Fixed price vs time and materials: which to pick

Should you pick fixed price or time and materials?

Pick fixed price when you can describe what you want built and want to know the cost up front. Pick time and materials when the scope will change as you learn. The real difference is who carries the risk: with fixed price the team does, with time and materials you do.

How each model works

Fixed price. You agree on a scope, a timeline and a price before work starts. If the work takes longer than planned, that's the team's cost. If you want something outside the scope, it's discussed and agreed as a change.

Time and materials. You pay for the hours worked, usually at a daily or hourly rate. The scope can shift week to week, and the final cost depends on how the work goes.

When fixed price fits

• The problem and the main workflow are clear
• You need a number for a budget, an investor or a board
• You want to limit the risk of overruns
• The project can be split into stages with a defined result for each

An MVP is often a good fit, because the whole point is to keep the first release small and specific.

When time and materials fits

• You're exploring a problem and expect to change direction
• The work is open-ended, such as ongoing improvements to a live product
• Research is a large part of the job and the outcome is uncertain

What can go wrong with each

Fixed price fails when the scope is vague. The team prices in the uncertainty, or the project drifts into arguments over what was included. The fix is a written scope with clear boundaries and a simple change process.

Time and materials fails when nobody is watching the budget. Without checkpoints, costs can grow without the product getting closer to done. The fix is a regular review of progress against a cap, with the right to stop at any point.

A middle path

Many projects work best with a fixed-price first stage and a flexible second. Define and build the core product at a set price, then keep a smaller ongoing arrangement for improvements once you've seen how people use it.

Questions to ask whichever you choose

1. What exactly is included, and what's excluded?
2. How are changes proposed, priced and approved?
3. What do I see, and when, to confirm progress?
4. What do I own at the end?

Our own projects are quoted at a fixed price after a free discovery call, because most of what we're asked to build can be scoped clearly enough to promise a number. If you're still choosing who to work with, our guide on how to choose a software development partner covers what to ask. For an example of a clearly scoped build, see our order tracking system for a printing press, or visit the SaaS development service page.