsourced bookkeeper’s role in a monthly basis to lift your level of confidence in your books and financial reports.”
  • What we will do? Typically, this requires spelling out the specific work you are being hired to do. For example: “Reconcile the bank account.”
  • What we will not do? These are the things that you, as a firm, just do NOT do, or are not willing to do even if paid for. For example: “Open your mail, and actually pay the bill with your checkbook.”
  • What we could do? This is for items that we could be hired to do in the middle of the engagements, but explicitly excluded from scope of work, thus rendering an additional fee. For Example: “We could be hired to research every single deposit slip to breakdown deposits, based on customers and/or jobs being paid for item by item … but, this is not within the agreed upon scope of work”
  • When will we start the work? The start date of the project is typically bound by conditions. For example: “After you have given us all the bank statements from January 2015 to September 2015 for all your bank accounts and credit card accounts, together with all images of checks issued and all images of deposit slips, we can get started with the project.”
  • When we will complete the work by? Expected completion date.
  • How we will do it? I like explaining the process (without writing a “accounting for dummies” book). For example: “We are going to login to your QBO from our offices at any time during the day, when we are available between the start state and expected completion date, and our work consists of reconciling all accounts that are accompanied by a statement from a financial institution, voiding uncleared checks in the accounting system from more than 6 months ago, categorizing all the expenses, etc.”
  • Who will do it? – IF there are multiple contact people in the firm, is i5 good to list the people and their positions, plus what typical roles they will have during the engagement?

Once you have a couple of good templates for Engagement Letters for different types of services, think about implementing a strong client on-boarding process that integrates your engagement letter language with all factors and stages of your sales cycle:

  • Marketing/Lead generation
  • Lead management, follow up and closing of the sale
  • Services Presentation (Engagement Letter or Fixed-Price Agreement)
  • Collection of Payment (Get a deposit or retain upfront)
  • Service completion and delivery (Project Management)
  • Ask for referrals -> Marketing / Lead Generation

*We recommend that you see your attorney to give you the final advice as to what specific language is required for the Engagement Letter or Contract to be enforceable in court, and offer the desired protection you require.

On my QuickBooks Training Blog, I have a page with several resources and links to sample letters. Feel free to check them out. Also, do not miss the recorded episode of QB Power Hour, where we explain this entire process in detail and show a couple of good examples of Engagement Letter. Watch it here, or by clicking the image below:


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