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April 27, 2011

Engagement letters vs. statements of work

This post was written by LegalBizDev Principals Mike Egnatchik, Tom Kane, and Jim Hassett.

At the beginning of a new matter, lawyers often specify its scope and fees in an engagement letter.  The engagement letter is designed to clarify exactly what is included, and excluded, from a particular matter.

Some states have specific requirements for what must be included in an engagement letter, and some firms have their own requirements as well. For example, in New York State, Part 1215 of the Joint Rules of the Appellate Division requires a letter of engagement in most matters, except for certain exceptions listed in the rule (i.e., an engagement letter is not required if the fee is expected to be $3,000 or less). 

From a project management point of view, there is considerable room for improvement in many engagement letters.  Consider, for example, this language from the sample letter of engagement published by New York State:

Scope of representation

A claim, dispute or dealings with relating to ______________.

All of our services in this matter will end, unless otherwise agreed upon in a writing signed by us, when there is a final agreement, settlement, decision or judgment by the court.  Not included within the scope of our representation are appeals from any judgments or orders of the court.  Appeals are subject to separate discussion and negotiation between our firm and you.  Also not included in the scope of this agreement are services you may request of us in connection with any other matter, action, or proceeding. 

The rest of New York’s two-page sample focuses on fees and client rights.  Fee options for the sample include a flat fee, a contingency, or hourly rates.

If a law firm copied the New York State sample exactly and negotiated a fixed fee, they might end up being very sorry when the matter spiraled out of control.  They would be better protected if the engagement letter specified timelines and deliverables, such as the maximum number of interviews, pleadings, interrogatories, opinions, and reports, the anticipated scope of travel and research, the use of outside consultants, and so on.

Could a lawyer possibly know in advance how many depositions would be required to settle or plead a particular case?  Of course not.  But he or she could specify the maximum number of depositions they expected, and exactly what would be included within the fixed price. 

This failure to provide sufficient detail is quite common.  The Executive Director of one AmLaw 100 firm (who preferred to remain anonymous) recently told us:

“The scope of work often contained in our engagement letters is generally no more than one or two lines.  Lawyers are missing an opportunity to clearly specify the scope of what is included in each matter, and what is not.”

From the client perspective, better specifying the work up front could lead to more predictable costs and a more sophisticated understanding of what they are paying for.  From the law firm’s point of view, it could reduce fee disputes, write-downs and write-offs. 

Entire textbooks have been written on how to develop what project managers call a statement of work (SOW), which specifies what a particular project includes and excludes.  (For example, see Delivering Project Excellence with the Statement of Work by Michael Martin.)  Lawyers may wish to adapt some of these ideas and write a SOW which could either be included in the engagement letter or be a separate document, depending on the nature of the matter, the lawyer-client relationship, and joint expectations.

This post has been adapted from the second edition of the Legal Project Management Quick Reference Guide, which will be published in May.

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