Fixed price vs time and materials: how to choose, with a decision sheet
Use fixed price when the requirements are written down, the work is familiar and the client decides quickly. Use time and materials when any of those is missing. A fixed price must include contingency: estimated hours times rate times one plus a risk percentage. If you cannot justify the contingency, sell a paid discovery phase first.
Fixed price and time and materials are two answers to the same question: who pays when the work takes longer than the estimate? Under fixed price, you do. Under time and materials, the client does.
Everything else follows from that. The right choice depends on how likely an overrun is and who is better placed to prevent it. This page gives you the arithmetic, a calculator for the fixed fee, and a decision sheet to score a project before the proposal goes out. For the other three models and how they compare, see the billing hub and the overview of agency pricing models.
The break-even math
Take a project you estimate at 400 hours. Your rate is $150. On time and materials, the client pays for whatever it takes. On fixed price, you add 20% contingency and quote 400 x $150 x 1.20 = $72,000.
| Actual hours | Time and materials revenue | Fixed price revenue | Fixed price realized rate |
|---|---|---|---|
| 360 | $54,000 | $72,000 | $200.00 |
| 400 | $60,000 | $72,000 | $180.00 |
| 480 | $72,000 | $72,000 | $150.00 |
| 560 | $84,000 | $72,000 | $128.57 |
| 640 | $96,000 | $72,000 | $112.50 |
The break-even is 480 hours, which is the fixed price divided by the rate. Finish under 480 and fixed price pays you more than time and materials would have. Finish over 480 and every extra hour is worked for free.
So the real question is how confident you are that the job lands under 480. If you have built this type of project five times and the worst overrun was 15%, take the fixed price. If this is new ground and your last three unfamiliar projects ran 40% over, the same $72,000 is a losing bet.
The calculator below runs this for your own numbers. Enter the estimate, the rate, your confidence in the estimate and the contingency. It returns the fixed price at which the fixed fee beats time and materials.
- Estimate at your rate
- Hours you should expect to spend
- Fixed price that beats T&M
- Contingency that requires
- Your fixed price
- Your price against break-even
- Effective rate if it overruns
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What each model is good at
| Fixed price | Time and materials | |
|---|---|---|
| Who carries overrun risk | Agency | Client |
| Client’s budget certainty | High | Low, unless you report weekly |
| Agency’s margin ceiling | High, if you finish early | Capped at rate x hours |
| Cost of changing direction | A change request each time | None, the client just redirects |
| Sales effort | Higher: needs a real specification | Lower: needs a rate and a rough budget |
| Incentive | Agency is rewarded for efficiency | Agency is rewarded for hours |
| Typical dispute | “That was included” | “Why did that take so long” |
Neither is safer in general. Fixed price is safer for the client and riskier for you. It pays you for that risk only when you price it in. There is one more reason the choice matters now: when AI makes the team faster, hourly billing hands the whole gain to the client. That argument is in agency pricing after AI.
The decision sheet
Score the project on eight factors before you choose. A high total supports a fixed price. A low total, or a low score on requirements or integrations, sends you to discovery or to time and materials. The sheet also sets the contingency and records the decision, so that six months later you can compare what you expected with what happened.
Fixed Price vs Time and Materials Decision Sheet
Complete this sheet before pricing [PROJECT NAME] for [CLIENT NAME]. One person fills it in. A second person, who was not on the sales calls, reviews the scores. Attach the completed sheet to the estimate.
1.Project details
| Item | Entry |
|---|---|
| Client | [CLIENT NAME] |
| Project | [PROJECT NAME] |
| Estimated hours | [HOURS] |
| Blended hourly rate | [RATE] |
| Estimate at rate (hours x rate) | [AMOUNT] |
| Estimate prepared by | [NAME] |
| Sheet completed by | [NAME] |
| Date | [DATE] |
2.Score the project
Score each factor from 1 to 5 using the two anchor descriptions. A score of 3 means you are between them. Score what you know today. Where you are guessing, score 2 or lower.
