A fixed bid sets one price for a defined scope. Time and materials (T&M) bills for the hours worked, plus any project-specific costs. Fixed bid fits work you can describe in full today. T&M fits work that will change as you learn. Most real projects sit somewhere between the two, and that is fine.
We build websites, apps and automation for business owners in Canada and the US. We have quoted and run both models. Here is how we think about the choice.
TL;DR
- Fixed bid gives you a known price for a known scope. Changes cost extra and need written approval.
- T&M gives you flexibility. You pay for actual work, so you need a cap and regular reporting.
- Choose by how well you can define the scope today, not by which price looks safer.
- A hybrid works well for many products: fixed price for the clear parts, T&M for the uncertain parts.
- Whatever you pick, ask for milestones, a change process and a budget ceiling in writing.
What each model means
In a fixed-price software contract, the customer pays a defined amount no matter how many hours the developer spends. In a T&M contract, the customer pays for hours worked, plus equipment or materials the project needs. A software contracting guide from a US law firm describes the two in just those terms.
The US government's rulebook is a useful reference point, even if you never sell to the government. Under the Federal Acquisition Regulation for fixed-price contracts, the price does not change with the contractor's cost experience. The contractor carries the cost risk and keeps the profit or takes the loss. Under the T&M rules, the buyer pays fixed hourly rates that cover wages, overhead and profit, plus the actual cost of materials.
So the real difference is who holds the risk. With a fixed bid, the studio holds the risk of overrun. With T&M, you do.
How the money works
Fixed bid
You agree on requirements and budget at the start. NetSuite's comparison notes that fixed-price projects generally settle both up front, while T&M projects have requirements that evolve and a final cost based on labor and materials used.
The studio prices in uncertainty. A project management paper from PMI says fixed-price contracts may cost more at the outset to cover risks and unknowns. That is not a trick. It is what happens when someone else agrees to absorb your surprises.
Payments usually tie to accepted deliverables or milestones. Change requests are typically written, approved by an authorized person on each side, and answered within a set period. They can move scope, schedule and cost, according to the same law firm guide.
Time and materials
You pay for the work as it happens. Usually that means a weekly or monthly invoice with hours by person and task. The budget is an estimate, not a promise.
Good T&M has a ceiling. The federal rules require a ceiling price on T&M contracts, which the contractor passes at its own risk. NetSuite describes a similar not-to-exceed clause as a way to set a maximum customer spend. Ask for one.
Pros and cons side by side
| Fixed bid | Time and materials | |
|---|---|---|
| Price certainty | High, if scope holds | Low to medium, depends on the cap |
| Flexibility | Low, changes go through change orders | High, you can reprioritize weekly |
| Who carries overrun risk | The studio | You |
| Upfront planning needed | A lot | A little |
| Billing | Milestones or schedule | Actual hours, regular invoices |
| Best when | Scope is clear and stable | Scope will evolve |
| Main danger | Padded price, or friction over every change | Hours piling up without results |
Where fixed bid goes wrong
The studio has a strong reason to control costs. The federal rules say a firm-fixed-price contract gives the contractor a strong incentive to control costs and work efficiently. That is the upside.
The downside shows up in the details. Academic work on software pricing suggests fixed-price models can push vendors to overstate costs. They can also push teams to argue about what was "in scope" instead of building what the user needs.
Where T&M goes wrong
The same academic work says T&M removes the reason to overstate costs, but it also weakens the direct drive for productivity. The federal rules say a T&M contract offers no positive profit incentive to control costs, so the buyer needs to watch the work.
In practice that risk is called unbounded burn. TechTarget's guide to Agile contract types flags it for buyers without strong project governance. If you cannot review progress every week or two, T&M is the wrong choice.
How to choose
Start with one question: can you write down what "done" looks like today?
Pick fixed bid when:
- The scope is short and specific, such as a brochure website, a defined integration or a clearly specified admin tool.
- You have a hard budget and need a number for a board, a lender or a partner.
- The product is close to standard, with few unknowns.
The academic paper notes fixed price is often used for standardized products. The law firm guide says it fits waterfall projects whose specs and effort can be scoped early.
