Fixed price vs time and materials in software development
Fixed price vs time and materials comes down to one question: who carries the risk if the work takes longer than planned. Choose a fixed price when the scope can be written down: what the software does, for whom, and how you'll know it's finished. Choose time and materials (paying for the days worked) when you don't yet know what to build, for ongoing maintenance or to add people to your own team. Capped time and materials sits in between. This guide explains each model, what it costs in practice and what to ask for in the contract.
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Fixed price or time and materials: the short answer
The UK government's guidance for buying digital work put the trade-off plainly. A fixed price ‘works best when your requirements are well defined’ and can cost more because the supplier ‘owns most of the risk’; with time and materials, you own more of the risk, because you pay the day rate for any extra days. The GOV.UK guidance for Digital Outcomes and Specialists was withdrawn in December 2025 as out of date, but its definitions remain a clear statement of how the models differ.
Agencies that write on the subject agree on the criterion even when they prefer different models. Apptension recommends a fixed price for short projects with a precisely defined scope and time and materials when you need room to change. For an SME solving a concrete problem (replacing a spreadsheet, connecting the ERP to the online shop, giving engineers a job sheet app), a fixed price is usually the more comfortable option: you know what you'll pay and nobody has to watch timesheets. For a product that will evolve for years, combining both models is common.
Rule of thumb: if you can write on one page what the software must do and how you'll know it works, ask for a fixed price. If you can't, pay for a short discovery phase first, then ask for the fixed price.
Fixed price, time and materials, capped T&M and retainers: what each one is
Four ways to buy the same work, each splitting the risk differently. The first three follow the GOV.UK definitions.
- Hybrid is the most common pattern: a short discovery at a fixed price, the build at a fixed price once the scope is defined, then evolution on a retainer or T&M. Magora, for example, publishes a two-week discovery sprint from £3,000 that ends in a fixed-price quote for the build.
- Capped T&M protects both sides only if the cap is realistic. Set too low, it becomes a fixed price without a written scope; set too high, it's T&M with a reassuring number on top.
| Model | How you pay | Who carries overrun risk | Fits when… |
|---|---|---|---|
| Fixed price | One agreed amount for a defined scope, usually in milestones | The supplier | Scope and acceptance criteria are written down |
| Time and materials (T&M) | Days actually worked × the day rate of each role, with regular reports | You | The product evolves and priorities change |
| Capped time and materials | As T&M, up to a ceiling; if the cap is reached, the supplier finishes at its own cost | You up to the cap, then the supplier | You want flexibility with a known maximum |
| Retainer or block of days | A prepaid number of days or hours a month, used as needed | You, within a known limit | Maintenance, small changes and support |
What each model costs in practice
With time and materials the maths is direct: days × rate. The median UK contract rate for a software developer was £525 a day in the six months to 3 November 2026 (IT Jobs Watch). Agencies charge more because their day includes testing, project management and margin: Magora puts its own fully loaded developer-day at £520–£570 and describes boutique London agencies at £60–£140 an hour. Spanish boutique studios publish €60–€120 an hour (≈ £50–£100), according to Duotach, a Spanish agency (June 2026; order of magnitude). A 60-day project at £525 is £31,500; at £800, it's £48,000. The rate is known. The number of days isn't, and nobody guarantees it.
With a fixed price, the supplier makes the same estimate and adds a margin for uncertainty. None of the sources consulted publishes a reliable percentage, so be wary of anyone who quotes one from memory. What you can judge is whether the margin is reasonable: the clearer the scope, the smaller it should be. For project-level ranges, see how much custom software costs.
Is a fixed price more expensive? On paper, sometimes. In practice it depends on how far the project would have overrun. McKinsey's study of more than 5,400 IT projects (2012) found that large projects, those with initial budgets above US$15 million (about £11 million), ran on average 45% over budget and 7% over time and delivered 56% less value than predicted. SME projects are far smaller, but the pattern holds: overruns happen, and the real question is who pays for them.
Pros and cons of each model
The strongest case against fixed price comes from reinteractive (2018): an exact price before building is rarely possible, so incentives pull apart, with the supplier doing the minimum the scope allows and the client pushing for extras. Its alternative is time and materials with detailed upfront scoping and weekly delivery. Both camps agree on one thing: frequent working demos reduce the risk whichever model you choose.
| Aspect | Fixed price | Time and materials |
|---|---|---|
| Cost predictability | High: you know the amount before you start | Low without a cap; medium with one |
| Flexibility to change | Changes are priced and approved separately | Total: decided at the next prioritisation meeting |
| Work before signing | The scope must be defined first | Work can start sooner |
| What it asks of you | Review demos and accept milestones | Review timesheets, prioritise and have someone with authority to decide |
| Main risk | Arguments over what was included, or quality cut to protect the margin | The project never quite finishes, or unproductive days are billed |
| Internal approval | Easy: one amount, one date | Harder: a rate and an estimate |
Change requests on a fixed price project
The most common worry: ‘what if I need something different halfway through?’ On a well-run fixed price project, changes aren't forbidden; they're just not free or automatic. The sensible process: you ask for the change, the supplier prices it in writing (cost and effect on the schedule), you approve or drop it, and only then does the work happen. Magora's published terms say the same: a scope change on a fixed-price project goes through a change request.
