Fixed-price vs Time and Materials (T&M) Pricing Models in Software Development

Introduction

When starting a software development project, one of the first decisions you'll face as a client is choosing a pricing model. The two most common options are the Fixed-Price model and the Time and Materials (T&M) model. Your IT partner will guide you in selecting the right pricing model for your development by reviewing your project request.

The success of your project depends on many factors. The better you understand the processes before entrusting your project development to tech teams, the more in control you will feel. This month, we aim to share the pros and cons of each pricing model in software development, along with real-life examples, to help you understand which one to choose based on your planned budget, your project’s scope, complexity, and requirements.

Fixed-Price Model: Description and Pros and Cons

The fixed-price model in software development means the tech team uses a fixed budget for your project, regardless of the time, tech stack, or team structure. This model is highly desired by customers for its predictability but is also quite challenging for tech teams. You can opt for this model if your budget and scope of the project are predefined, and you don’t want your tech partner to exceed the agreed amount.?

But why is it difficult to implement? To begin the software engineering process under a fixed-price contract, you as the client must have a full understanding and a plan of all your project requirements, scope, and features. This means your tech team should stick to a 100% fixed design and specifications. Otherwise, if you don’t have everything pre-planned and expect your requirements to change, working with a fixed-price contract becomes hard to achieve, if not impossible. That's why this model works best for smaller-scale, well-documented, and clearly-defined projects.

The tech team typically explains that even minor adjustments, new requests, or feature changes can lead to budget increases. As a result, this pricing model is quite inflexible, making it challenging for the client to plan and stick to a clear vision from the beginning, and difficult for the development team to stick to strict requirements.

Pros of a Fixed-Price Contract

• Ideal if you have a limited or fixed budget and wish to avoid unpredictable cost overruns,
• Ideal if you have a clear and fixed deadline,
• Ideal if you can provide all necessary requirements in advance,
• Though you will be asked to give feedback or take part in meetings, the collaboration will be less hands-on because of the well-defined requirements.
• Development time tends to be shorter due to the extensive planning done upfront.

Cons of a Fixed-Price Contract

• As a client, you need to have a full vision of your project from the start.
• This model only works for well-specified, risk-free projects, which are rare.
• It takes much longer to prepare for fixed-price projects,?
• High costs can be expected for analytics, which can become outdated during product development. For example, requirements defined a year ago would likely no longer be relevant during the actual development process.
• Changing the project scope after signing the contract requires additional procedures and approvals, which can slow down progress.
• Any other requested change must be agreed upon, and additional budget allocated, which can lead to overlapping changes, especially toward the end of the project.

Fixed-price project example

At SCD, we've completed multiple projects where clients chose to work with a fixed-price model due to having clearly predetermined specifications. Such projects do not have to be limited to simple standard websites or mobile applications with limited functionalities. We’ll bring an example, based on one of our experiences when this model was used successfully.?

We once designed an online circuit diagram maker for a startup in the UAE. Circuit diagram makers are web-based tools that allow users to design, create, and simulate electrical circuits and schematics through drag-and-drop interfaces with various components.

When the company approached us, they presented clear requirements and had a comprehensive understanding of the project from start to finish. As in most cases involving the fixed-price model, the research phase took a bit longer. We dedicated three weeks to thoroughly analyzing and documenting each of their requirements in the form of a software requirements specification. After that, we documented the product architecture.

This preparation was crucial to ensure that the development process would run smoothly and we did not exceed their desired budget. Thanks to this thorough organization, we delivered a custom circuit diagram maker for substations, automating routine tasks like selecting equipment locations and cabling methods. As mentioned, such cases are rare because even if a client clearly understands what they need and how it should be implemented, it’s hard to plan every single feature in advance and make sure no major new requirements arise in the process.

Time and Materials Model:? Description and Pros and Cons

The Time and Materials (T&M) model operates on an hourly payment basis for the development work completed. The T&M model suits projects where you, as the client, may not have a clear vision of the final product at the start. You begin with an idea, which evolves step by step, with constant feedback and growing needs until you achieve a final solution.

Time and materials contracts are better suited for medium and large-scale projects. This model is extremely flexible allowing the development team to make quick refinements and manage priorities. It works well for complex projects that require ongoing customization.

Here, it's important to ask your tech partner what project management methodologies they use to ensure transparency. This is crucial, as without transparency, the project scope and budget can spiral out of control.?

For example, at SCD, we encourage clients to remain actively involved. We use agile methodologies, so our clients can even take part in our daily stand-up meetings where we track their project process and adjust plans. Our project development process is divided into sprints, lasting 2-3 weeks. At the end of each sprint, we organize a meeting with the client and provide them insights into the project progress, present completed features and receive feedback for the next stage.

