ByAhsan NadeemLead Full-Stack Engineer
Before a single line of code is written, every software project faces the same question: do we agree a price for the whole thing, or pay for the time it actually takes? The honest answer is that the pricing model matters less than how well you understand what you're building. The model simply decides who carries the risk of not knowing.
The models in plain English
Fixed price
You agree a scope, a price and a timeline up front. If the work takes longer than expected, the vendor absorbs the cost; if you want something new, it becomes a paid change request.
Time and materials (T&M)
You pay for the hours actually worked, at agreed rates, usually invoiced weekly or monthly. Scope can change at any time, and you decide priorities as you learn.
Capped T&M and milestone hybrids
You pay for time worked, but with a ceiling per milestone or phase. Or you fix the price of each milestone and plan the next one once the previous is done. These hybrids exist because neither pure model fits most real projects.
Side by side
Fixed price | Time and materials | Capped T&M / milestones | |
|---|---|---|---|
Budget certainty | High | Low unless managed | High per milestone |
Flexibility to change scope | Low: changes need a change request | High | Medium: re-plan between milestones |
Who carries overrun risk | Vendor (priced into the quote) | You | Shared |
Upfront work needed | Detailed specification | A clear goal and backlog | Discovery, then milestone scopes |
Best for | Small, well-defined projects | Evolving products, ongoing work | MVPs and most new products |
Typical risk | Padded quotes, disputes over scope | Slow drift in budget | Needs discipline at each milestone |
When fixed price works
- The scope fits on a few pages and nobody expects it to change much.
- You've built something similar before, or the vendor has.
- There are few unknowns: no unproven integrations, no research.
- Examples: a marketing website, a defined integration between two well-documented systems, a migration with a clear inventory.
Be aware of the trade-off. To protect themselves, vendors add a contingency buffer to fixed bids, and anything outside the written scope becomes a change request. A fixed price buys certainty, and certainty has a price.
When time and materials works
- You're building a new product and expect to learn from early users.
- Requirements are a direction, not a specification.
- You want to reprioritise every week or two.
- The work is ongoing: maintenance, new features, a long roadmap.
The risk is quiet budget drift. You manage it with visibility: weekly time reports, a backlog in priority order and a short demo every sprint, so you always know what you've paid for and what's next.
Fixed price doesn't remove uncertainty. It just moves it into the quote and the change requests.
A worked example
Imagine a customer portal: sign-in, account pages, invoices, support tickets and an admin view. After a scoping session the team estimates 300 to 420 hours. The figures below use an illustrative rate of $40 an hour.
Scenario | Hours | Price |
|---|---|---|
Fixed price | 420 (top of the range) + 20% contingency | $20,160 |
T&M, it goes well | 340 | $13,600 |
T&M, scope grows | 460 | $18,400 |
Capped T&M at 420 hours | Up to 420 | Up to $16,800 |
In this example, fixed price is the most expensive option if things go well, and the cap gives you most of fixed price's certainty at a lower ceiling. The numbers will differ for your project, but the shape of the trade-off rarely does.
The approach we recommend for new products
- A short, paid discovery. One to two weeks to agree the users, the core workflow, the data model and a module-by-module estimate.
- Milestones with a clear definition of done. Each milestone has a scope, acceptance criteria and either a fixed price or a time cap.
- A change process both sides understand. New ideas go into the backlog. They're estimated and either swapped for something of equal size or added to the next milestone.
- Transparent reporting. A shared board, weekly hours and a demo at the end of every sprint.
If you're working out a budget for a new product, our SaaS MVP cost breakdown shows how to estimate the hours in the first place.
Contract clauses that matter more than the pricing model
Clause | What to look for |
|---|---|
Intellectual property | All code, designs and content are assigned to you on payment |
Code and accounts | The repository, cloud and domain accounts live in your organisation from day one |
Acceptance criteria | How each milestone is tested and signed off, with a time limit for feedback |
Change requests | How new work is estimated, approved and billed |
Warranty | A period after launch during which defects are fixed at no cost |
Payment schedule | A deposit, then payments tied to accepted milestones or monthly invoices |
Termination and handover | What you receive if either side ends the contract early |
Red flags in a proposal
- A fixed price far below the others, with a one-paragraph scope.
- No discovery or design phase before building.
- No mention of testing, code review or deployment.
- Code hosted only in the vendor's accounts.
- "Unlimited revisions" on a fixed price. Someone is going to pay for them.
Frequently asked questions
Is fixed price cheaper than time and materials?
Not usually. Fixed bids include a buffer for the vendor's risk. T&M can cost less when the work goes well, but it can also cost more if scope keeps growing and nobody manages it.
What is a change request?
A formal way to add, remove or change scope after the contract is signed. It describes the change, its estimated cost and its effect on the timeline, and both sides approve it before work starts.
Can we switch models during a project?
Yes, and it's common: a fixed-price discovery, a milestone-based build, then a monthly retainer for ongoing improvements after launch.
How do I keep a time and materials project under budget?
Agree a cap per phase, review hours weekly, keep the backlog in priority order and watch a demo every sprint. If the budget is tight, cut lower-priority items rather than quality.
What deposit is normal for a software project?
It varies by vendor and project size. Many fixed-price projects take a deposit before work starts, with the rest tied to milestones. For T&M, monthly invoicing in arrears or a small upfront retainer is common.
We offer project, retainer and dedicated-team engagements. See how each works on our pricing page, or tell us about your project and we'll suggest the model that fits.
