Fixed price vs time and materials: which software contract protects you?
Quick answer
Choose fixed price when the scope is clear and you need a known budget; the developer carries the risk of overruns. Choose time and materials when the work will keep changing; you pay for hours used, so you need weekly reports. Many projects work best as a fixed-price first version followed by time and materials for changes.
The contract model decides who pays when a project takes longer than planned. That happens often: McKinsey and Oxford’s study of more than 5,400 IT projects found large projects ran 45% over budget and 7% over time on average (McKinsey). Your contract decides whose problem that is.
In this article
How do fixed price and time and materials work?
Fixed price
You agree a written scope, a price and a timeline before work starts. If the work takes longer, the developer absorbs the extra hours. Changes to the scope are priced separately as change requests.
Time and materials
You pay an agreed hourly or daily rate for the time spent, usually invoiced every week or month. You can change direction at any time, but the total cost is open until the work is done.
Fixed price vs time and materials side by side
| Fixed price | Time and materials | |
|---|---|---|
| Budget known up front | Yes | No, only an estimate |
| Who carries overrun risk | Developer | You |
| Flexibility to change | Through change requests | High |
| Effort needed from you | Clear scope at the start | Weekly review of hours and progress |
| Best for | First versions, websites, defined systems | Ongoing development, research, unclear scope |
Expect a fixed price to include a margin for risk. That is fair: it is the price of certainty. A fixed quote far lower than hourly estimates for the same scope usually means something is missing from the scope.
When should you choose each model?
- Fixed price if you can describe what “done” looks like, have a set budget, or are buying from a developer for the first time.
- Time and materials if you already have a product and need steady improvements, or the work depends on things nobody can know yet.
- Both: a fixed price for the first version, then a monthly time-and-materials budget, with a cap, for changes after launch.
Prefer a fixed price?
Every Truecrest Studio project starts with a written scope and a fixed quote.
Which contract clauses protect you?
- Staged payments tied to things you can see working, not dates. We use three payments (50/30/20) with a working demo before the last.
- A written scope listing features, pages and integrations, plus what is excluded.
- A change-request process: every change priced in writing before work starts.
- Ownership: code, data, domains and accounts belong to you once paid.
- Acceptance testing: a set period to test and report defects, fixed at no extra cost.
- A cap on hours for time-and-materials work, so the budget cannot run away.
From my work
Most disputes I have seen between clients and developers start with a scope that was never written down. A one-page list of what is in and what is out takes an hour and prevents weeks of argument. When I quote a fixed price, that list is part of the contract, and anything outside it gets a written price before anyone starts work.
Common questions about software contracts
Is fixed price always more expensive?
It can include a risk margin, but it often costs less overall because the scope is controlled. Time and materials can end up cheaper or far more expensive depending on how well the work is managed.
What if I do not know exactly what I need?
Pay for a short, fixed-price discovery phase first: a few days to map your process and write the scope. Then get a fixed quote for the build.
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