What's in your Engagement Letter?
My experience has taught me that effective planning at the onset may yield reduced stress and improve realization. In this edition, we examine various factors that ultimately affect the Receivables Management process in Law Firms. Quite often the scope of engagement is an ongoing process, which may change throughout the course of the matter.
The engagement letter is a contract specifically worded to protect the operations of a firm’s handling of client accounts before, during and after the engagement. In addition to your rates, the letter of engagement must include a clause that governs collection of receivables and the consequences, if the bills are not paid. In developing a collection process we must examine the aging periods for past due accounts; 30, 60, 90 and over 120 days. Although these periods are used for accounting purposes, steps can be taken before, and during these periods to recover fees. Remember not only to implement a multi-step process but be sure to enforce it. If you offer a discount on early payment, remind your clients. If you are going to charge interest; collect it. Where you fail to follow through on business policies, it weakens your position. Advise the client if you accept credit card payment and bank charges associated with it’s use. Communicate call-to-action for accounts 30, 60, 90 and 120 days past due. Payment plan must not exceed three to six months; take into consideration work left to be done on the matter, the amount unpaid and length of delinquency.
Additional factors to consider when drafting Letter of Engagement
Expand on the use of ‘Retainer’. The amount of retainer requested must depend on the client’s reputation and the perceived risk of collecting during the life-cycle of the matter. For new clients, request half of the total fees but where the new client matter is of a higher risk, request 70% of the expected fees. Also, notify clients when the retainer has been depleted by way of an interim bill. Make client visits customary and take note of the business environment. Another factor to determine up front is who is responsible for paying the bill; if the engaging client is acting on behalf of, make additional provisions for payment. Communicate these conditions at the point of engagement and prepare for the exception; non-payment. Be consistent and firm in your approach.
Another area of concern, which must be highlighted in the engagement letter is the client’s payment mechanism. Increased technological advancement have made an impact on businesses globally, hence resulting in most financial transactions being done electronically. Most businesses have implemented a cut off period for monies owed, this is in an effort to better manage their cash flow.
e-Billing platforms have become common business practices, get this information upfront, it saves time and will ensure timely payment of your bills. There are also specific forms that are required when working with international companies, the completion of these forms have a huge impact on taxation. For example, a W-8 form is used by foreign businesses and non-resident aliens earning income from U.S. sources. Its purpose is mainly to let brokers and mutual fund companies know that the person or company in question is not subject to the usual tax withholding from investment Income. American citizens generally do not need to use W 8 forms, nor resident aliens -- instead, they would use the corresponding W-9 form that certifies their tax identification number. Failure to provide a W-8 form when it's required can result in your experiencing a 30% tax withholding, and possibly penalties on top of that.
The foregoing is not an exhaustive list of terms for an engagement letter. Putting time in at the outset of a client relationship to draft a proper engagement letter will save time — and possibly money — down the road. Review and update your engagement letters regularly, making sure each letter is drafted with the particular project in mind.
