Fixed price or time and materials: which model fits your project

Choose a fixed price when the scope can be written down completely and is unlikely to change. Choose time and materials when it cannot, which is the case for most new products and for ongoing work. A fixed price moves the risk of overruns to the supplier, who prices that risk in and has a reason to resist changes; time and materials keeps you flexible and bills only the work done, but it needs your attention to keep the budget in check. For many projects the safest arrangement combines both: a written scope, work split into milestones, and a pricing model chosen for each phase.

#What each pricing model means

Under a fixed price contract, you and the supplier agree on a defined scope, a price and usually a delivery date. The supplier carries the risk that the work takes longer than planned. Anything outside the agreed scope becomes a change request with its own price.

Under time and materials, you pay for the hours or days actually worked at agreed rates, plus direct costs such as licences or paid services. You carry the risk of overruns, and in return you keep the freedom to change priorities at any point.

	Fixed price	Time and materials
Who carries overrun risk	The supplier	The client
How change is handled	Change requests, priced and approved one by one	Priorities can be reordered at any time
Budget certainty	High, for the agreed scope only	Depends on tracking and agreed caps
Work before the start	A detailed specification	Enough scope to begin, plus a shared priority list
Best suited to	Well-defined, stable work	New products, changing requirements, ongoing work
Main risk	Padded quotes, disputes over scope, quality cut near the deadline	Budget drift without regular review

#When a fixed price fits

• The requirements are complete and stable, for example a rebuild of an existing site with known pages and features.
• The work is small and well understood, such as one integration with a documented API.
• Your organization needs a budget approved in advance, and you accept less flexibility in exchange.
• Acceptance criteria can be written for every feature, so both sides can tell when it is done.

#The hidden risks of a fixed price

A supplier who takes on the risk of overruns has to price it in. The quote includes a buffer, and you pay for it even if nothing goes wrong. That is fair, and it also means a fixed price is rarely the cheapest route for a well-run project.

The larger problems come from ambiguity. If the specification says "users can manage their orders" and the two sides read that differently, every difference turns into a negotiation. Under a fixed price the supplier has a reason to read requirements narrowly and the client has a reason to read them broadly. When time runs short, the easiest things to cut are the ones you cannot see in a demo: tests, documentation and error handling.

A fixed price also makes learning expensive. Once real users try the first version, you will often want to change something. Each of those changes needs a new price and a new approval, which slows the project at the moment feedback is most useful.

#When time and materials fits

• You are building a new product and expect to learn from its first users.
• Part of the work involves unknowns, such as an undocumented legacy system or a third-party API nobody on the team has used.
• The work is ongoing: maintenance, improvements and new features month after month.
• You want to be able to pause, reprioritize or scale down without renegotiating a contract.

#How to keep a time-and-materials budget under control

The typical risk of time and materials is budget drift: many small, reasonable decisions that add up to more than you planned. A few habits prevent it.

• Ask for an estimate anyway. Even though you pay for actual time, an estimate against a written scope gives you a baseline to compare against.
• Set a cap for each milestone. Agree that the supplier stops and talks to you before going over it.
• Read the time reports. Ask for time broken down by feature or task, so you can see where it goes and question anything unexpected.
• See working software often. A demo every few weeks shows progress better than any report and exposes misunderstandings early.
• Own the priority list. Decide what comes next, and move lower-value items to a later release when the budget tightens.

#How milestones and a written scope reduce risk

In either model, most of the risk comes from unclear scope and long stretches without feedback. A written scope and milestones deal with both.

The written scope lists the features, user roles, integrations, data migration and testing included, and it states what is excluded. It is the document both sides return to when a question comes up. Under a fixed price it defines the deal. Under time and materials it defines the baseline that tells you whether the project is on track. What goes into the estimate behind it is covered in what drives the cost of a custom web application.

Milestones split the work into parts that each end with something you can use or review. They give you natural points to check quality, adjust the plan and decide whether to continue. A common hybrid builds on this structure:

1. A short discovery phase, often at a fixed price, that produces the written scope and the estimate.
2. A fixed price for each milestone whose content is well understood.
3. Capped time and materials for the parts that still carry unknowns, and for work after launch.

Whichever model you choose, the contract should say how change requests are raised, estimated and approved; what "done" means for each milestone; who owns the code, the accounts and the documentation; and what happens to the finished work if either side ends the project early.

#How PN Scripts can help

Every PN Scripts project starts with a written scope and estimate, and nothing starts until you have read it and said yes. On web projects you see a working demo every two to three weeks, so you judge progress on the software itself. If you are deciding how to structure a project, tell us what you plan to build and we will reply within one business day.