How a software project is priced shapes how it is run. The two most common models are fixed price and time and materials, with phased approaches combining elements of both. Each allocates risk differently.
Fixed price
The supplier agrees to deliver a defined scope for an agreed price.
Works well when: the requirements are clear, stable and well understood, such as a website with a defined set of pages and features. Advantages: budget certainty and a clear deliverable. Risks: the supplier must price in uncertainty, so quotes can be higher; changes require formal change requests; and pressure to stay within price can affect quality if scope was unclear.
Time and materials
The client pays for the time actually spent, usually at agreed rates, often with regular reporting and budget limits.
Works well when: requirements will evolve, the problem needs exploration or priorities are expected to change. Advantages: flexibility, and you pay only for work done. Risks: less budget certainty, so it requires trust, transparency and active involvement from the client.
Phased approaches
Many projects use a combination:
- a fixed-price discovery phase to understand the problem;
- a fixed-price first release with a clearly defined scope;
- time and materials, or a series of fixed phases, for continued development.
This balances certainty for well-understood work with flexibility for what is still uncertain.
Retainers for ongoing work
After launch, maintenance and improvements are often handled through a support agreement or retainer with defined response commitments and a set amount of time each month.
What to agree regardless of model
- What is included and what is not.
- How changes will be requested, estimated and approved.
- Payment milestones and invoicing.
- Acceptance criteria and the sign-off process.
- Ownership of code and deliverables.
- Support and warranty after delivery.
Choosing the right model
Ask how certain the requirements really are. If you can describe the outcome precisely and it is unlikely to change, fixed price may suit. If you expect to learn and adjust as you go, time and materials, or a phased approach, usually produces a better result for the money.
