Guide

Fixed price or time and materials: who carries the risk?

Every software contract divides risk between you and the supplier. A fixed price puts the risk of overrun on the supplier; paying for time puts it on you. Neither is automatically better. The right choice depends mainly on how clearly the work is defined.

Key takeaways

Fixed price suits clearly defined work. It buys certainty, and a cushion for the supplier's risk is built in.
Time and materials suits uncertain or evolving work. It buys flexibility, and you carry more of the risk.
Capped or phased pricing combines the two and is often the best fit.
A fixed price is only as good as the written scope behind it.
The cheapest quote is rarely the lowest total cost.

The three common models

Fixed price. An agreed price for an agreed scope. If the work takes longer, the supplier absorbs it; if you change the scope, the price changes through an agreed process.
Time and materials. You pay for the time spent, at agreed rates, plus agreed expenses. Usually reported regularly, with an estimate to guide you but no guarantee.
Capped, or not-to-exceed. Time and materials with a ceiling. You pay for time actually used, up to a maximum that can only be raised by agreement.

Many projects mix them: a fixed price for a short discovery phase, then fixed or capped prices for each stage of the build. See what happens in a discovery workshop.

Fixed price: the strengths and the catch

Strengths: you know the cost up front; the supplier has an incentive to work efficiently; budgeting and approvals are simple.
The catch: to protect itself, the supplier adds a cushion for the unknown, so a fixed price for a vague brief is higher than the likely cost of the same work.
The catch: every change becomes a negotiation. Teams may be reluctant to improve what they discover could be better, because it costs them.
The catch: a fixed price reflects the scope as written. If something you assumed was included was never written down, you may be charged for it.

Works best when the scope is stable, the requirements are well understood and you have a thorough written specification.

Time and materials: the strengths and the catch

Strengths: you can change direction as you learn; you pay for work done, not for a cushion; priorities can be adjusted every few weeks.
The catch: the total is uncertain, so you need a budget conversation and regular reporting; without them, costs can drift.
The catch: it needs more of your time. Someone on your side must decide, review and prioritise regularly.

Works best for products still being discovered, ongoing improvement and work where the scope will certainly change.

How to choose

Can you describe exactly what you want, on paper? If yes, fixed price is realistic. If no, start with discovery or work in phases.
Is the main risk technical or about the market? Unknowns about integrations or demand favour smaller, time-based steps.
How much of your time can you give? Time and materials needs it; fixed price needs it earlier, to write the scope.
How firm is your budget? A hard ceiling suggests a fixed or capped price with a scope you can trim to fit.
How much do you trust the supplier? Pricing models do not fix a poor relationship. Check references first.

Contract points that matter under either model

A written scope, including what is not included.
How changes are requested, priced and approved, and how long a quote for a change takes.
Acceptance criteria: how you decide a deliverable is finished.
Payment tied to deliverables, not only to dates.
Reporting, for time-based work: hours spent against work completed, at least monthly.
Ownership and handover: see choosing a development partner.

Have a lawyer review any substantial contract. This guide is not legal advice.

Frequently asked questions

Is a fixed price always cheaper in the end?

No. It is cheaper only when the scope does not change and was clear to begin with. Otherwise it often ends up costing the same or more, with friction over changes.

Can I switch model part-way through?

Often yes, and it is common to do so after discovery. Agree in the contract how a switch would work.

What is a reasonable payment schedule?

One that ties payments to delivered milestones rather than only to dates, with part held until the work is accepted. The exact split depends on project size and is for you and the supplier to agree.

Unsure how to structure the work?

Tell us how clear your scope is. We will suggest a way to price it that shares the risk fairly.

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