Estimate: cost and liability
Money does not grow on trees – sometimes you need to know in advance how much money you need for a paint job, car repair, or a large building project. A cost estimate can serve as a basis for getting an overview of the expected costs, to calculate your budget, and to compare several providers of the same service with each other.
However, many customers are unsure: Does the cost estimate itself cost anything? Is it even binding? And what actually happens if the agent exceeds the estimated sum? We answer these and other questions.
- What is a cost estimate?
- What must be included in a cost estimate?
- How much can a cost estimate cost?
- Is a cost estimate binding?
- Cost estimates vs. quotations
- Summary: detailed overview or fixed calculation basis?
What is a cost estimate?
A cost estimate contains the expected costs required to implement a specific order. On the basis of a relatively accurate estimate, the client can obtain an idea of the price companies are offering their services for and whether the costs incurred (labor and materials, for example) are realistic or affordable.
A cost estimate is a professional calculation carried out by entrepreneurs of the expected costs incurred in the implementation of a service contract.
Estimates are possible in many sectors, but are used in particular in engineering (e.g. construction, crafts, automotive repairs, electrical engineering), finance (e.g. life insurance) and medicine (e.g. dental or medical service) – i.e. in areas where large, high-priced and long-term contracts are common. In these cases, consumer protectors generally recommend obtaining a detailed cost estimate that lists all cost items transparently and comprehensibly before the final contract is awarded.
What must be included in a cost estimate?
The estimated costs should be used as guidelines or approximate estimates. The cost estimate must include a breakdown of the basis on which these estimates are calculated:
A professional cost estimate should therefore always be formulated in writing and contain the following information:
- The nature and extent of the work to be carried out
- The working time that will be needed to do this
- The cost of the labor force employed
- The necessary material and the associated costs
Read the information in the cost estimate very carefully in order to find gross errors like slipped decimal places in monetary amounts (e.g. $1,100.00 instead of $110.00) before you place the order, otherwise disputes may arise at later stages.
In addition, many companies offer their customers several options when quoting costs, which they can select or deselect at will in order to influence the quoted price – for example, for insurance packages.
Are you a business owner? Then you might be interested in our free Word template for cost estimates.
How much can a cost estimate cost?
Preparing a cost estimate can take a certain amount of time, and many companies understandably want to be remunerated for this – especially when it comes to extensive planning, complex calculations, or even drafts. A fee for this service should always be agreed upon before the work is undertaken – it is common to agree on a fixed sum or a set amount, e.g. 10% of the order value. These fees are normally refunded when a contract is concluded or offset against the order. If the customer does not agree to the fee, the service provider can refuse to issue the cost estimate.
Is a cost estimate binding?
No. As a customer, you can and should formally accept the cost estimate by signing it, in order to have a basis for negotiation in the event of a dispute. However, the contract concluded with this content is legally non-binding for both parties. This means that the service provider does not have to guarantee the estimated costs’ accuracy, since it concerns just an estimate, not the final price (this is different with an offer). However, this circumstance is not always clear to every customer, which is why many companies explicitly state that “The cost estimate is non-binding.”
Nevertheless, deviations from the original agreements do not remain without consequence for the company you have concluded the contract with. However, the decisive factor is whether the costs involved are insignificant or significantly in excess of estimated costs.
Estimate: deviations within an insignificant framework
As a rule, the customer must tolerate a situation in which the actual costs and/or the implementation time of an order deviate to a certain extent from the original cost estimate. Whether this deviation is considered insignificant, however, depends on the individual case. It is generally accepted that an overrun of 10% is still considered insignificant, whereas 10-20% and higher are considered significant.
Cost estimates: the consequences of a significant overrun
However, the inherent non-binding nature of the estimate does not mean that it can be exceeded indefinitely without any consequences. Significant overstepping of the pricing guidelines can result in two consequences:
Information obligation for service providers
As soon as a substantial increase in the cost is foreseen, the service provider should inform the customer immediately. This gives the latter the opportunity to decide whether to continue the contract at a higher price. In this case, the maximum expected exceedance should be contractually stipulated so that it doesn’t become a vicious cycle of new exceedances.
Extraordinary right of termination for customers
The customer’s option to terminate the contractual relationship. This step should be taken if the service provider has intentionally exceeded the cost estimate, failed to comply with information obligations, or if the additional costs could have been avoided. In these cases, customers should seek legal advice as to whether or not they can terminate their contract. In the event of this occurring, the service provider can only claim remuneration corresponding to work already performed, plus any expenses not yet reimbursed.
Cost estimates vs. quotations
Many service providers give the customer a choice: cost estimate or quotation? Here are the differences:
A cost estimate is a list of all anticipated costs and may require a fee. However, since it is not legally binding, the business owner may exceed the estimated sum within a certain framework without having to fear consequences. The cost estimate therefore creates transparency for the customer, but is also associated with a certain calculation risk.
A quote, on the other hand, is always binding, unless it has been explicitly marked as a “non-binding quote.” When the level of research required before issuing a quote is greater, a home or site visit to assess the environment is almost always undertaken. There is also usually a fee for this service. Once accepted by the customer, the service provider will not be able to change it afterwards – they can therefore neither make it more expensive, nor change the terms of service. This gives the customer a certain security with the budget planning.
Summary: detailed overview or fixed calculation basis?
As a customer, you should always obtain a cost estimate for larger orders, as this provides important assistance in making a decision and is also completely non-binding. However, the contractor also benefits from this non-binding nature, so that it is possible that the actual costs exceed the original estimates.
In the event of significant deviations, you can take legal action (depending on the legislation in place in your state – consult a legal professional if you are uncertain) and therefore reduce the financial loss incurred. If you want a more detailed breakdown of costs and want a reliable calculation basis instead, however, you should obtain a binding quotation which cannot be changed by the contractual partner.
Click here for important legal disclaimers.