# Fixed Price vs Time and Materials: Which Model When

> Choose a fixed price when the scope can be specified precisely up front, because the agency then carries the overrun risk and prices it in as a buffer. Choose time and materials when requirements are still moving, accepting that the risk shifts to you. For most projects, time and materials with a written cap is the best compromise.

- URL: https://agenturbewertung.de/en/proposals-and-pricing/fixed-price-vs-time-and-materials/
- Language: en
- Updated: 2026-10-19
- Publisher: Agenturbewertung (OnlineBuilders LLC, https://onlinebuilders.biz)

Fixed prices feel safe. You know the number and the agency has to deliver. That safety costs more than most clients realise, and it only covers what's written in the contract. Everything else becomes a change request.

Time and materials looks like a blank cheque by comparison. That's only half true too. With a few rules in place, it is often the fairer arrangement and, in the end, the cheaper one.

## Who carries which risk

Behind the choice of pricing model sits one question: who pays when the project turns out to be more work than expected?

**Four pricing models side by side**

| | Fixed price | Time and materials | T&M with cap | Fixed price per phase |
|---|---|---|---|---|
| Overrun risk sits with | agency | client | shared | agency, per phase |
| Contingency built into price | yes | no | partly | partly |
| Changes mid-project | change request only | any time | up to the cap | between phases |
| Specification effort up front | high | low | medium | medium |
| Typical fit | well-defined websites | ongoing product work | most projects | larger software builds |

Our own classification. Contract wording varies.

Under a fixed price, the agency owns the overrun risk, and it won't give that away for free. Any sensible agency adds a contingency to its estimate because projects rarely shrink. You never see the size of that buffer in the proposal.

## What the buffer costs you

Numbers make this concrete. An agency estimates a project at 200 hours and allows for the estimate being off by up to a quarter, most likely upwards.

**Example: one project, two pricing models**

- Agency estimate: 200 h
- Fixed price with 25% buffer × $150: $37,500
- T&M, project goes well (180 h × $150): $27,000
- T&M, project goes to plan (200 h × $150): $30,000
- T&M, project goes badly (260 h × $150): $39,000
- **T&M with a $33,000 cap: at most $33,000**

Rate, buffer and scenarios are assumptions for the example.

The fixed price only protects you in the bad scenario, and only by $1,500. With the other two outcomes you pay $7,500 to $10,500 more. The cap sits in between: it limits your exposure without paying for the full buffer.

The example is deliberately simple. It still shows why experienced buyers rarely insist on a fixed price for work they can't specify precisely.

## When a fixed price is still right

There are good reasons to want one. Your budget may be fixed because it comes from a grant or needs board approval. The scope may be clear, say a website with a known page count, finished content and no integrations, so the buffer is small. Or you may not trust the agency yet and want a hard limit.

The precondition is a precise scope. Anything not written down isn't in the price. The tighter the description, the smaller the buffer and the fewer arguments about change requests. Our [agency brief template](https://agenturbewertung.de/en/choosing-an-agency/agency-brief-template/) helps you prepare one.

Pay special attention to the change process. How are change requests raised, estimated and approved, and at what hourly rate? Without that clause you renegotiate every change under time pressure, with nothing to compare against.

## What the US government does

Public buyers have thought hard about this. The US Federal Acquisition Regulation allows time-and-materials contracts only when it is not possible to estimate accurately the extent or duration of the work at the outset. [FAR 16.601](https://www.acquisition.gov/far/16.601) then requires a ceiling price, above which the contractor works at its own risk. The rule also states openly that such contracts give the contractor no profit incentive to control costs, which is why it demands appropriate surveillance of the work.

You are probably not a federal agency. The logic still transfers neatly to any agency project: use T&M when you genuinely can't specify the work, cap it, and watch the burn rate.

## The compromise: time and materials with a cap

For most agency projects a hybrid makes the most sense. You pay for actual hours, up to a ceiling that can only be exceeded with your written approval. Three rules make it work:

1. The agency reports hours used and its forecast to complete every week or fortnight.
2. At a set threshold, for example 80% of the cap, you sit down together and agree the rest.
3. Hours beyond the cap are only billable after your written sign-off.

Write a concrete trigger into the contract, for instance: "If the agency expects the estimate to be exceeded by more than 10%, it will notify the client in writing and obtain approval before continuing."

## Fixed price per phase for software

Larger software projects often use another variant. The work is split into phases, each with its own fixed price. First a discovery phase of two to four weeks, whose output is the specification for the next phase. Then build phases, each starting from what the previous one delivered.

The upside: you can stop after any phase, and the buffer per phase is small because each phase is manageable. The downside: more admin and no fixed total at the start. For an example of how a studio structures phased builds, see [software development at OnlineBuilders](https://onlinebuilders.biz/solutions/software-development).

## Contract type is a separate question

Pricing and legal structure are related but not the same. What matters legally is what the agency promises to deliver: a defined result, or effort and expertise. Even a contract for a finished, working website can be billed by the hour. If your agency is in Germany, that distinction decides whether there is a formal acceptance step, explained in our guide to [software acceptance testing contracts](https://agenturbewertung.de/en/working-together/software-acceptance-testing/).

## How to decide

Three questions settle it for most projects:

- Can you describe the scope so precisely that two agencies would understand the same thing? Then a fixed price is realistic.
- Does the budget have to be a single number? Then use a fixed price or T&M with a hard cap.
- Do you want to change things as you learn? Then go for T&M with a cap, or fixed price per phase.

The hourly rate underpins every model, and [agency hourly rates](https://agenturbewertung.de/en/proposals-and-pricing/agency-hourly-rates/) explains how to judge it. If you are holding proposals built on different models, [how to compare agency proposals](https://agenturbewertung.de/en/proposals-and-pricing/compare-agency-proposals/) shows how to put them on a common footing.

Next step: ask every agency to show its quote as an hours estimate per building block as well. Then you can see how big the buffer in any fixed price really is.

## FAQ

### Is a fixed price cheaper than time and materials?

Only if the project overruns badly. Agencies add a contingency to fixed prices, so on projects that go roughly to plan you pay for risk that never materialised. On well-defined work the buffer is small and the difference shrinks.

### What is a not-to-exceed clause?

A ceiling on total fees in a time-and-materials contract. The agency bills actual hours up to the cap and needs your written approval to go beyond it. It combines the flexibility of hourly billing with a predictable maximum.

### Can agile projects use a fixed price?

Rarely for the whole project, since agile work expects requirements to change. Fixed prices per sprint or per phase work well, combined with an overall budget that limits how many sprints you buy.

### What happens if the contract has no price at all?

It depends on the governing law. In England, Wales and Northern Ireland, the Supply of Goods and Services Act 1982 implies that the customer pays a reasonable charge, and what counts as reasonable is a question of fact. That's a recipe for argument, so always agree rates in writing.

Photo: John Cummings, CC BY-SA 4.0 (https://commons.wikimedia.org/wiki/File:Glass_egg_timer.jpg)