Definition and legal classification of the cost estimate
Der Cost estimate is a term commonly used in German law and business practices, referring to the anticipated costs of a planned service or work. It serves as a basis for economic planning between the service provider and the client and carries significant legal relevance in both contract law under the German Civil Code (BGB) and in specific legal provisions, such as the law on contracts for work and services or construction law.
Definition and legal foundations
A cost estimate is the projected total cost assessment of a planned service, work, or delivery. Legally, a cost estimate does not necessarily represent a binding commitment regarding costs—its legal quality depends on the specific circumstances, particularly the type, content, and wording of the contractual relationship, as well as the parties’ agreements.
Cost estimate in the law of contracts for work and services (§§ 631 et seq. BGB)
In the law governing contracts for work and services, Section 650 BGB (“Cost estimate”) predominantly regulates the legal framework for cost estimates. Therefore, it is important to distinguish whether a binding (“binding cost estimate”) or a non-binding cost estimate is in place:
- Non-binding cost estimate: A non-binding cost estimate merely represents an estimate of the expected costs. The contractor is not obliged to adhere to the quoted cost estimate, but must determine it according to professional standards and due diligence.
- Binding cost estimate: A binding cost estimate is viewed within the contract as a guarantee or fixed price. Such binding declarations oblige the contractor not to exceed the specified cost limit, unless contractually stipulated or statutory exceptions apply.
In case of doubt, differentiation should be made based on the circumstances of the individual case, the contract design, and the parties’ interests. If no explicit declaration of binding effect is made, the statutory presumption is that it is a non-binding cost estimate.
Duty to inform and obligation to notify
According to Section 650(2) BGB, under a contract for work and services, the contractor has a duty to inform if a significant overrun of the cost estimate becomes foreseeable. If the contractor realizes that the actual costs will likely substantially exceed the announced costs in the cost estimate, they must notify the client without delay.
If the contractor breaches this duty to inform, the client may, pursuant to Section 650(2) sentence 2 BGB, terminate the contract and—depending on fault and extent of the breach—may assert claims for damages or demand a reduction in remuneration.
Costs for preparation of the cost estimate
Whether remuneration can be claimed for preparation of a cost estimate depends on the circumstances of the specific case:
- Remunerated cost estimates: The obligation to pay for the preparation of a cost estimate must be expressly agreed upon. Without such an agreement, preparation of the cost estimate is generally free of charge (§ 632(3) BGB).
- Gratuitousness as the rule: The legislator generally assumes that cost estimates are prepared free of charge, unless a separate remuneration has been agreed upon, or this results from commercial practices or particular circumstances (such as unusual technical or economic effort).
Distinctions from the ‘Kostenvoranschlag’ (formal cost quotation)
Although the terms cost estimate and ‘Kostenvoranschlag’ are often used synonymously in everyday language, they are legally distinct. The ‘Kostenvoranschlag’ is precisely defined in the BGB and other laws and typically relates to contracts for work and services. While the cost estimate indicates the expected total costs, either in overview or detail, the ‘Kostenvoranschlag’ is a prepared, detailed list that sets out all anticipated individual costs.
Legal effects and consequences
Contractual basis and binding effect
Whether the cost estimate becomes part of the binding contractual content depends on whether a fixed price commitment is attached to it. A binding cost estimate acts as a guaranteed assurance. If the actual costs exceed the stated amount, the contractor is generally not entitled to full payment. In the case of a non-binding cost estimate, an overrun up to a degree considered ‘substantial’ is generally possible, but the client has an extraordinary right of termination and may have special rights to price adjustment.
Price increases and participatory rights of the client
If a foreseeable and significant overrun of the cost estimate occurs, as described above, the client must be informed immediately. Should the client exercise their right of termination, the contractor may claim a pro rata remuneration for the services rendered up to the time of termination.
Damages and further claims
If a breach of duty occurs in the preparation or communication of the cost estimate (e.g., incorrect calculation, delayed notification of cost increases), the client may, in addition to rights of rescission or termination, also have claims for damages. The decisive factors here are fault as well as the causal connection between the breach of duty and the damage.
Significance in other areas of law
Construction contract law and VOB/B
In construction contract law, especially according to the German Construction Contract Procedures (VOB/B), the cost estimate plays a central role with respect to construction cost control and contract drafting. The provisions therein, such as those on billing, change orders, or additional and reduced services, partially modify the BGB regulations.
