Definition and Explanation of Terms: Estimate
Ein Estimate is a forward-looking, written or oral calculation of the likely costs for a planned service or delivery. Legally, an estimate is the detailed listing and estimation of cost items including materials, labor, incidental expenses, and any additional services, which is presented to the contractual partner either for clarification or with binding effect prior to conclusion of the contract. The estimate serves particularly as a basis for concluding the contract as well as providing transparency regarding the anticipated fee or payment claim.
Legal Nature of the Estimate
The estimate does not constitute a separate contractual relationship but is to be classified as an ancillary part of the pre-contractual or ongoing obligation. The legal qualification depends on whether it concerns a binding or non-binding estimate.
Non-binding Estimate
A non-binding estimate is to be understood as a mere cost estimation. The costs stated therein are not guaranteed as final. Exceeding the estimated costs within a permissible margin is generally considered acceptable by case law, provided that significant deviations are communicated to the client in good time and the overrun is objectively justified.
Binding Estimate
If an estimate is described as binding, this is to be interpreted as a legally binding guarantee of the total remuneration. Cost overruns in relation to the binding estimate may generally not be subsequently claimed by the contractor, unless a case of error or unforeseeable circumstances arises and the client has been duly informed in advance.
Legal Provisions Concerning Estimates in Germany
German Civil Code (BGB)
Das German Civil Code (BGB) contains no explicit statutory provisions regarding estimates, but binding principles arise in particular from the regulations governing contracts for work and services (§§ 631 ff. BGB), service contracts, and the general provisions of the law of obligations.
Section 650 BGB – Estimate
According to § 650 BGB, in contracts for work and services, the contractor may prepare an estimate, with the assumption of costs depending on the respective agreement. As a rule, the estimate must be reimbursed when there is an express agreement between the parties or the preparation of an estimate serves the interest of the client and the amount is proportionate.
Gratuitousness of the Estimate
An estimate is regularly to be prepared free of charge unless compensation for it has been expressly agreed upon. Such an agreement usually requires written form in order to prevent later disputes. Simple, standardized, or minor estimates are especially free of charge, while a complex calculation (for example, for complicated technical projects) may be subject to compensation.
Exceeding the Estimate
A significant exceeding of a non-binding estimate obliges the contractor pursuant to § 650 para. 2 BGB to notify the client of the additional costs without delay. If this notification is omitted, the client may demand compensation for the resulting damage or withdraw from the contract. An overrun of more than 15 to 20 percent is usually considered significant.
Right of Withdrawal in Case of Overruns
If, after the contract is concluded, it becomes apparent that the execution will be significantly more expensive than foreseen in the estimate, the client may assert an extraordinary right of termination pursuant to §§ 313, 314, and 648 BGB, in which case the work performed up to that point must be compensated.
Special Provisions in Other Legal Areas
Procurement Law and Public Contracting
In the public sector, especially in procurement law and in public construction contracts, the estimate plays a prominent role. Here, the estimate serves the standardized determination of the anticipated costs and the comparability of bids, and must be prepared and reviewed in accordance with the requirements of the procurement regulations.
Crafts Law
In crafts law, contractors are obliged to prepare an estimate for the consumer free of charge upon request and before conclusion of a contract, provided that a service of substantial scope and value is involved (§ 650 BGB in conjunction with § 3 HandwO).
Consumer Protection
According to the principles of consumer protection a contractor must inform the consumer of the possibility and content of an estimate before the utilization of a chargeable service. Specifically, § 650 BGB as well as the Distance Selling Act entail special obligations to provide information in this respect.
Difference from an Offer
Although estimate and offer are often used interchangeably in everyday language, there are significant legal differences. While the offer constitutes a legally binding declaration of intent to conclude a contract at the stated price, the estimate is merely a calculation of costs without immediate binding effect as to the price. If a contract is concluded on the basis of an estimate, the binding effect of the offer may, however, extend to the estimate.
Requirements for the Content of an Estimate
A qualified estimate should contain at least the following details:
- Full names of the parties (contractor and client)
- Description of the scope of services
- Individual calculation items (material, labor time, incidental costs)
- Total amount and currency
- Note as to whether the estimate is binding or non-binding
- Date of preparation and term of validity of the estimate
If the indication of binding nature is missing, it is generally assumed to be non-binding.
Evidentiary Function and Burden of Explanation
The estimate has a significant evidentiary function in the context of disputes concerning the appropriateness of the invoiced costs and services. In civil proceedings, the estimate serves as evidence for the agreed scope of services and price level. The burden of presentation and proof for a significant cost overrun lies with the contractor who invokes the necessity.
