Home Business and Finance Estimates , quotes and legally binding contracts

Estimates , quotes and legally binding contracts

by editor

The words ‘Quote’ and ‘Estimate’ have two different meanings, except when they are used in the context of an offer to the client.

Technically, an estimate is an ‘informed guess’ or an ‘approximation of the price’. You give the client an estimate of the cost of the work based on the information you have. If the work is well defined the client has a right to expect that the estimate be within 10% of the final sum you charge. If the parameters are not clearly defined (for example, you are asked to give an estimate for repairing a fence without knowing anything about the fence) the percentage can be greater.

When you give an ‘estimate’ it is a guide of the price when the client understands that it is a guide. If you make an offer to the client but call it an estimate, then it is actually a quote!

A quote is a formal offer you make to the client, which once accepted becomes a legally binding contract between you and the client.

What makes an ‘offer’ or quote?
When you formally offer to do work for the client in exchange for something (usually money). When this is accepted it forms a legally binding contract between you and the client.

To form a contract you must follow a few rules.

First, you must make a formal offer by sending the client a contract and have them accept it. If the client accepts the offer, you (the contractor) must honour it. It is legally binding and cannot be taken back, so if you make a mistake you must wear it. This is one reason why you must have a ‘offer valid until’ date in your offer. Once the date has passed the offer is removed from the table and is no longer legally binding. This is especially important at the moment, with material prices increasing at a crazy rate. You do not want a contract to be accepted in 2 years when all the profit has been eaten by inflation!

The client may want to make changes to the offer (this is called a counteroffer), so you negotiate and finally settle on a contract you both agree to. Once you have both signed, the contract is legally binding (as long as you can prove ‘intent’, see below).

Verbal contracts are legal, however they are hard to prove and the onus is on the professional body (you) to prove the contract was agreed to. A licenced contractor (for example a builder or structural landscaper) must legally have a written contract with their client. Don’t rely on verbal contracts!

Second, you must show ‘intent’. This means you need to gather proof that the client wants to go ahead with the work. Just getting the client to sign the contract is not enough, you need to prove they read and understood the contract and intend to go through with it. A deposit is a good indicator of intent, however it does not prove the client read and understood the contract. It is good practice to go through the contract with the client in person, making sure they understand everything within it.

Once the contract is signed it cannot be changed unless a variation is issued and signed. A variation is essentially a change to the contract. It is extremely important that all variations are put in writing and formally accepted. If they are not the client can dispute them.

The following items should be included in a legally binding contract:
• The name, address and contact details of the contractor, the person making the offer.
• The name, address and contact details of the client, the person receiving the offer.
• The date the offer is being made.
• The date the offer expires.
• The site address.
• The scope of works.
• Works by others.
• The contract sum – The scope of works and contract sum are usually presented in a Bill of Quantities.
• Payment terms.
• Terms and conditions.
• Details of your Public Liability Insurance,

Professional Indemnity Insurance, Workers Compensation Insurance, and Home Warranty Insurance if that is applicable.

If you make an offer to the client to do work in exchange for money, you have given the client a contract to agree to. That contract, even if you make it verbal and call it an estimate, is legally binding. You are legally bound to do the work as agreed.

Make sure the client knows when you are giving them an estimate. Make sure they understand the work will be carried out on a cost-plus basis and the figure you gave them is an estimate of the cost, not the offer. The best way to do this is to draw up a cost-plus contract, so you have a legal contract based on costplus work.

My advice is to make the contract as detailed and clear as possible. Clearly state the extent of the work you intend to carry out. Clearly outline your inclusion and exclusions. Yes, the client may use your contract to shop around (it is worth noting that showing a contract to a third-party is illegal, however it is hard to prove and doesn’t stop them), but at least you are covered and the client understands what they are getting. Good contractors use their contracts as a selling point; they use it to give the client confidence in them.

Related Articles