How each model works
Fixed price
The supplier agrees to deliver a defined scope for a set price, usually paid in milestones. If the work takes longer than estimated, the supplier absorbs the cost. If you want something outside the agreed scope, it goes through a change request, which is estimated and approved separately before any work starts.
The key phrase is defined scope. A fixed price is only as reliable as the specification behind it. “A booking platform” cannot be fixed-priced responsibly. “A booking platform with these twelve user stories, these three integrations, and these acceptance criteria” can.
Time and materials
You pay for the time the team actually spends, usually at an agreed day or hourly rate, and invoiced weekly or monthly. Scope can change at any point without renegotiating a contract. The trade-off is that the final cost is not known in advance — you carry the risk that the work takes longer than expected.
Most agencies give an estimate even on time and materials work, but an estimate is not a commitment. If the project runs long, you pay for the extra time.
Side-by-side comparison
| Factor | Fixed price | Time & materials |
|---|---|---|
| Budget certainty | High — agreed upfront | Low — depends on hours worked |
| Who carries overrun risk | Supplier | Client |
| Flexibility to change scope | Via change requests | Change any time |
| Upfront planning needed | Significant | Minimal |
| Headline price | Includes a risk margin | No risk margin, but no cap |
| Client time required | Heavy at the start, lighter later | Steady, ongoing involvement |
| Best for | Clear, well-defined projects | Exploratory or evolving work |
When fixed price is the right choice
Fixed price works well when you can describe what “done” looks like before the project starts. That is more common than people assume. Most business software — customer portals, internal tools, booking systems, integrations, and MVPs with a clear core workflow — can be specified well enough to price with confidence.
Choose fixed price when:
- You have a fixed budget. If you are spending investment money, a grant, or a departmental budget that cannot move, cost certainty matters more than flexibility.
- You need approval from others. A board, investors, or a finance team will want a number, not a range.
- The requirements are stable. Replacing an existing process or system, where the workflow is already known, is ideal fixed-price territory.
- You cannot be involved day to day. Fixed price puts more of the delivery responsibility on the supplier once scope is agreed.
The hidden benefit of fixed price is the discipline it forces. To price the work, both sides have to think hard about requirements upfront, and that conversation surfaces misunderstandings while they are still cheap to fix.
When time and materials is the right choice
Time and materials is the better model when the work genuinely cannot be defined in advance — not because nobody has sat down to define it, but because the answer depends on things you will only learn by building.
- Research and prototyping. Testing whether an AI model can reliably extract data from your documents, for example, is an experiment. Its scope depends on the results.
- Ongoing product development. After launch, a SaaS product evolves week by week based on user feedback. A retainer or time and materials arrangement fits this rhythm far better than a series of small fixed-price contracts.
- Working inside an unknown codebase. Fixing or extending a legacy system nobody fully understands carries risk no supplier can price honestly without investigation first.
- Augmenting your own team. If you are adding engineers to work under your own product manager, you are buying capacity, not a deliverable.
The real risks of each model
Fixed price risks
The biggest risk is a vague specification priced as if it were precise. Some suppliers win work with a low fixed price, then recover their margin through a stream of change requests for anything not explicitly written down. Watch for proposals that are short on detail, and ask exactly what is and is not included.
The second risk is rigidity. If you discover halfway through that a feature should work differently, a fixed-price contract makes that change formal and slower. That is a reasonable trade for cost certainty, but it needs to be understood upfront.
Time and materials risks
The obvious risk is cost overrun. Less obvious is the incentive problem: a supplier paid by the hour has no financial reason to finish sooner. Most agencies are professional about this, but you need visibility into how time is being spent — detailed timesheets, regular demos, and a clear view of progress against the estimate.
Scope drift is the other danger. When changes are easy, they accumulate. Ten small “while you’re in there” requests can add weeks without anyone deciding to make the project bigger.
What UK development typically costs on each model
For time and materials work, UK agencies typically charge somewhere in these day-rate ranges, depending on seniority, location and specialism:
| Role | Typical UK agency day rate |
|---|---|
| Mid-level developer | £400 – £600 |
| Senior developer | £550 – £850 |
| Technical lead / architect | £700 – £1,100 |
| Product / project manager | £450 – £750 |
Fixed-price quotes are built from the same underlying rates, plus a contingency for estimation risk — often 10 to 30 per cent depending on how well the scope is understood. That makes the headline number higher, but it is the price of transferring the overrun risk to the supplier. For typical project totals, see our custom software cost guide and our published pricing.
The hybrid approach most projects should use
In practice, the best results usually come from combining the two models rather than picking one:
- Fixed-price discovery first. A short, paid discovery phase turns an idea into user stories, wireframes, an architecture, and a reliable estimate. It is low-risk for both sides and produces something you own regardless of what happens next.
- Fixed-price build in phases. With discovery done, the build can be priced with confidence. Splitting it into phases — MVP, then version two — keeps each commitment small and lets you learn between them.
- Time and materials or retainer after launch. Once real users arrive, priorities change weekly. A flexible arrangement suits ongoing improvement.
Another middle ground is capped time and materials: you pay for actual hours, but with an agreed maximum the supplier cannot exceed without your sign-off. It suits projects that are mostly clear but have a few genuine unknowns.
Questions to ask before signing either contract:
Frequently asked questions
Is fixed price more expensive than time and materials?
Usually by 10 to 30 per cent on paper, because the supplier prices in the risk of being wrong. In practice a well-scoped fixed-price project often costs less overall, because time and materials budgets on loosely defined projects tend to overrun by more than that margin.
Can you change requirements on a fixed-price contract?
Yes, through a change request. The supplier estimates the impact on cost and timeline, you approve it in writing, and the contract is updated. A good supplier makes this quick and transparent rather than adversarial.
What is a capped time and materials contract?
A time and materials contract with an agreed maximum spend. You pay for actual hours up to the cap, and the supplier must get your approval before exceeding it.
Which contract model is best for an MVP?
For most UK startups, a short fixed-price discovery followed by a fixed-price MVP build works best. After launch, a time and materials or retainer arrangement suits ongoing iteration. Our SaaS MVP guide covers the build itself in more detail.
AyTech note: We quote every project on a fixed-scope, fixed-price basis, with discovery priced separately so the build estimate rests on real requirements rather than guesswork. If your project genuinely needs flexibility, we will tell you that too.
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