| Factor | Score 1 | Score 5 | Score |
|---|---|---|---|
| A. Requirements clarity | A goal and a few conversations | Written requirements with acceptance criteria the client has approved | [1-5] |
| B. Client decision speed | Committee approval, answers take weeks | One named decision-maker who answers within two business days | [1-5] |
| C. Novelty for our team | First time with this type of work or this technology | Delivered the same type of project three or more times | [1-5] |
| D. Integration unknowns | Third-party or legacy systems we have not seen, no documentation | No integrations, or all of them documented and tested by us before | [1-5] |
| E. Client-side dependencies | Client supplies content, data, access or other vendors on the critical path | We control everything needed to finish | [1-5] |
| F. Stakeholder count | Five or more people give feedback, no single owner | One or two people give feedback and one signs off | [1-5] |
| G. Likelihood of change | Client is still discovering what they want | Scope is stable and the client has a reason to keep it stable | [1-5] |
| H. Definition of done | Finished when the client is happy | Finished when listed, testable criteria are met | [1-5] |
Total score (A through H, maximum 40): [TOTAL]
3.Scoring rule
| Total | Fee structure | Condition |
|---|---|---|
| 34 to 40 | Fixed price | Standard contingency from section 4 |
| 27 to 33 | Fixed price by phase | Fix the price of each phase only when the phase before it is accepted |
| 19 to 26 | Paid discovery, then decide | Sell discovery at a fixed fee, rescore this sheet when it ends |
| 8 to 18 | Time and materials | Weekly budget reporting and a written budget estimate, no cap |
Two overrides apply regardless of the total.
- If factor A or factor D scores 1 or 2, do not quote a fixed price for the build. Sell discovery first.
- If factor B or factor H scores 1, a fixed price requires a written acceptance clause with a deemed-acceptance period of [NUMBER] business days.
4.Contingency guide
Contingency is added to the estimated hours before the fixed price is calculated. It is part of the price and is not shown to the client as a separate line.
| Total score | Confidence in estimate | Contingency on hours |
|---|---|---|
| 37 to 40 | High. Repeat work, tight specification | 10% |
| 34 to 36 | Good. Familiar work, minor open questions | 15% |
| 30 to 33 | Moderate. Some unknowns, phased delivery | 20% to 25% |
| 27 to 29 | Low. Several unknowns, phased delivery | 30% to 35% |
| 26 or under | Too low to fix | Do not fix the price. See section 3 |
Add 5 percentage points for each of the following that applies.
- A hard external deadline with consequences for missing it
- A new client with no payment history with us
- A team member on the project who is new to our process
- Payment terms longer than 30 days
Fixed price calculation:
| Line | Calculation | Amount |
|---|---|---|
| Estimated hours | From section 1 | [HOURS] |
| Contingency % | From the table and checklist above | [PERCENT] |
| Priced hours | Estimated hours x (1 + contingency %) | [HOURS] |
| Fixed price | Priced hours x blended rate | [AMOUNT] |
| Break-even hours | Fixed price / blended rate | [HOURS] |
| Walk-away price | The lowest fixed price we will accept before switching to time and materials | [AMOUNT] |
5.Checks before the price goes out
- The scope document lists what is excluded as well as what is included
- Assumptions behind the estimate are written into the proposal
- A change request process is referenced in the contract
- The payment schedule includes a deposit before work starts
- The number of revision rounds is stated
- Client responsibilities and response times are stated
- The person who will deliver the work has reviewed the estimate
6.Record the decision
| Item | Entry |
|---|---|
| Total score | [TOTAL] |
| Overrides triggered | [NONE / A / B / D / H] |
| Fee structure chosen | [FIXED PRICE / FIXED BY PHASE / DISCOVERY FIRST / TIME AND MATERIALS] |
| Contingency applied | [PERCENT] |
| Price or budget estimate quoted | [AMOUNT] |
| Break-even hours | [HOURS] |
| Reason, if the choice departs from the scoring rule | [REASON] |
| Review date (end of discovery or first phase) | [DATE] |
| Decided by | Reviewed by |
|---|---|
| Name: [NAME] | Name: [NAME] |
| Role: [ROLE] | Role: [ROLE] |
| Signature: | Signature: |
| Date: [DATE] | Date: [DATE] |
7.After the project
Complete this section at close. It is the only way the next estimate gets better.
| Item | Entry |
|---|---|
| Actual hours | [HOURS] |
| Actual hours as % of estimated hours | [PERCENT] |
| Revenue collected | [AMOUNT] |
| Realized rate (revenue / actual hours) | [RATE] |
| Change requests raised and billed | [NUMBER AND AMOUNT] |
| Which factor did we score too generously? | [FACTOR] |
Download the editable .docx
Fixed price vs time and materials decision sheet, as a Word file you can change, with the clause notes at the back. Free. No email, no sign-up.
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How to use the sheet
Score what is written down
Each factor has an anchor for 1 and for 5. Score from evidence. A client telling you the requirements are clear is an opinion. A requirements document they have approved is evidence. Where you are guessing, the score is 2 or lower.
