Meaning of Cost Estimate

Meaning of Cost Estimate

A quote is not the same as a quote – there are some significant differences to note. Apart from that, it is an important document because on the one hand it should inform potential customers, on the other hand it should convince them that the order has been placed and, last but not least, be as precise as possible. We have put together for you in this article everything you need to consider when making a good cost estimate.

Cost Estimate definition

You should create a cost estimate to show potential customers how much time and money it would take to carry out your order. It shows all costs and the planned time horizon within which you will provide the desired services. In contrast to an offer , however, the cost estimate is not legally binding. If your customer accepts a binding offer, it has to be complied with exactly. The cost estimate, on the other hand, leaves room for maneuver, which we will go into in more detail below.

Why is a quote being written?

The purpose of a cost estimate is to provide potential clients with a list in advance of which work is likely to take what length of time and the costs involved. So it’s not about a very exact calculation , but about a planning overview. Typically, cost estimates serve as a basis for comparison. Subsequently, you can work it out in more detail with exact offers.

Who has to prepare a cost estimate?

Basically, if someone asks for a cost estimate, you should of course be ready to prepare one. In the course of this, you must also show future customers how they can subsequently place a binding order. Alternatively, you can also point out that the cost estimate does not yet contain any details and that you can create an exact offer again if you are interested. It is important that you communicate very clearly here and include all relevant information, including on how to proceed, in the cost estimate.

What is in the estimate?

In most cases, cost estimates are created for craftsmen’s work, but cost estimates are also common for other larger projects . A distinction must be made between non-binding and binding. In most cases, non-binding cost estimates are created, in which the costs can change somewhat accordingly.

Estimates should be as transparent as possible and therefore contain the following information:

  • Description of the work
  • Costs – if necessary, you can list different hourly rates here, depending on who is doing the work, or lump sums for milestones
  • Working time – an estimate of the total duration of the work is important when clients have specific deadlines in mind
  • Material costs and material description – details on which material and in which quality is included in the price
  • Further procedure – how can an order take place? Which cost fluctuations are common? Will a more precise offer be made? Show in clear words what the next steps are!

Quotation with or without VAT?

This is certainly one of the aspects that repeatedly lead to disputes in everyday life – especially between end users and craftsmen. Because: of course, a cost estimate should above all help you to estimate the actual final price for a service and to be able to plan the available budget accordingly.

But what if the company suddenly demands the estimated amount PLUS VAT ? Depending on the amount of the net sum, there can be considerable differences.

Basically, private customers must always be shown the respective (estimated) final price – including VAT – in the course of a cost estimate. If the said cost estimate is submitted to a company that can claim the tax as input tax again, provided that the contract is concluded, it is sufficient to refer to this.

Furthermore, it is important to underline clear differences to the classic invoice due to the structure and choice of words of the cost estimate . Because: if there is a risk of confusion, the probability is high that the tax office will insist on paying the corresponding sales tax .

To be on the safe side here, the following applies:

  • Private individuals must always be referred to the full invoice amount (including the applicable tax!)
  • Business customers know that the amounts in the estimate are net prices to which the respective tax item has to be added. In order to ensure maximum transparency here, it is helpful to refer to the respective tax rate (7 or 19%?) In a two-line line
  • Confusion with “real invoices” must be avoided – ideally on the basis of clear formulations – in order to avoid misunderstandings in connection with the sales tax burden.

How binding is a cost estimate?

If you have a cost estimate, you want to get the most realistic impression possible of how expensive (or cheap) it will be to carry out a particular order. Accordingly, it can be assumed that this is a legally binding document that the customer can refer to at any time.

However, this assumption is only partially correct. And indeed: the actual costs often do not correspond to the price stated in the cost estimate. As a rule, these documents are therefore initially considered to be non-binding.
Because: this is not a precise list of costs, but rather a preliminary calculation of what “order X” will in all probability cost. Or to put it another way: a cost estimate is only an estimate that is based, among other things, on the experience and prices of the company in question … and should therefore ideally be realistic.

However, there is also an important exception that can make the cost estimate binding: the fixed price agreement. Here you cannot exceed the corresponding amount. Of course, this type of cost estimate represents a high risk, especially for the executing company. The customer, on the other hand, benefits from the opportunity to compare potential contractors with one another even better and to be able to plan their budget even better.

However, if you submit a non-binding cost estimate to your customers, you can exceed this accordingly. But here too, of course, limits must be observed. In addition, as a contractor, you are obliged to inform your customers in good time that the estimated amount has been exceeded. The legal requirements for this are regulated in the BGB. If, for example, the price stated in the cost estimate is significantly exceeded, the customers naturally also have the right to extraordinary termination of the contract.

Tips for creating a cost estimate

A good cost estimate is clearly structured and contains all the relevant information. At the same time, this information should be well prepared, i.e. clearly and logically explained. The step before it is also important. Because you should definitely inform the person who requested a cost estimate whether you will create it for free or charge something.

Also, after you’ve sent the estimate, you should be proactive. After a few days, ask whether everything is clear, whether there are any questions and whether you should provide detailed information on certain points. The best price-performance ratio is important, but communication certainly plays an equally important role. So stay tuned to your potential customer.

Cost Estimate

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