Fixed Price vs Time and Materials - Which Model Saves You Money
The pricing model you choose for a software project affects your budget as much as the features you build. Fixed price and time-and-materials (T&M) are the two dominant models, and most people pick based on gut feeling or whichever one their preferred agency offers. That is a mistake. Each model has specific conditions where it saves you money and specific conditions where it costs you more. Picking the wrong one for your situation can add 20-40% to your total spend.
This article breaks down both models with honest pros and cons, explains when each one works best, and introduces hybrid approaches that combine the strengths of both. By the end, you will know which model fits your project - and which one to avoid.
How Fixed Price Works
In a fixed-price contract, the agency quotes a single number for a defined scope of work. You pay that amount regardless of how many hours the team actually spends. If the project takes longer than expected, the agency absorbs the cost. If it finishes faster, the agency keeps the margin. The scope, deliverables, and acceptance criteria are defined before work begins.
Advantages of Fixed Price
- Budget certainty - you know the exact cost before signing the contract
- Simple financial planning - no surprise invoices or hours overruns
- Clear deliverables - both sides know exactly what will be built
- Lower management overhead - you do not need to track hours or review timesheets
- Easier to get internal approval - a fixed number is easier to present to a board or finance team
Disadvantages of Fixed Price
- Built-in risk premium - agencies add 20-35% to their estimate to protect against scope uncertainty. You are paying for insurance whether you need it or not.
- Rigid scope - any change, no matter how small, triggers a change order process. This makes sense for the agency but slows you down.
- Incentive misalignment - the agency makes more money by spending less time. This can lead to cutting corners on testing, documentation, or polish.
- Specification burden - you need to define every detail upfront. If you miss something, it is either not built or it costs extra.
- Slower start - creating a detailed specification takes 2-6 weeks before development even begins.
How Time and Materials Works
In a T&M contract, you pay for the actual hours worked at agreed-upon rates. A developer costs $X per hour, a designer costs $Y per hour, and your monthly bill reflects the actual time spent. There is usually an estimated budget range, but the final cost depends on how long the work takes. Scope can evolve during the project.
Advantages of Time and Materials
- Flexibility - you can add, remove, or reprioritize features at any point without change orders
- No risk premium - you pay for actual work, not a padded estimate
- Faster start - you can begin with a rough scope and refine as you go
- Better quality incentive - the team is paid for time spent, which means they can invest in testing, code quality, and documentation without eating into their margin
- Transparency - you see exactly where every hour goes
Disadvantages of Time and Materials
- Budget uncertainty - the final cost is unknown until the project is complete
- Requires active management - you need to review progress regularly to ensure hours are being spent productively
- Scope creep risk - without a fixed scope, it is easy to keep adding features until the budget is exhausted
- Harder to get approval - "it will cost somewhere between $60K and $100K" is a tough sell to a CFO
- Trust dependent - you need to trust that the team is working efficiently, which means you need visibility into their process
When Fixed Price Works Best
Fixed price is the right choice when three conditions are met: the scope is well-defined, the requirements are unlikely to change, and the project is relatively straightforward. Specifically, fixed price works well for projects where you have a detailed specification or an existing product to replicate, the technology is proven (no R&D or experimental components), the timeline is under 3 months, and you have limited bandwidth to manage the development process day-to-day.
Good candidates for fixed price: marketing websites, mobile app redesigns with an existing backend, data migration projects, simple CRUD applications, and integrations with well-documented APIs. These projects have clear inputs, clear outputs, and predictable effort.
When Time and Materials Works Best
T&M is the right choice when the scope is likely to evolve, the project involves significant complexity or unknowns, and you want to be involved in shaping the product during development. This covers most new product development, especially for startups and innovation projects.
Good candidates for T&M: MVPs where user feedback will shape the roadmap, complex platforms with many integration points, projects with evolving business requirements, R&D or AI-driven projects where the technical approach may change, and long-term product development (6+ months) where priorities will shift.
The Hidden Cost of Choosing Wrong
Choosing the wrong model does not just affect your invoice. It affects the product. A fixed-price contract on an evolving project leads to a rigid product that does not adapt to user feedback - because every change costs extra and takes weeks to approve. A T&M contract on a well-defined project leads to budget overruns because there is no ceiling and no incentive to ship quickly.
We tracked 40 projects over two years and found a consistent pattern. Projects that used the appropriate pricing model for their situation came in within 10% of the estimated budget. Projects that used the wrong model overran by 25-45%. The pricing model is not just a financial decision. It is a project management decision that ripples through every aspect of delivery.
Hybrid Approaches - The Best of Both
Most experienced agencies (including us) offer hybrid models that combine the certainty of fixed price with the flexibility of T&M. Here are the three most common variations.
1. Fixed Price Discovery, T&M Development
You pay a fixed fee ($3K-$10K) for a discovery phase that produces a detailed specification, architecture plan, and refined estimate. Then you move to T&M for development with a budget range based on that specification. This gives you certainty about the plan and flexibility during execution. It is the model we recommend most often for new products.
2. T&M With a Budget Cap
You work on T&M but set a maximum budget. Once the cap is reached, work stops and you reassess. This gives you the flexibility of T&M with a hard ceiling. The trade-off is that hitting the cap may mean some features are not built, so you need to prioritize rigorously from the start.
3. Phased Fixed Price
Break the project into phases (typically 3-6 weeks each) and price each phase as a fixed-price block. At the end of each phase, you review the work, adjust priorities, and price the next phase. This gives you budget certainty for the current phase while allowing scope changes between phases. It works well for projects that are complex but can be meaningfully divided into milestones.
How to Decide - A Practical Checklist
Answer these five questions to determine which model fits your project.
- Do you have a detailed specification with clear acceptance criteria? If yes, fixed price is viable. If no, start with T&M or a fixed-price discovery phase.
- Are requirements likely to change during development? If yes, T&M or phased fixed price. If no, fixed price.
- Is budget certainty more important than flexibility? If yes, fixed price or T&M with a cap. If no, T&M.
- Do you have bandwidth to manage the project actively (weekly reviews, quick feedback)? If yes, T&M gives you more control. If no, fixed price requires less involvement.
- Is the project under 3 months with proven technology? If yes, fixed price is efficient. If no, T&M handles the uncertainty better.
If your answers split evenly, go with a hybrid approach. Most projects are not purely one model or the other. The right answer is usually a combination that matches the level of certainty you have at each stage of the project.
The Bottom Line
Neither model is inherently cheaper. Fixed price saves money when scope is clear and stable. T&M saves money when requirements evolve and you need flexibility. The expensive mistake is choosing based on comfort ("I like knowing the exact price") instead of fit ("my project has stable requirements, so fixed price works"). Match the model to the project, not to your preference, and you will consistently get better outcomes and lower total costs.
