Fixed Price vs Time and Materials
Last updated: February 2025
Quick Comparison
| Aspect | Fixed Price Contract | Time and Materials Contract |
|---|---|---|
| Cost certainty | Fixed; client knows total cost upfront | Variable; final cost depends on time spent |
| Risk allocation | Provider bears cost overrun risk | Client bears cost overrun risk |
| Scope flexibility | Rigid; changes require formal variations | Flexible; scope can evolve organically |
| Client involvement | Less ongoing oversight needed | Active management required to control costs |
| Best for | Well-defined, predictable projects | Exploratory, evolving, or agile projects |
What Is a Fixed Price Contract?
A contract where the total price is agreed upfront for a defined scope of work, regardless of the actual time or resources required to complete it.
Key Features
- • Total cost agreed before work begins
- • Scope must be clearly defined upfront
- • Provider bears the risk of cost overruns
- • Change requests handled through a formal variation process
Best For
- • Well-defined projects with clear requirements
- • Clients needing budget certainty
- • Competitive tendering processes
What Is a Time and Materials Contract?
A contract where the client pays for actual time spent and materials used, typically at agreed day rates or hourly rates.
Key Features
- • Client pays for actual time and resources consumed
- • Flexible scope that can evolve during the project
- • Regular timesheets and reporting required
- • Often includes a rate card and estimated budget
Best For
- • Projects where requirements are unclear or evolving
- • Agile and iterative development approaches
- • Advisory and consulting engagements
When to Use a Fixed Price Contract
Use fixed price when the scope is well-defined, requirements are stable, and you need budget certainty. Ensure you invest in thorough scoping before committing to a fixed price.
When to Use a Time and Materials Contract
Use time and materials when requirements are unclear, the project needs flexibility, or you are following an agile methodology. Set a budget cap or regular review points to manage costs.
Which Does Your Business Need?
Fixed price suits well-scoped projects where budget certainty matters. Time and materials suits evolving projects where flexibility is more important than cost predictability. Many engagements use a hybrid: fixed price for defined phases and T&M for discovery or support.
FAQ
Can I cap costs on a time and materials contract?
Yes. You can agree a budget cap or not-to-exceed figure, require approval before exceeding estimates, or include break points for review. This gives some cost control while maintaining scope flexibility.
What happens if the scope changes on a fixed price contract?
Changes are handled through a formal change control process. The provider assesses the impact and proposes an adjusted price and timeline. Both parties must agree before the change is implemented. Without a change control clause, disputes are common.
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