When you commission software, the pricing model in the contract shapes the whole project: how much freedom you have to change your mind, who absorbs the cost of surprises, and how much paperwork surrounds every decision. The two most common models are fixed price and time and materials. Understanding fixed price vs time and materials is less about which is "better" and more about matching the contract to how certain your project really is.
The two models in plain terms
Fixed price
The supplier agrees to deliver a defined scope for a set amount, usually paid in milestones. If the work takes longer than estimated, the supplier bears the extra cost. If you want something outside the agreed scope, it goes through a change request: a formal process to estimate, price and approve the addition.
Time and materials (T&M)
You pay for the time actually spent, at agreed hourly or daily rates, plus any direct costs such as third-party licences. Scope can evolve as you go, and you see and approve how time is spent. The risk of the work taking longer sits mainly with you.
A third variant, the dedicated team, is a form of T&M in which you reserve specific people for a period, typically monthly, and direct their priorities yourself.
Fixed price vs time and materials: where the risk goes
Every software project carries uncertainty. The contract does not remove it; it decides who carries it.
| Question | Fixed price | Time and materials |
|---|---|---|
| Who pays if the work takes longer? | Mostly the supplier | Mostly the client |
| How easy is it to change scope? | Possible, via change requests | Easy; reprioritise at any time |
| How predictable is the budget? | High, for the agreed scope | Lower, unless capped |
| How much upfront specification is needed? | A lot | Enough to start |
| How much client involvement is needed? | Moderate | High and continuous |
The hidden cost of certainty
A fixed price looks safer, but suppliers are not insurers working for free. A sensible supplier adds a contingency to cover the risk they are taking on. On a well-understood project that margin is small. On a vague one it can be large, and you pay it whether or not the risks materialise.
Fixed price can also create friction. Because every extra hour costs the supplier money, there is a natural incentive to interpret requirements narrowly. Discussions about whether something was "in scope" can consume energy that would be better spent building. None of this means fixed-price suppliers act in bad faith; it is simply how the incentives point.
The hidden cost of flexibility
Time and materials removes that friction, but it asks more of you. Without active involvement, priorities drift and budgets grow. T&M works well when the client:
- Has a product owner (a person who decides priorities and answers questions quickly).
- Reviews working software regularly and gives clear feedback.
- Tracks spend against value delivered, not just hours logged.
If nobody on your side can play that role, T&M can turn into an open-ended cost.
When fixed price makes sense
- The scope is small, well understood and unlikely to change, such as a defined integration or a website rebuild with an agreed design.
- You have a detailed requirements document with acceptance criteria.
- Budget certainty matters more than flexibility, for example in grant-funded or board-approved projects with a hard ceiling.
- You are working with a new supplier and want a contained first engagement.
When time and materials makes sense
- You are building a new product and expect to learn from users as you go.
- Requirements are likely to change because the market or business process is still evolving.
- The work is ongoing: maintenance, improvements and support, such as continuing web application development after launch.
- You have someone who can own priorities and engage with the team every week.
Hybrid approaches that work well
Many successful projects combine the two:
- Fixed-price discovery, then T&M build. A short, fixed-cost phase produces requirements, designs and an estimate. You then decide how to contract the build with far better information.
- T&M with a cap. You pay for time spent, up to an agreed ceiling per phase. Reaching the cap triggers a review rather than automatic spending.
- Fixed price per phase. A large project is broken into smaller phases, each priced once the previous one is complete.
- Fixed budget, flexible scope. The budget and timeline are fixed, and you agree to adjust which features fit, prioritising the most valuable first.
Contract details that matter in either model
- A clear definition of "done" for each deliverable, including testing.
- Regular reporting: hours used, budget remaining, progress against milestones.
- A warranty period for defects after launch.
- Ownership of source code and intellectual property on payment.
- Terms for ending the contract and handing over work in progress.
Have a lawyer review the agreement; this article is general guidance, not legal advice.
A quick way to decide
Ask yourself one question: could I write down today, in testable detail, everything this software must do? If yes, fixed price is a reasonable choice. If no, and especially if the honest answer is "we will find out once users try it", time and materials (or a hybrid) is usually the more honest contract. When you are unsure, an independent software consulting review of your requirements can tell you how much uncertainty you are really carrying.
Key takeaways
- Fixed price shifts overrun risk to the supplier but needs a detailed scope, and the risk is priced in.
- Time and materials offers flexibility but needs active client involvement and spend tracking.
- Hybrid models, such as fixed-price discovery followed by a capped build, often give the best balance.
- Match the contract to how certain your requirements genuinely are.