Fixed price, time and materials, or fixed time? Choosing how to pay for software

How you pay for software changes how it gets built. It decides who carries the risk when something turns out harder than expected, how willing everyone is to change course, and how honest conversations about scope will be. There is no universally best model, only a best fit for how well you understand the problem today.

Option 1: Fixed price, fixed scope

You agree a list of deliverables and a total price up front.

• Good when: the requirements are small, well understood and unlikely to change, such as a defined integration or a straightforward marketing site
• Risk for you: changes become negotiations, and you may pay a premium for the vendor's risk buffer
• Risk for the vendor: underestimating, which tempts corner-cutting to protect margin

Technical teams should watch for quality shortcuts in areas the contract does not measure, such as testing, documentation and operability.

Option 2: Time and materials

You pay for the time spent, usually at agreed daily or hourly rates, often with an estimate or a cap.

• Good when: the problem is still being discovered, or priorities will change as you learn from users
• Risk for you: costs can drift without active management
• What makes it work: regular demos, a visible backlog, and a budget ceiling that triggers a conversation rather than a surprise

Option 3: Fixed time, variable scope

You fix the time and budget up front, and agree the scope to fit. If something proves harder, scope is trimmed rather than the budget or deadline being stretched. This is the idea behind the Shape Up method that informs how we work.

• Good when: you care about a predictable cost and date, and can accept that the least important features may be dropped
• Risk for you: needs clear priorities, so you must be willing to decide what matters most
• What makes it work: shaping the work first so the team starts with a solution that realistically fits the time available

How to decide

Ask three questions.

• How well do we understand the problem? If not well, avoid fixed scope.
• How costly is a late or over-budget outcome? If very, favour fixed time or a capped model.
• How much management time can we invest? Time and materials needs more of your attention than the other two.

A hybrid that often works

Many engagements start with a short, fixed-price discovery phase that produces a shaped plan, risks and an estimate range. The build then proceeds under fixed time or capped time and materials, with the first phase having reduced the biggest unknowns. You pay a small amount to learn whether the larger commitment makes sense.

Whatever model you choose, insist on frequent working demos. Progress you can see and use is the best protection against every pricing model's weaknesses.

For finance and procurement readers

Fixed price is easiest to approve but is not the same as low risk. Ask what happens when scope changes, what is excluded, and how the price was built. A very low fixed bid is a prompt for questions, not a reason to celebrate.

For engineering readers

Check that quality practices are explicit deliverables under any model: automated tests, deployment automation, documentation and handover. If it is not written down, it is the first thing to go when time is short.