A cost estimate is a pre-contractual, itemized estimate of the expected costs for a service or delivery. It serves as a guide for the client and forms the basis for budget planning. A cost estimate is generally not a tax document for recognizing revenue or profit; it only documents a price estimate prior to performance of the service.
Legal classification and binding effect
Legally, a cost estimate is an offer in a broader sense, but it is not automatically binding. Under German civil law (BGB), the explicit designation determines whether an estimate is binding or non-binding. Phrases such as “non-binding” or “without guarantee” generally make it non-binding. However, if it is offered as a “binding cost estimate”, this can create a legal obligation to adhere to the stated price.
Important for small businesses and freelancers:
- A cost estimate is not an offer for immediate settlement; only upon acceptance by the customer does a contract for work or services typically arise.
- Significant deviations between the estimate and the final invoice can have legal consequences under the law on contracts for work and services (BGB), especially if no price change was agreed.
Accounting treatment and tax consequences
In accounting, a cost estimate itself has no accounting effect because it does not create a receivable or liability. Relevance only arises upon acceptance of the offer, performance of the service, or receipt of advance payments.
Recording principles
- No revenue is recognized as long as no invoice has been issued or the service has not been performed.
- Advance payments must be recorded as a liability; upon receipt of such payments, VAT liability generally arises under the Value Added Tax Act (UStG).
- When an order is obtained, the subsequent invoice is recorded as revenue and VAT is shown accordingly.
Practical examples (simplified journal entries)
| Scenario | Journal entry |
|---|---|
| Invoice €10,000 net + 19% VAT | Accounts receivable €11,900 / Sales revenue €10,000 and VAT €1,900 |
| Advance payment €3,000 net (incl. 19% VAT = €3,570 received) | Bank €3,570 / Advance payments €3,000 and VAT €570 |
Important for VAT (UStG): A cost estimate does not trigger a VAT liability. This arises only upon performance of the service or upon receipt of an advance payment (§ 13 UStG).
Content, format and retention
There is no legally mandated form for a cost estimate, but from an accounting and legal perspective certain information should always be included so that it functions as an informative document:
- complete company details (name, address, where applicable legal form such as GmbH),
- description of the service or delivery with individual line items,
- unit and total prices net and, where applicable, gross and the applied tax rate,
- validity period of the estimate,
- information on any services that may be charged additionally (e.g. travel costs, excess material consumption),
- date and signature of the issuer.
Retention: Cost estimates are generally considered business correspondence and are subject to the retention period under Commercial Code (HGB) §257 and the provisions of the Fiscal Code (AO). Keep cost estimates for at least 6 years so that you can present documents during tax audits or inquiries from the tax office (Income Tax Act (EStG)/AO).
Practical tips for freelancers and small businesses
From the perspective of daily bookkeeping and client communication it is advisable to:
- clearly label cost estimates as non-binding or binding.
- set validity periods (e.g. 30 days) to limit price risks.
- break down prices transparently (materials, labour time, taxes) to avoid later disputes.
- for larger projects agree on interim estimates or staged payments and record these correctly in the accounts as advance payments.
A well-documented cost estimate not only simplifies calculation and client acquisition but also protects you in tax audits and legal disputes. Use it as a planning tool, not as an invoice — and only record revenue and VAT upon performance of the service or actual receipt of payment.