Fixed price vs time and materials for software

The two ways UK software firms charge, who carries the risk under each, and how to tell which one your project can stand.

Updated 4 October 2026 · 8 min read

The short answer

A fixed price is one agreed figure for agreed work. Time and materials means paying a day rate for however many days the work takes. Under the first, the supplier pays when their estimate turns out wrong. Under the second, you do.

Neither is cheaper by nature. A fixed price only protects you if there is a written scope detailed enough to argue over. Time and materials suits work nobody can describe yet, provided someone on your side can tell whether the days are being well spent.

Software estimates are wrong often, and occasionally by a lot. Bent Flyvbjerg and Alexander Budzier looked at 1,471 IT projects for the Harvard Business Review. The average cost overrun was 27 per cent, which most budgets can absorb. One project in six overran by around 200 per cent, which most businesses cannot.

The choice between fixed price and time and materials decides who pays for that one in six.

Who carries what under each model

	Fixed price	Time and materials	Capped time and materials
How you pay	One agreed figure for an agreed scope, usually in stages.	A day rate for the days worked, usually invoiced monthly.	A day rate, up to a ceiling the supplier cannot pass without your agreement.
If the supplier underestimated	They absorb it.	You pay for the extra days.	They absorb anything above the ceiling.
If you change your mind	A change request, priced before it is done.	More days.	More days, until the ceiling, then a conversation.
What you know before you start	The total.	The rate, and an estimate that is only an estimate.	The most you will pay.
How it goes wrong	A quote pitched low to win the work, then recovered through change requests or cut testing.	No natural stopping point. The project runs for as long as the budget does.	The ceiling is set so high it never bites.

What you pay for in a fixed price

A supplier who quotes a fixed price adds a margin for the things nobody can see yet: data messier than described, a system that is harder to connect to than its documentation says. You pay that margin whether or not those things happen. In return, you know the number.

In a fixed-price deal the written scope matters more than the figure. A figure attached to a two-page brief is an opening bid, because every gap in the brief becomes a change request later. A scope worth fixing a price to says what each screen does, which systems it connects to, what happens to the existing data and what "finished" means. If you cannot imagine using it to settle a disagreement, it is too thin.

When a fixed-price project overruns and the supplier is absorbing it, watch the testing. It is the stage that gets squeezed when money is short, and it is the stage that decides whether anybody uses the system. Ask how much of the plan is testing before you sign, and ask again at the halfway point.

What you pay for in time and materials

UK agencies charge roughly £350 to £550 a day outside London and £600 to £900 in it, according to the ranges in the cost guide. On time and materials, the estimate you are given is a forecast of how many of those days the work will need. It is useful, and it binds nobody.

Time and materials is honest about uncertainty, and that is its strength. Nobody pads a price against risks that may not happen, and you can change direction without a renegotiation. It suits work where the second month depends on what the first month found.

Its weakness is that it needs a buyer who can judge progress. If nobody in your business can look at a fortnight’s work and say whether it was a good fortnight, you are paying for days on trust. Most owners are in that position, and there is nothing wrong with it. It is a reason to choose the other model.

Six questions to ask whichever you choose

For a fixed price: what is in the written scope, and what happens to anything outside it? Ask to see a change request from a past project, with its price.
For a fixed price: if you underestimated, who pays? The only acceptable answer is that they do.
For time and materials: how will I know each week what the days bought? You want a short written note against the plan, not a timesheet.
For time and materials: at what point will you tell me the estimate is wrong? A supplier who will say so at a quarter of the budget is worth more than one with a lower rate.
For both: how are payments tied to things I can see working, rather than to dates?
For both: who owns what has been built if we stop halfway? It should be you, with everything needed to continue elsewhere. This is what happens when it is not.

When time and materials is the better choice

Nobody can describe the finished system yet, and the first weeks are about finding out. Fixing a price there means paying for a large margin of guesswork.
You have a technical person of your own who can judge the work week by week.
The system is already live and the work is a stream of small improvements. Pricing each one separately costs more in paperwork than it saves.

Outside those three, a fixed price against a written scope is usually safer for a business that buys software once every few years. The eight questions for choosing a supplier cover the rest of the contract.

Common questions

Is fixed price more expensive than time and materials?

The quoted figure usually is, because it includes a margin for risks the supplier is taking on. Whether the final bill is higher depends on whether those risks happen. On a well-scoped project they often do not, and time and materials comes in cheaper. On a poorly scoped one, the fixed price is the cheaper of the two.

What happens if a fixed-price project runs over?

If the overrun comes from the supplier’s own estimating, they absorb it. If it comes from a change you asked for, it is priced as a change request before the work is done. The written scope is what decides which of the two it is.

What is a change request?

A written description of work outside the agreed scope, with its own price, which you approve before it is done. A supplier that does changes first and invoices later has turned your fixed price into time and materials without telling you.

What is capped time and materials?

Time and materials with a ceiling. You pay for the days worked up to an agreed maximum, and the supplier carries anything beyond it. It works when the ceiling is set close to a realistic estimate, and gives no protection when it is set far above one.

Can we switch models halfway through?

Yes, and it is often sensible. A common pattern is time and materials for the first few weeks of investigation, then a fixed price for the build once the scope is clear.

Which do UK software companies use?

Both, and many offer either. Agencies that bill by the day tend to prefer time and materials. Studios that publish their prices tend to quote fixed. We quote fixed price against a written scope for work we take on directly.

Sources

Flyvbjerg and Budzier, Why Your IT Project May Be Riskier Than You Think (Harvard Business Review, 2011)

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