Fixed Price vs Time and Materials: Which Contract Model Is Better?

Fixed Price vs Time and Materials — What Founders Need to Know

Choosing between fixed price vs time and materials is one of the first decisions you will make when hiring a development team, and it is one of the most consequential. The contract model you pick determines who carries the risk, how changes are handled, and whether your project comes in on budget.

Neither model is universally better. Each works well in specific situations and fails in others. This guide explains how both models work, when to use each, and what red flags to watch for in contracts.

How Fixed Price Contracts Work

In a fixed price contract, the development team commits to delivering a defined set of features for a specific price. You agree on the scope, timeline, and cost before work begins. If the project takes longer than expected, the agency absorbs the extra cost. If it finishes early, they keep the margin.

Example: You want a web application with user accounts, a dashboard, payment processing, and an admin panel. The agency quotes $45,000 and 10 weeks. You pay $45,000 regardless of how long the work actually takes.

How Payment Typically Works

• Milestone-based: 20% upfront, 30% at design completion, 30% at development completion, 20% at launch
• Monthly installments: Equal payments spread across the project timeline
• 50/50 split: Half upfront, half on delivery

How Time and Materials Contracts Work

In a time and materials (T&M) contract, you pay for the actual hours worked at agreed-upon rates. The scope can evolve as the project progresses. If you want to add a feature or change direction mid-project, you can — you just pay for the additional hours.

Example: You hire a development team at $50/hour for a senior developer and $35/hour for a mid-level developer. They estimate 600-800 hours for your project. You pay for whatever the actual hours turn out to be, typically billed weekly or bi-weekly.

How Payment Typically Works

• Weekly or bi-weekly invoices based on hours logged
• Monthly invoices with detailed time reports
• Retainer model: Pre-pay a block of hours at a discounted rate

Side-by-Side Comparison

When Fixed Price Works Best

Fixed price contracts are the right choice when three conditions are true: the scope is clear, the requirements are stable, and you need budget certainty.

Projects with clear, documented requirements

If you can describe every feature, every screen, and every user flow before development starts, fixed price works well. The agency knows exactly what to build, can estimate accurately, and can commit to a price.

Good candidates:

• Marketing websites and landing pages
• Simple web applications with standard features (CRUD operations)
• Redesigns of existing products with documented current functionality
• Integration projects where the APIs are well-documented
• Mobile apps with a limited, clearly defined feature set

Projects with regulatory or budgetary constraints

If you have a board-approved budget with zero flexibility, or you are spending grant money that must be fully allocated upfront, fixed price gives you the predictability you need.

First-time engagements with a new team

If you have never worked with the agency before and want to limit your financial exposure, a fixed price contract on a small initial project is a low-risk way to evaluate their work.

When Time and Materials Works Best

T&M contracts are the right choice when the scope is likely to change, when you are building something novel, or when you want maximum flexibility.

Products in the discovery phase

If you are building an MVP and expect to learn from user feedback as you go, T&M gives you the freedom to pivot without renegotiating the entire contract. You might start building a booking feature and realize halfway through that messaging is more important — with T&M, you simply redirect the team.

Long-term product development

Successful products evolve continuously. If you are hiring a team to build and iterate on a product for 6-12+ months, T&M is more practical than signing a series of fixed price contracts. Your roadmap will change as you learn from users and the market.

Complex or unprecedented projects

If nobody has built exactly what you are building before, accurate upfront estimation is nearly impossible. T&M lets you manage uncertainty without forcing the agency to pad their estimate with a massive risk buffer.

Ongoing maintenance and support

Post-launch maintenance — bug fixes, feature updates, security patches — is inherently unpredictable in scope. T&M is the standard model for ongoing support engagements.

The Risk Distribution Problem

The core difference between these models is who carries the risk when things go wrong — and things always go wrong in some way.

Fixed Price Risk for the Client

• Scope gets cut to fit the budget. If the agency underestimated, they might deliver a bare-bones version to stay profitable
• Change requests cost extra. Every modification outside the original spec triggers a change order with additional fees
• Quality shortcuts. Under budget pressure, some agencies skip testing, documentation, or code quality
• Adversarial relationship. The agency's financial incentive is to do less work. Your incentive is to get more. This creates tension.