Pick T&M when:
- You are building a first version and expect to learn from users.
- The work depends on third-party systems you have not seen yet.
- You want to change priorities as you go.
The federal rules use T&M when you cannot accurately estimate the extent or duration of the work. The same law firm guide says T&M, with suitable limits, tends to suit agile work where total effort is hard to estimate.
Pick a hybrid when both are true. The U.S. Digital Service's TechFAR Hub describes combining fixed price for well-defined milestones with T&M for uncertain development. It also warns that forcing a fixed price onto vague requirements can lead to unnecessary contingencies in the price. You pay for guesses.
A worked example
Say you run a distribution business and want a dealer portal.
The login, the product catalog and the order history are well understood. Price those as a fixed-bid phase with clear acceptance criteria.
The integration with your accounting system is not well understood. Nobody knows the data quality until someone opens it up. Run that part as a short, capped T&M discovery. When it ends, you will know enough to fix the price on the next phase.
You get certainty where it exists. You get honesty where it does not.
What to put in any software contract
- Milestones with acceptance criteria. Each payment ties to something you can test.
- A written change process. Who can request a change, who approves it, and how fast.
- A budget ceiling on T&M work. The studio goes past it at its own risk.
- Regular reporting. Hours by task, plus a demo of working software.
- An exit. You can stop after any milestone and keep what was built.
- Ownership. You own the code and the design files when you pay for them.
For budgeting beyond the build, read our notes on custom software costs and the 15 to 20 percent maintenance line. If you are scoping a first product, our week-by-week SaaS MVP plan shows which pieces are clear enough to fix.
Our perspective
We do not treat this as a debate. We treat it as a scoping question.
When a client arrives with a clear brief, we price it as a fixed scope and say plainly what is outside it. When the idea is still forming, we say so, and we suggest a short, capped first phase. Then we price the rest once both sides have seen real screens and real data.
The model matters less than the habits around it. Clients see our work as it develops. They know what we are doing and why. They hear from us when something changes, not when the invoice arrives. A fixed price with silence is worse than a flexible one with weekly demos.
One warning from us: be wary of any quote that is much lower than the others. Either the scope is thinner than you think, or change orders will make up the gap.
— Loic
How we scope projects at Westcode
We build custom websites, mobile apps, AI integrations and workflow automation from Kelowna and Vancouver. Every project starts with a conversation about what is known and what is not. From there we recommend a fixed scope, a capped phase or a mix, and explain why. See how we work on our app development service page.
We do not publish prices, because each project is scoped to your needs. Tell us what you want to build and we will tell you which model we would use.
FAQ
Which is better, fixed price or T&M?
Neither wins every time. Fixed price is better when scope is clear and stable, because you know the cost early. T&M is better when requirements will change, because you can adjust without renegotiating. Many teams combine them.
What is the difference between T&M and fixed price in one line?
Fixed price pays for a defined result at an agreed amount. T&M pays for the hours and materials actually used. The first moves risk to the studio, and the second keeps more of it with you.
What are the disadvantages of fixed-price contracts?
The price may include a cushion for unknowns. Changes usually need a written request and may add cost and time. Disputes over what was in scope are common if the brief was loose. Research on software pricing also notes the incentive to overstate cost.
How do I keep T&M costs under control?
Set a ceiling or not-to-exceed amount. Ask for weekly hours by task and a working demo every sprint or two. Review them. If the budget is burning faster than the progress, stop and re-plan.
Can I switch models mid-project?
Yes, and it is often smart. A capped T&M discovery phase can end with a fixed-price quote for the build. Agree on that path in the first contract so nobody is surprised.
Sources
- Subpart 16.2, Fixed-Price Contracts (Acquisition.GOV)
- 16.601 Time-and-materials contracts (Acquisition.GOV)
- Contract Types for Agile Development Contracts (TechFAR Hub)
- Software Development Agreement: Drafting and Negotiating (Katten)
- Fixed-Price vs. Time and Materials Contracts (NetSuite)
- Contracts from the vendor and the buyer points of view (PMI)
- Pricing Software Development Services (University of East Anglia)
- Which Agile contract type fits your project and budget? (TechTarget)
