Cost & Budgeting
Cost & Budgeting3 min read
Fixed price or time and materials: who is actually carrying the risk
Both models price the same uncertainty. They differ in who absorbs it, and what each side does when the estimate turns out wrong.
Working on something like this?
Get an estimateThe short version
- Fixed price does not remove risk. It prices it, and the premium is 20–40%.
- Under fixed price, every conversation after signing is a negotiation about whether something is in scope.
- Time and materials is honest but gives you no ceiling unless you add one deliberately.
- Capped time-and-materials with a fixed scope per sprint gets most of both, and is what we default to.
Procurement prefers fixed price because it looks like certainty. Engineering prefers time and materials because it looks like honesty. Both are right about the other model and wrong about their own.
What fixed price actually buys
A fixed price does not eliminate uncertainty. It transfers it to the supplier, who prices it. That premium is typically 20–40% above the honest estimate, and you pay it whether or not the risk materialises.
That can be a perfectly good trade. If you need board approval against a hard number, or the work is genuinely well-understood, paying a premium for a ceiling is rational.
What you should understand is what it does to the relationship. Under a fixed price, the supplier's margin is the difference between the estimate and the actual. From the moment of signing, every request has a commercial answer attached:
- “Is that in scope?” becomes the most frequent sentence in the project
- Changing your mind is expensive, so you stop mentioning things you notice
- The supplier is incentivised to interpret the specification narrowly
- Quality work with no line item, like refactoring, test coverage, and accessibility, comes out of their margin
What time and materials actually buys
T&M removes the premium and the scope arguments. You pay for work done, you can change direction on any given Monday, and nobody has a commercial reason to hide a discovery.
The obvious objection is that it has no ceiling. That is true, and it is also solvable, but only if you build the controls in deliberately rather than assuming goodwill.
Controls that make T&M safe
- A not-to-exceed cap per phase, renegotiated at each phase boundary
- Fixed team size, so cost is predictable even when scope is not
- Working software demonstrated every two weeks, not status reports
- A prioritised backlog you own, so you decide what gets built next
- The right to stop at any sprint boundary with no termination fee
That last one does most of the work. If you can walk away every two weeks having received something usable, the supplier's incentive is to keep proving value. That is a stronger guarantee than a fixed price gives you, because a fixed price obliges them to deliver *something*, not something good.
Comparing them honestly
The model we default to
Neither, exactly. Fixed scope per sprint, capped spend per phase.
1
Fix the price of discovery
Discovery is well-understood work with a defined output, so it can be quoted precisely. One to three weeks, a fixed number, and you own the artefacts whether or not you continue. What those artefacts should be is worth agreeing before you pay for them.
2
Fix the team and the cadence, not the scope
An agreed team size for an agreed number of sprints gives you a predictable monthly cost. You know the spend; you retain the right to change what it produces.
3
Fix the scope of each sprint at its start
Two weeks is short enough that a commitment holds and long enough to ship something real. You get the certainty of a fixed price, renewed fortnightly, without the premium or the scope arguments.
4
Cap the phase, review at the boundary
A not-to-exceed figure per phase with an explicit decision point. Continue, change direction, or stop. You have working software either way.
When fixed price genuinely is right
Three cases, and they are narrower than most buyers think:
- 1The work is a known quantity, like a migration between two documented systems, a rebuild of something that exists and is specified.
- 2Your governance requires a single approved number and cannot accommodate a range.
- 3The deadline belongs to somebody else and schedule risk is the risk worth transferring — a lender facing a bank partner's review window took fixed scope for exactly that reason.
- 4The engagement is small enough that the premium costs less than the process of managing it.
If a supplier offers a fixed price without discovery, they have either done this exact build before or they have padded it heavily. Ask which.
Working through this on a real project?
Tell us what you are building. You will get a scoped estimate and an architecture you own, not a capability deck.
Common questions
Fixed price suits well-understood work with stable scope, such as a migration between documented systems or a rebuild of something specified. Time and materials suits anything involving discovery or a new product. For most builds a hybrid works better: fix the price of discovery, fix the team and cadence, fix scope per two-week sprint, and cap spend per phase with an explicit stop point.
Typically 20–40% above an honest estimate. The supplier is absorbing estimate risk and prices it accordingly, and you pay that premium whether or not the risk materialises. That can still be a sound trade if you need a hard number for approval, but it is a premium, not a saving.
It makes learning expensive. Once signed, every new discovery becomes a change-order negotiation, so teams stop surfacing what they find. The supplier is also incentivised to interpret the specification narrowly and to cut unbilled quality work like refactoring, test coverage, and accessibility, because it comes directly out of margin.
Add the controls deliberately: a not-to-exceed cap per phase, a fixed team size so monthly cost is predictable, working software demonstrated every two weeks, a prioritised backlog you own, and the right to stop at any sprint boundary without penalty. The stop right does most of the work. It keeps the supplier proving value fortnightly.