By Alpit Patel and the aibrevo team · October 31, 2026 · 5 min read
Fixed Price vs Time and Materials: Which Contract Fits Your Software Project?
Quick answer
A fixed-price contract sets one price for a defined scope, so the vendor carries the risk of overruns and you carry the risk of rigidity. A time-and-materials contract bills actual hours at agreed rates, so you keep flexibility and carry the risk of overruns. Fixed price fits a well-defined first release; time and materials fits work whose scope cannot be pinned down yet. Below: definitions from US federal contracting rules, a side-by-side table, worked numbers and the hybrid models most teams actually use.
Key takeaways
- US federal acquisition rules describe a firm-fixed-price contract as one that 'places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss' (FAR 16.202-1).
- The same rules say a time-and-materials contract may be used only when it is not possible 'to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence,' and require a ceiling price (FAR 16.601).
- Fixed price fits a first release with a written scope and acceptance criteria. Time and materials fits discovery, research, ongoing improvement and work where requirements will change as you learn.
- On fixed price, the vendor prices in a contingency and changes go through change orders. On time and materials, you pay for every extra hour, so a not-to-exceed cap and weekly reporting matter.
- Most software projects use a hybrid: a short discovery phase, then a fixed-price first release, then time and materials or a retainer for what comes after.
A fixed-price contract sets one price for a defined scope: the vendor carries the risk of overruns, and you carry the risk of rigidity, because changes need a change order. A time-and-materials (T&M) contract bills the hours actually worked at agreed rates: you keep the flexibility to change direction, and you carry the risk of overruns. Fixed price fits a well-defined first release. Time and materials fits work whose scope cannot be pinned down yet.
Checked October 31, 2026. We used the definitions in the US Federal Acquisition Regulation (FAR) as a neutral reference, and Clutch’s hourly rate data (updated Sep 21, 2026) for the worked examples.
How do the two contract types differ?
The clearest neutral definitions come from US federal contracting rules, which govern how the government buys services, software included:
- Firm fixed price: the contract “places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss” (FAR 16.202-1).
- Time and materials: pays for labor hours at fixed hourly rates plus materials at cost, and “may be used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.” It must include “a ceiling price that the contractor exceeds at its own risk” (FAR 16.601).
Both checked Oct 31, 2026. Private software contracts are not bound by the FAR, but the risk logic is the same.
| Fixed price | Time and materials | |
|---|---|---|
| What you agree | One price for a written scope | Hourly rates, plus materials at cost |
| Who carries overrun risk | Vendor | Client |
| Flexibility to change scope | Low: change orders | High: redirect any week |
| Needs up front | Detailed requirements and acceptance criteria | A backlog and priorities |
| Price contains | Vendor’s contingency for unknowns | Only hours used |
| Client oversight needed | Acceptance testing at milestones | Weekly hours and progress review |
| Fits | Defined first release, fixed deadline, fixed spend approval | Discovery, research, iteration, maintenance |
| Main failure mode | Disputes over what was “in scope” | Hours grow without a matching result |
What does each look like in numbers?
An illustrative project estimated at 1,200 hours at $49 an hour, the top of the range Clutch reports most listed firms charge (Clutch, updated Sep 21, 2026, checked Oct 31, 2026):
| Outcome | Time and materials | Fixed price with a 20% contingency |
|---|---|---|
| Estimate | 1,200 h x $49 = $58,800 | $58,800 + 20% = $70,560 |
| Work runs to plan (1,200 h) | $58,800 | $70,560 |
| Work runs 25% over (1,500 h) | $73,500 | $70,560 (vendor absorbs $2,940 beyond its contingency) |
| Work finishes early (1,100 h) | $53,900 | $70,560 |
| T&M with a $65,000 not-to-exceed cap, 1,500 h | $65,000 billed; the rest needs your written approval | n/a |
The 20% contingency and the hour counts are illustrative, not an industry standard or our pricing.
The pattern holds at any rate: fixed price costs more when things go to plan and protects you when they do not. Time and materials costs less when things go to plan and exposes you when they do not. A cap moves part of that exposure back to the vendor.
When should you choose fixed price?
- The first release has a written scope with user roles, screens, integrations and acceptance criteria.
- You need one approved number before work starts, for example from a board or a grant.
- The deadline is fixed, such as a launch date or a season, and the scope can be cut to fit.
- The vendor has built something similar before, so its estimate rests on real data.
A good requirements document makes fixed-price work possible. How to write a software requirements document walks through one.
When should you choose time and materials?
- Discovery and research, where the point is to find out what to build.
- Products after launch, where the backlog changes weekly based on what users do.
- Integrations with unknown systems, where nobody can see the other side’s quirks until they connect.
- Maintenance and support, where the work is whatever breaks or changes.
Protect yourself with a not-to-exceed cap per phase, weekly reports of hours against tasks, and the right to stop at the end of any sprint.
What do most software teams actually use?
A hybrid, in phases:
- Discovery, short and fixed price or capped T&M: workshops, requirements, designs and an estimate.
- First release, fixed price against the scope discovery produced, with milestone payments tied to acceptance.
- After launch, time and materials or a monthly retainer for new features and maintenance.
This puts fixed price where the scope is known and flexibility where it is not. It also keeps the first release short. Our own 44 published builds each went live in 5 to 10 weeks, with a median of 7, which is a window where scope can be written down and held.
How do we quote?
We scope each build on a free 30-minute call, then send a written quote with the scope, milestones and timeline. Our app and web app builds typically cost $7,000 to around $25,000 to $30,000, depending on features, and we work project-based or hourly.
Deciding how to contract a build? See custom software development, send us a message, or book a free 30-minute call.
Sources
All pages opened on Oct 31, 2026.
- Federal Acquisition Regulation, 16.202-1 Firm-fixed-price contracts.
- Federal Acquisition Regulation, 16.601 Time-and-materials contracts: description, when it may be used, oversight and ceiling price.
- Clutch, Software development pricing guide, updated Sep 21, 2026: typical hourly rates.
- aibrevo, our work: timeframes stated on each of 44 builds.