Time and Materials Risk for the Client

• Budget overruns. If the team is slow or encounters unexpected complexity, you pay for every extra hour
• No finish line. Without a fixed scope, projects can expand indefinitely
• Requires active management. You need to monitor progress, prioritize features, and make trade-off decisions
• Trust dependency. You are trusting the team to work efficiently and honestly report hours

The Bottom Line on Risk

Fixed price transfers financial risk to the agency, but creates quality and scope risk for you. T&M keeps you in control of quality and scope, but puts financial risk on your side. Neither model eliminates risk — they just move it around.

Hybrid Approaches

Smart teams often combine elements of both models to balance risk and flexibility.

Fixed Price Discovery + T&M Development

Start with a fixed price discovery phase ($3,000-$8,000 over 1-2 weeks) to define the project scope in detail. Then use T&M for the actual development with a well-defined backlog and weekly budget reviews.

Why this works: You get the cost certainty of a fixed scope definition without forcing the development team into rigid estimates for the entire project.

T&M with a Budget Cap

Agree on hourly rates but set a maximum budget. The agency works on T&M up to the cap. If they hit the cap, work stops and you renegotiate priorities.

Why this works: You maintain flexibility while capping your downside exposure.

Fixed Price with a Change Order Process

Use fixed price for the initial scope but establish a streamlined process for change orders. Each change is estimated, quoted, and approved before work begins.

Why this works: Budget certainty for the core project with a structured way to handle inevitable changes.

Sprint-Based Pricing

Agree on a fixed cost per sprint (usually 2 weeks) for a defined team. You set the priorities for each sprint, and the team delivers what they can within the sprint.

Why this works: You get predictable bi-weekly costs with full flexibility on what gets built. This is essentially how Soatech operates for most projects — learn more about our development process.

Red Flags in Contracts

Regardless of which model you choose, watch for these warning signs.

Fixed Price Red Flags

• No detailed specification. A fixed price without a detailed scope document is a recipe for disputes
• No change order process. If the contract does not explain how changes are handled, expect surprises
• 100% upfront payment. Standard practice is milestone-based payments
• Vague acceptance criteria. "The application will work correctly" is not an acceptance criterion
• No warranty period. Post-launch bug fixes should be included for at least 30-60 days

Time and Materials Red Flags

• No time tracking transparency. You should see detailed time logs, not just totals
• No regular status updates. Weekly demos or progress reports are essential
• No estimate or budget guidance. Even in T&M, the agency should provide an estimated range
• Team composition changes without notice. Your senior developer should not be quietly replaced with a junior
• No velocity metrics. After the first few weeks, the team should be able to forecast completion timelines

How to Decide for Your Project

Ask yourself these five questions:

1. Can you fully define the scope before development starts? Yes = fixed price. No = T&M.

2. Is your budget absolutely fixed, or is there flexibility? Fixed budget = fixed price. Flexible = T&M.

3. How likely are requirements to change during development? Unlikely = fixed price. Very likely = T&M.

4. How involved do you want to be during development? Hands-off = fixed price. Actively involved = T&M.

5. Is this a one-time project or ongoing development? One-time = fixed price. Ongoing = T&M.

If your answers split evenly, a hybrid approach (fixed discovery + T&M development or sprint-based pricing) is likely your best option.

For help scoping your project and choosing the right model, read our guide on how to scope a software project without overbuilding.

Choose the Model That Fits Your Reality

The fixed price vs time and materials decision is not about which is "better" — it is about which matches your project's characteristics. Fixed price works when you know what you want. T&M works when you are figuring it out as you go. Hybrid models work when reality is somewhere in between.

The most important thing is to understand the trade-offs before you sign. A contract that looks cheap upfront can become expensive when change orders pile up, and a contract with no budget ceiling requires active management to keep on track.

Not sure which contract model is right for your project? Talk to our team — we will assess your project's complexity, explain our recommended approach, and structure an engagement that protects both sides. No commitment, just honest guidance.