The factor owners score most generously is client decision speed. Look at how long the client took to answer questions during the sale. That is the fastest they will ever be.
Respect the two overrides
A project can total 35 and still carry one unknown that doubles the hours. Requirements clarity and integration unknowns produce the largest overruns in my experience, which is why a score of 1 or 2 on either one blocks a fixed price regardless of the total. The remedy is a paid discovery phase: a small fixed fee, two to four weeks, ending in a specification the client owns. Rescore the sheet at the end. The numbers usually move enough to fix the build price with a normal contingency.
Keep contingency inside the price
Contingency is the fee for carrying the client’s risk. Show it as a separate line and the client will negotiate it away, or ask for it back when the project runs to estimate. Build it into the hours and quote one number.
Set the walk-away price first
The sheet asks for the lowest fixed price you will accept. Decide it before the negotiation starts. When the client pushes below it, cut scope or switch the offer to time and materials. Holding the scope while dropping the price is how an agency ends up with a project at $112 an hour.
Fill in section 7
Record actual hours and realized rate at close. After ten projects you will know your real overrun by score band, and your contingency stops being a guess. Almost nobody does this, and it is the part that makes the next estimate better.
Making fixed price safe
A fixed price holds only as long as the scope does. Four documents do the work.
- A scope that lists exclusions. What is out matters as much as what is in. The format I use is the statement of work template.
- Written assumptions. “Client supplies all content by week 3.” “One round of revisions per milestone.” When an assumption fails, the price is open for discussion.
- A change process. Anything outside the scope gets a written estimate and an approval before work starts. The steps are in the change request process. Without it, fixed price turns into the pattern described in the pillar on scope creep.
- Milestone payments. A deposit before work starts and payments tied to dates or deliveries. A fixed-price project paid entirely on completion gives the client every reason to keep “completion” moving.
Making time and materials safe
Time and materials protects your margin and puts the relationship at risk in a different way. The client is exposed, so the client watches.
- Give a written budget estimate with a range, and report hours against it every week.
- Flag at 75% of budget. A client told at 75% can make decisions. A client told at 110% feels ambushed.
- Itemize invoices with a short description of what was delivered in the period.
- Track time daily. Hours reconstructed on a Friday are the ones clients dispute.
Avoid the not-to-exceed cap. A capped time-and-materials deal means you are paid hourly if you finish early and absorb the loss if you finish late. That is fixed-price risk with an hourly ceiling on the reward. If the client needs a cap, they need a fixed price, and it should be priced like one.
The structure I use most
For any project above roughly $40,000 with a new client, I split it.
| Phase | Fee structure | Why |
|---|---|---|
| Discovery | Fixed price, small | The scope of discovery itself is easy to define |
| Build, phase by phase | Fixed price per phase, quoted when the phase is specified | Each price is set with current knowledge |
| Changes | Hourly, by change request | Keeps the fixed scope intact |
| After launch | Retainer | Ongoing, variable work |
Each part uses the model that fits its level of uncertainty. Whichever model you choose, log the hours. Your realized rate on fixed-price work is the only evidence of whether the bet is paying, and the pillar on billable hours shows how to calculate it.
This is a working document from a practitioner. Have a lawyer in your jurisdiction review it before you sign.
Common questions
- What is the difference between fixed price and time and materials?
- Under fixed price, the client pays an agreed fee for an agreed scope and the agency absorbs any extra hours. Under time and materials, the client pays for the hours worked at an agreed rate, plus expenses, and absorbs the risk of the work taking longer.
- How much contingency should I add to a fixed-price quote?
- Between 10% and 35% of estimated hours, depending on how well you know the work. Repeat work with a tight specification needs about 10%. Familiar work with open questions needs 15% to 25%. If you think you need more than 35%, the project is not ready for a fixed price.
- Which is better for the client, fixed price or time and materials?
- Fixed price gives the client budget certainty and costs more on average, because the price includes a risk premium. Time and materials costs less when things go well and gives the client freedom to change direction. Clients with a hard budget prefer fixed. Clients still shaping the product are better served by time and materials.
- Can I combine fixed price and time and materials on one project?
- Yes. The most reliable structure is a fixed-price discovery phase, then a fixed price for each build phase once it is specified, with change requests billed at an hourly rate. A time-and-materials engagement with a not-to-exceed cap is the combination to avoid, because you carry the downside and give up the upside.