Under a fixed price, you and the supplier agree what will be delivered and what it will cost before work starts, and the supplier bears the cost if the work overruns. Under time and materials, you pay for the hours worked at an agreed rate, and you bear it. Choose fixed price when you can describe the finished result. Choose time and materials when you cannot describe it yet, or when the work has no natural end.
What each model means
Fixed price. The supplier commits to a defined scope for a set sum. If the work takes longer than the supplier expected, the price stays the same. If you want something that was not in the scope, that is a change, and it is priced separately.
Time and materials. You pay for the time spent, at a daily or hourly rate, plus costs the supplier incurs on your behalf, such as licences or hosting. The supplier gives an estimate, not a commitment. You can change direction whenever you like, because nothing was fixed to begin with.
Who carries the risk of an overrun
Under a fixed price, the supplier carries the risk that the agreed scope takes longer than expected. That protection is not free. A careful supplier investigates the unknowns before quoting and includes an allowance for the uncertainty that remains, so part of what you pay is the price of certainty. One risk stays with you: that the scope you agreed turns out not to be what you needed. Putting that right means paying for changes.
Under time and materials, you carry the overrun. If the work takes twice the estimate, you pay twice the estimate. In return you pay only for time used, and you can stop, change or re-order the work at any point. The supplier has less commercial pressure to finish quickly, so you have to keep an eye on progress yourself.
Neither model removes risk. Each decides who holds it, and it is best held by whoever can control it. When the supplier can see the whole job, a fixed price is fair. When the job depends on discoveries nobody has made yet, or on decisions you will take as you go, the control is yours and so is the risk.
Fixed price and time and materials compared
| Fixed price | Time and materials | |
|---|---|---|
| Who carries overrun risk | The supplier, for the agreed scope. | You. |
| How much must be defined up front | Most of it: scope, assumptions, exclusions and acceptance checks. | Little. A goal and a rough estimate are enough to start. |
| How changes are handled | Each change is assessed and quoted, then added, swapped for something of similar size or deferred. | A change is simply the next piece of work, and the total moves with it. |
| Budget certainty | High, for the agreed scope. | Low, unless you set a cap and track what has been spent. |
| Suits which kind of work | A defined build with a clear finished state. | Exploratory work, ongoing support and open-ended improvement. |
| What to watch for | A quote given without questions, a vague scope, no acceptance checks, change rates you have not seen. | No estimate, infrequent reporting, nothing working to look at, an end date that keeps moving. |
When fixed price is the better fit
Fixed price suits you when most of these are true.
- You can say who will use the software, which tasks it must support and what it connects to.
- The main unknowns, such as the state of existing data, can be looked into before the price is set.
- You need one figure to get a budget approved.
- You do not have the time or the technical background to supervise the work week by week.
- The work has a clear end: a system delivered, or a database moved to a supported version.
We have written separately about what to agree before signing a fixed-price contract.
When time and materials is the better fit
Time and materials is the right choice, and not a second-best one, in these cases.
- Nobody can yet say what finished looks like. A new product whose features will be shaped by how its first users behave is an example.
- The work is an investigation. Nobody can know how long an intermittent fault will take to trace before the cause is found.
- The work has no end. Support and small changes to a live system carry on for as long as the system does, and are normally arranged by the month, as with software maintenance.
- The system has not been assessed. The first weeks on undocumented code that someone else wrote cannot be scoped with confidence.
- You want to direct the work yourself. If someone on your side will set priorities every week and expects to change them often, a fixed scope gets in the way.
- The job is very small. Writing and agreeing a scope can cost more than the uncertainty it removes.
A fixed price for work like this is either a guess with a large allowance built in or the start of an argument about what was included.
Hybrid arrangements
Three common arrangements sit between the two models.
Paid discovery, then a fixed price
A short first stage, paid for separately, investigates the unknowns and produces a scope that can be priced. The build then proceeds at a fixed price. Make sure the output of the discovery is yours to keep, so that you could take it to another supplier.
Fixed price per stage
A large programme is divided into stages, each with its own scope and price, agreed one at a time. You have certainty about the stage in hand and freedom to change direction between stages. This suits modernising an existing system, where each stage reveals more about the next.
Capped time and materials
You pay for time used, up to an agreed ceiling. Check what happens when the ceiling is reached. In some agreements the supplier must finish the work at their own cost. In others they are only obliged to stop and ask.
Questions to ask a supplier
Under a fixed price
- What exactly is included, and what have you left out?
- What have you assumed about our data and the systems this connects to?
- How will we both know the work is finished?
- How is a change priced, and can I swap one item for another of similar size?
Under time and materials
- What is your estimate, and what is it based on?
- Who will do the work, and at what rate?
- How often will I see working software and a statement of time spent?
- At what point will you stop and ask before spending more?
Under either model
- Who owns the code, and from when?
- What happens after delivery, including defects, support and hosting?
- If we part company, what will you hand over?
How we can help
CodeFirst builds new software at a fixed price, and our fixed-price page explains how we handle scope, acceptance checks and changes. Where a project is not yet defined well enough for that, we would sooner say so and suggest how to close the gaps than quote a guess.