Consumer and trade law
In consumer protection, the cost estimate is important for transparency and information prior to contract conclusion. Under various special legal provisions, offering a cost estimate may be mandatory or a pre-contractual obligation. In trade law, craft businesses are regularly required to provide a cost estimate, which serves as the basis for entering into contracts with consumers.
References and case law
The courts have issued numerous rulings defining the binding nature and participatory obligations related to cost estimates. Leading guidelines and judgments of Germany’s highest courts, especially the Federal Court of Justice (BGH), clarify both the requirements for a cost estimate and the consequences of exceeding costs. Commentaries, such as Palandt and Staudinger on the BGB, address these issues comprehensively.
Summary
The cost estimate is a significant institution in German civil law, playing a central role in the law of contracts for work, construction contracts, and consumer protection law. Its legal nature, binding effect, and the associated rights and obligations of the contracting parties depend essentially on the type, content, and contractual arrangement. Anyone who prepares or relies on a cost estimate should be aware of its legal implications: proper and legally sound handling of the cost estimate is indispensable for balanced and transparent contract design.
Frequently asked questions
Is a cost estimate legally binding?
A cost estimate is usually a non-binding estimate of the expected costs for a specific service or work. Under German law (§ 650 BGB for contracts for work), it must be differentiated whether the cost estimate was explicitly agreed to be binding or non-binding. A non-binding cost estimate is merely a forecast; the contractor may exceed the actual costs within a reasonable margin. However, if a binding (i.e., firmly agreed) cost estimate is provided, it binds both contractor and client, and exceeding it is only permissible in exceptional cases. If the contractor exceeds the binding cost estimate without urgent or unforeseeable reasons, the client may demand a corresponding reduction or, if necessary, even withdraw from the contract. Thus, the precise designation and agreement regarding the degree of binding force are of central importance.
Does the contractor have to inform about a foreseeable cost overrun?
According to Section 650(2) BGB, the contractor is obliged to notify the client without delay if they become aware, or should have become aware through proper diligence, of a significant overrun of the non-binding cost estimate. This obligation serves to protect the client, who should be given the opportunity to decide how to proceed, for instance to terminate the contract, request a price adjustment, or negotiate additional agreements. If the contractor fails to fulfill this duty, they may be held liable for the additional costs, with a potential liability for damages amounting to the difference between the original estimate and the actual costs incurred.
What are the legal consequences of exceeding the cost estimate?
The legal consequences depend on whether the cost estimate was binding or non-binding. For a non-binding cost estimate, the actual, reasonable costs apply. If the contractor substantially exceeds a non-binding cost estimate without timely notice, the client may terminate the contract and is only required to pay for the services provided and the costs incurred up to that point. For a binding cost estimate, additional costs are generally not reimbursable unless they are due to unforeseeable circumstances for which neither party is responsible. Unauthorized overruns may entitle the client to claim damages.
Is there a right to remuneration for the preparation of a cost estimate?
Under German law, the cost estimate is generally free of charge unless otherwise expressly agreed (§ 632(3) BGB). Remuneration for the cost estimate arises only if it has been expressly agreed between the contracting parties in advance. In certain industries, such as trades or with extensive planning services, it is customary to demand separate remuneration for the effort involved in cost determination, but this must be transparent and agreed in advance.
Can the customer terminate the contract if costs are exceeded?
Yes, in the case of a substantial overrun of a non-binding cost estimate that was not timely communicated to the customer, the customer has the right to extraordinary termination under § 650(2) sentence 2 BGB. In such a case, they are only obliged to pay for the services provided up to the date of termination and the relevant expenses incurred by the contractor. The courts usually consider an excess of about 15 to 20 percent over the originally stated cost framework to be substantial, although the individual circumstances must always be taken into account.
How does a ‘Kostenvoranschlag’ differ from a fixed-price agreement legally?
A ‘Kostenvoranschlag’ merely constitutes an estimate (unless otherwise agreed), whereas a fixed-price agreement sets a legally binding upper limit for the service to be rendered. In the case of a fixed-price agreement, the risk of a cost increase is generally borne by the contractor, unless there are exceptional, unforeseeable circumstances. Exceeding the fixed price is usually only possible if the scope of services is subsequently extended or changed and this is expressly agreed. A contract based on a fixed price is much more binding for both parties than a contract with a non-binding cost estimate.
