Both models are honest; they allocate risk differently
Fixed price means the supplier carries the risk of it taking longer than expected, and prices accordingly — typically 20–40% above their expected cost. You buy certainty and pay for it.
Time and materials means you carry that risk. If it takes twice as long, you pay twice. The rate is lower because the supplier is not insuring you.
Neither is a trick. What causes problems is using the wrong one for the level of uncertainty involved.
When fixed price is right
- Scope is genuinely well understood, ideally after a discovery phase
- You need budget certainty for approval
- The work is similar to things the supplier has built before
- You can define done unambiguously
- Changes will be rare, and you are willing to pay for the ones that happen
When time and materials is right
- Scope will genuinely evolve as you learn
- You have technical capability to direct and review the work
- The relationship is ongoing rather than a single project
- You want the ability to change direction without a change-request negotiation
- You trust the supplier and can verify progress meaningfully
That last condition is not optional. Time and materials without the ability to judge progress is an open-ended commitment to someone else's estimate of their own productivity.
The hybrid most experienced buyers use
- Paid discovery, one to three weeks, fixed price. Produces a specification, architecture and a real estimate.
- Fixed-price phase one against that specification, with milestones.
- Time and materials for ongoing improvement afterwards, once you know the supplier and the system.
This gets certainty where it matters — the initial commitment — and flexibility where it helps, and it means the fixed price is based on real understanding rather than a guess.
Whichever you choose, get these right
- Milestones tied to demonstrable functionality, not to dates or percentages
- Payment on acceptance of each milestone, with a defined acceptance process
- A change process agreed in advance, so changes are priced rather than argued about
- Code ownership and repository access from day one, in writing
- A warranty period for defects after launch, typically 30–90 days
Warning signs in either model
A fixed price with no written scope is not a fixed price; it is a number that will be renegotiated. A time-and-materials arrangement with no estimate and no reporting cadence is an invitation to overrun.
In both cases, the protection is the same: know what done looks like, see working software regularly, and pay against demonstrable progress rather than elapsed time.