There's often a way to avoid extra cost: swap one thing for another. If a new feature matters more than one already planned, it can replace it at no change in price, provided the effort is similar and the swap is agreed in writing.
On time and materials, agree the rates in writing too. In England, Wales and Northern Ireland, where a service contract doesn't fix the price, the law implies that you'll pay a ‘reasonable charge’, and what is reasonable is ‘a question of fact’ (Supply of Goods and Services Act 1982, s. 15). That's a dispute nobody wants. Check your contract with your solicitor.
Ask for the contract to describe the change procedure: who requests a change, how quickly it's priced, who approves it and how it affects the schedule. Without that, a fixed price stops being fixed.
What to put in the contract
Whichever model you choose, the contract matters more than it seems. Under UK copyright law the author of the code is its first owner unless it's assigned, and an assignment only takes effect in writing, signed by the assignor (Copyright, Designs and Patents Act 1988, ss. 11 and 90(3)). Paying the invoice doesn't transfer it on its own. Clauses to ask for:
- Any model: confidentiality, assignment of intellectual property, warranty, service levels, data protection, governing law and early termination.
- Fixed price: change procedure, payment milestones tied to deliverables, acceptance criteria, test protocol and what happens with specification errors.
- Time and materials: rate per role, timesheet reporting, a budget cap, invoicing frequency, rate reviews, team changes and notice to terminate.
- Retainer or block of days: what happens to unused days, whether they expire and what work they can be spent on.
- Always: the code repository in your company's name and a documented handover if you change supplier.
Common mistakes when choosing a model
- Fixed price on a vague scope. It ends in arguments about what was included, or in software that meets the paper but not the need.
- Time and materials with no goal. Days get paid with no agreed result and no definition of done.
- ‘Fixed price, but we'll add things as we go’. That isn't a fixed price.
- Buying hours when you want an outcome. If what you want is the ERP and the shop in sync, buy that, not 200 hours.
- Forgetting your own dependencies. Waiting for access, test environments, content or decisions on your side delays the project in either model. Write down what the supplier needs from you and by when.
- Comparing only day rates. A team at £800 a day that takes half the time costs less than one at £500.
Checklist: fixed price or time and materials?
- Can you describe on one page what the software must do and how you'll know it's finished? If yes, fixed price.
- Do you need a fixed amount to get internal approval or financing? Fixed price.
- Will you discover what you need as you go? Capped time and materials, or a short discovery, prototype and MVP phase before fixing the price.
- Is it maintenance or small improvements on something that already works? A retainer or a software maintenance and support agreement.
- Do you have someone with time and authority to prioritise every week? If not, time and materials is risky.
- Will you see working software every few weeks, whichever model you pick? If not, the risk grows either way.
How SocketStack works
We work with one fixed price per project: changes in scope are quoted separately and only go ahead with your approval, you see a working demo every two weeks, and the code is yours from day one. The whole process is on our fixed price software development page, and it starts with a free 30-minute call.
Frequently asked questions
Which is better, fixed price or time and materials?
Neither in general. A fixed price suits work whose scope and acceptance criteria can be written down; time and materials suits exploration, evolving products and maintenance. Many projects combine both: a short discovery, a fixed-price build and a retainer afterwards.
What happens if I change the scope on a fixed price project?
The change is priced in writing, with its effect on the schedule, and only goes ahead if you approve it. Often a new feature can replace a planned one of similar effort at no extra cost, as long as the swap is agreed in writing.
Is a fixed price more expensive than paying by the day?
On paper it can be, because the supplier prices in the risk; the GOV.UK buying guidance said as much. In practice it depends on how far the project would have overrun on time and materials, where you pay for every extra day.
What is capped time and materials?
You pay for the days actually worked, up to an agreed ceiling. If the cap is reached before the work is done, the supplier finishes at its own cost; if the work finishes early, you only pay for the days used.
Who owns the code if I pay for the project?
Not automatically you. Under the Copyright, Designs and Patents Act 1988 the author is the first owner of the copyright unless it's assigned, and an assignment must be in writing and signed. Ask for the assignment clause and for the repository to be in your company's name from day one.
What happens if the supplier is late on a fixed price project?
It depends on the contract. Ask for dated milestones, payments tied to accepted deliverables and a clear remedy for delay. Working demos every couple of weeks let you spot slippage early rather than at the deadline.
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