International Aspects
Comparable rules regarding estimates can also be found in other legal orders, especially within the European internal market. The terminology and procedures may vary, however; particularly in Anglo-American jurisdictions, the terms “estimate” or “quotation” are more commonly used, with corresponding peculiarities in their legal classification.
Conclusion
An estimate is a central instrument for financial planning, transparency, and risk allocation in the context of contracts for work and services. Its legal significance lies especially in protecting the client against unexpected additional costs and in its clear distinction from binding offers. Precise wording, clear statements regarding binding nature, and comprehensive information for the contractual partner are essential requirements to avoid later disputes regarding liability and billing. Anyone preparing or receiving an estimate should carefully observe the legal distinctions and the associated rights and obligations.
Frequently Asked Questions
What are the legal requirements for an estimate?
An estimate is generally not subject to any special form requirement, but can be given either orally or in writing. In practice, written form is always recommended for reasons of evidence and to clarify mutual rights and obligations. Legally, an estimate must be drafted so as to enable the client to clearly understand the nature, scope, and expected cost of the service. It should contain essential information such as description of services, quantities, prices (including or excluding VAT), period of validity, any incidental services, and other conditions. In addition, the estimate must specify whether it is a non-binding cost estimate or a binding fixed price. A binding estimate may only be exceeded within the agreed price constraints, provided the contractor complies with statutory requirements (e.g., timely notice of additional costs under § 650 BGB for contracts for work and services).
How does the law distinguish between a binding and a non-binding estimate?
German law makes a clear distinction between binding and non-binding estimates. A binding estimate obliges the contractor to perform the service at the specified price, unless unforeseen circumstances justify an adjustment. In cases of significant deviations, the contractor must inform the client without delay; otherwise, he bears the risk for additional costs. A non-binding cost estimate, on the other hand, merely represents an estimation; the actual price to be paid may differ. However, this deviation must not unreasonably breach the basis of calculation or the legitimate expectation of the customer (see § 650 para. 2 BGB). Even in this case, the contractor is legally required to inform the client when an overrun becomes foreseeable.
Does the client have a right to receive and review the calculation bases underlying the estimate?
Legally, the client is basically not entitled to full disclosure of all internal calculation bases underlying the estimate, unless this has been individually or by industry agreed upon. However, the estimate must, according to good faith (§ 242 BGB), be sufficiently transparent that the client is able to understand the offered service and its cost components to be invoiced. The client may request evidence if there are justified doubts about the appropriateness of particular items, such as in cases of unusual material prices or hourly rates, provided this is for the purpose of price review or to justify a complaint. For public contracts, specific procurement and contract regulations (such as VOL/A or VOB/B) apply, which may impose further transparency obligations.
Can a contractor charge a fee for a written estimate?
Whether a contractor may charge a fee for preparing a cost estimate essentially depends on the content and effort of the calculation as well as on an explicit note regarding potential cost liability. As a rule, a cost estimate is considered a free service prior to conclusion of a contract, unless it involves substantial preparatory work which necessitates special calculation or planning. According to § 632 para. 3 BGB, a payment may only be demanded if this has been agreed upon in advance or has been clearly communicated to the client. Without the relevant notice prior to issuing the estimate, the preparation is usually free of charge. In case of dispute, the contractor bears the burden of proof that compensation was owed.
What are the legal consequences of a significant exceeding of the estimate?
If the actual effort significantly exceeds the estimate of a non-binding cost estimate, the contractor is legally obliged to inform the customer of this without delay (§ 650 para. 2 BGB). If this notification is omitted, the customer has various rights: they may withdraw from the contract and must remunerate the services provided to date, or may claim damages if they were not adequately informed by the contractor and suffered financial loss as a result. In the case of a binding cost estimate, there is generally no claim for payment of additional costs by the customer, unless these are due to circumstances not attributable to the contractor and which could not have been foreseen when the estimate was properly calculated.
Is the period of validity of an estimate legally relevant?
The period of validity of an estimate is not legally mandatory, but is of considerable practical importance. If no deadline is specified in the estimate, it is only considered binding as long as a binding period can be reasonably expected according to good faith and usual business practice. Particularly where material prices fluctuate strongly or services are seasonal, it is advisable to stipulate a specific binding period. After expiry of the period of validity, the contractor is no longer bound by the original prices and a new offer or an adjustment to the terms may be required. If the period lapses without acceptance, all contractual obligations based on the estimate lapse.
