You get a number, you sign a contract, and in theory the risk sits with the vendor.
It’s a completely understandable instinct, especially if you’re a CFO or COO approving a significant development budget for the first time.
But that instinct is based on a misunderstanding of where the risk actually goes.
In this article, we’ll walk you through how both contract models work in practice, why fixed price creates problems that rarely show up at the proposal stage, and what to look for in a time and materials (T&M) partner if cost predictability is your main concern.
Let’s dive in!
More of a visual learner?
Here’s our Account Manager, Ivor Cindric, breaking down how both models work and what that difference means in practice:
What fixed price contracts actually promise
A fixed price contract locks three things before a single line of code is written: scope, budget, and deadline.
The vendor agrees to deliver a defined piece of software for an agreed sum by an agreed date.
On paper, that’s a clean deal.
In practice, it depends entirely on one assumption: that you know exactly what you need before development starts.
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For most custom software projects, that isn’t the case. What you think you need in week one is almost always different from what you need by week eight.
You’ve seen the first working version. You’ve talked to end users. You’ve uncovered a dependency you didn’t know existed.
Requirements change around 25% during the course of a typical development project. That’s not negligence or poor planning. It’s just the nature of complex work.
A fixed price contract has no good mechanism for handling this.
Every change, no matter how small, requires a formal change order, a new estimate, and often a renegotiation.
The project slows down, costs rise, and frustration builds on both sides.
These failures don’t happen because developers are careless. They happen because the contract model creates the wrong incentives.
In practice, fixed price projects rarely stay fixed. The initial quote gets a foot in the door. Then changes come, each one reasonable on its own, and each one billed separately.
The project ends up costing more than a T&M engagement would have, but with fewer protections and less flexibility along the way.
Large IT projects run 45% over budget on average, delivering 56% less value than predicted.
A fixed price contract doesn’t protect you from these outcomes. It just changes how they happen.
What happens when a vendor is losing money on your project
This is the part nobody talks about in the proposal meeting.
When a vendor realizes partway through that they’ve priced a project too low, the relationship changes:
The team assigned to your project gets pulled onto more profitable work
Senior engineers get replaced by junior ones
Bugs that should be fixed get deprioritized
The vendor starts looking for exit ramps, whether that’s change orders to recover margin, or a delivery that technically meets the spec but misses the point.
When a vendor is losing money on your project, you’re carrying that risk, even if the contract says otherwise.
When fixed price is the right call
To be fair, fixed price isn’t always the wrong answer. It works well in specific, limited circumstances:
The scope is small and genuinely well-defined: a single integration, a specific feature, or a clear handoff.
The requirements are unlikely to change because they’re driven by regulation or a defined technical standard.
The vendor has built the same thing many times before and has high confidence in the estimate.
The engagement is short enough that surprises are unlikely.
For anything longer than a few weeks, involving new functionality, UX design, data integration, or evolving business requirements, T&M is almost always the better model.
If you’re a CFO who wants a ceiling on spending, a capped T&M contract (also called a “not-to-exceed” or NTE contract) gives you the flexibility of T&M with a hard budget limit.
Ask any partner you evaluate whether they offer this option. Not all do, but it’s worth the conversation.
The team works transparently within the cap. If less work is done, you spend less.
The floor is real, the ceiling is real, and you’re not paying a risk premium on uncertainty that may never materialize.
How time and materials contracts work in practice
In a T&M contract, the team’s capacity and rate are fixed. What stays flexible is the scope.
You and the development team work together to decide what gets built, in what order, and for how long.
You pay for actual work done. No more, no less.
Every sprint, you see exactly where time is going:
Which features were built
What was tested
What decisions were made and why
There’s no black box. You’re not waiting for a delivery milestone to find out whether the work is on track.
That transparency changes the dynamic in a useful way. When you can see progress clearly, you can make better decisions about where to direct effort next.
You can pause work that isn’t adding value, or fast-track something that’s turned out to be more important than you expected.
This means you have more control over your project, not less.
The budget isn’t fixed in a single upfront number, but you’re spending it on things that matter rather than assumptions from 6 months ago.
Why T&M works well with agile development
Almost all development teams today work under an agile methodology. Short cycles, regular reviews, and adjusting priorities based on feedback.
Fixed price is structurally at odds with this approach.
Iteration and discovery are at the heart of agile development. It assumes scope will evolve — that’s the point.
T&M fits naturally. The team works in sprints, you see results, and you adjust the scope accordingly.
Waterfall projects fail outright 59% of the time, compared to just 11% for agile.
What to look for in a T&M partner
The concern with T&M is usually: “how do I know they won’t just run up the hours?”
It’s a fair question, and the answer lies in how the engagement is structured from the start.
Look for a development partner who:
Works in clearly defined sprints with weekly or bi-weekly reviews.
Provides transparent timesheets and task tracking so you can see where hours are going.
Has a project manager who can explain technical progress in plain language.
Involves you in prioritization decisions.
Can give you a detailed estimate at the project phase level, even if the full scope is flexible.
Has a track record with projects of similar complexity, not just similar industry.
The partner’s incentive should be aligned with your outcome.
In a well-run T&M engagement, the team earns continued work by delivering value. That’s a better incentive structure than a vendor trying to protect a fixed margin.
But, before you commit to either model, these questions will tell you a lot about how a vendor operates:
How do you handle changes to requirements mid-project?
Can you show me how projects of similar complexity were scoped and tracked?
Who will I be talking to day-to-day, and what’s their technical background?
How do you prioritize work within a sprint, and how am I involved in that?
What does your change order process look like for fixed price work?
Do you offer a capped T&M option, and what does that structure look like in practice?
How do you handle it when a project estimate turns out to be wrong?
The answers to these questions will reveal more about how a vendor operates than the contract model itself.
A good T&M partner won’t hedge or deflect. They’ll have clear, direct answers.
Fixed price vs. time and materials contracts: FAQs
Not inherently. In a well-managed T&M engagement, you only pay for work actually done.
Fixed price contracts often include a built-in risk buffer, plus the cost of change orders when the scope inevitably shifts. So, for most complex projects, T&M actually ends up cheaper in the end.
A capped T&M or not-to-exceed contract gives you a hard ceiling while keeping the flexibility of T&M inside that limit.
Work with your partner to define the most valuable features first, so if you approach the cap, you’re cutting lower-priority work, not quality.
Yes, though for small and well-defined pieces of work, fixed price is simpler to manage.
The key question is whether the requirements are truly stable. If there’s any ambiguity, T&M is safer.
Looking for a development partner who has nothing to hide?
If you’ve been burned by a fixed-price engagement before, you already know how this goes. If you’re evaluating your first major custom software project, now’s a good time to learn.
We almost always work on a time and materials basis with our clients.
Full visibility into where effort is going. Genuine collaboration on priorities. No incentive to pad hours or bury problems.
Our project managers communicate in plain language, not technical abstractions. Every engineer on your project is directly accessible to you.
Over 14 years, we’ve built dozens of complex software products for businesses in manufacturing, logistics, healthcare, and financial services.
That experience has shaped how we work and how we structure every engagement.
If this sounds like the right fit, feel free to reach out and we’ll set up a quick call to discuss your needs in more detail.
A seasoned software engineering executive, Marin’s role combines his in-depth understanding of software engineering processes (particularly mobile) with product and business strategies. Humbly boasting 20+ years of international experience at the forefront of telecoms, Marin knows how to create and deliver state of the art software products to businesses of all sizes. Plus, his skills as a lifelong basketball player mean he can lead a team to victory.
When he’s not hopping from meeting to meeting, you’ll find Marin listening to indie rock, or scouring the latest IT news.