Since your project direction and development focus may change frequently due to product market tests and your client feedback, you should strive to be as involved as possible, to keep track of how your project is evolving and whether the tech partner is fulfilling their promises.

Pros of Time and Materials (T&M) pricing model

• Ideal when requirements aren’t fully known at the start or are expected to evolve during the project.
• Perfect for projects requiring constant changes in priorities and features.
• Suitable for large-scale or long-term projects.
• Ideal if you wish to start without a detailed product plan.
• Offers greater flexibility and transparency.
• Quicker to get started due to a lack of clear vision upfront.
• Adapts well to a rapidly changing environment.

Cons of Time and Materials (T&M) pricing model

• Project vision is defined step by step, so it takes time to form a well-defined vision.
• The cost is not determined at the beginning of the collaboration and the budget can increase more than your initial plan.
• The project scope or team size can change rapidly.
• Requires constant involvement in the project development process with the tech partners to sync visions and minimize the risk of potential delays.
• Longer development process due to constant feedback, new prototypes and refined versions unless a fully-fledged version is achieved.

Time and Materials (T&M) project example

This model works well when clients have a vision but need continuous testing, feedback, and step-by-step development to finalize their vision and achieve a working solution. We work together with the client to achieve their goal.

Around 15 years ago, Henkel requested a custom tool for tracking their competitor’s activities. Although they wanted to reduce their marketing team’s manual efforts, the path forward wasn't entirely clear. Our task was to guide them through this process step by step.

Once we had the product vision, we outlined and specified each development phase. As soon as one step was achieved, we outlined the next one. As you can see, such projects are exploratory in nature, both in terms of implementation and formulating requirements. Step by step, all requirements and paths were defined during the actual development process.

Using agile development methods, continuously reporting and receiving feedback from the client, we started coding a system that could analyze and compare unstructured data across hundreds of their competitors' websites and interpret its meaning. The vision evolved step by step, and the end result was a system that monitored Henkel’s competitors’ websites daily, tracking changes such as modifications, updates, positioning, or page removal.

Is there a mixed model?

There is a hybrid approach, where you begin with fixed costs but leave room for additional expenses. So this is a combination of the Fixed-Price and Time and Material (T&M) models. Some tech teams may also agree to a fixed-price model for the initial phase of a larger project, mitigating risks through research and prototyping, before switching to a T&M model for the rest of the development.

Mixed-Model Pricing Example

An international medical company once approached us about developing 3D medical image processing software to automatically determine the placements of human organs. However, at that time, this was a new challenge for us and the existing software solutions did not satisfy the client’s needs. We suggested a mixed-model approach. The initial phase of the research would be a fixed price so we could figure out a plausible way to solve the client’s challenge.?

To find ways to automate the process of determining specific organ placement boundaries from images, we first cooperated with a specialized research institute. Thus the initial research phase cost us $5,000. Then we performed a detailed analysis of scientific research articles on similar image processing problems, and we told the client we were ready to begin the actual development.?

At this stage, we switched to a T&M (Time and Materials) contract. The process involved testing the researched approaches by creating prototypes, pre and post-processing data, developing an initial product version, presenting it to the client for feedback, finalizing the solution, and maintaining it.

As you can see, this approach is more flexible and works well for highly complex projects, especially when customization is required or no prior solutions exist. This allows the initial phase to operate under a fixed budget to determine if your vision is feasible. Afterward, we transition to a T&M model, where the direction of development can shift as needed, allowing us to adapt to your evolving project strategy.

Which Pricing Model Should I Choose For My Development?

Your project’s size, complexity, and how well-defined your requirements are will determine the best model. As mentioned earlier, the fixed-price model requires exact requirements, making it ideal for simpler projects, such as basic websites or minimum viable products (MVPs).

As for Time and Material pricing-based projects, the diversity and range are quite broad and we cannot list them all in one paragraph. The more customized and frequently changing the requirements, the more suitable this approach becomes. Projects like custom mobile applications, CRM systems, SaaS platforms, and complex web applications fit well under this model.

Conclusion

Choosing the right pricing model in software development is critical for the success of your project. Each model has its strengths, depending on the scope, complexity, and clarity of your requirements. The Fixed-Price model works well for projects with well-defined requirements, while the Time and Materials (T&M) model offers flexibility for projects with evolving needs. Ultimately, the right choice depends on the level of certainty around your project’s requirements and your need for flexibility.?