Fixed price vs time and materials for agencies

Fixed price vs time and materials comes down to one question: who carries the risk that the work takes longer than planned? With a fixed price you carry it, so you price it in. With time and materials (T&M) the client pays for the time actually spent, so they carry it. Use a fixed price when you can count the deliverables, T&M when the scope will move, and a mix when only part of the work is clear.

What each model means

Fixed price, also called a fixed bid or a fixed fee project: you agree one price for a defined scope before work starts. If the work takes longer, your margin shrinks. If it goes faster, you keep the difference.

Time and materials: the client pays an agreed day or hourly rate for the time you actually spend, plus agreed costs such as licences or stock photos, usually invoiced monthly. "Fixed bid vs hourly" is the same choice in other words.

Each model goes with a different kind of document. A fixed price is a quote: a firm number for defined work. T&M usually comes with an estimate: a range the client plans with, not a promise. If clients mix those up, what an estimate, a quote and a proposal each promise helps you set the expectation in writing.

The choice is messier in practice than in theory. Lichtenstein and McDonnell studied fourteen outsourced software projects at two large companies in 2003. They expected the risky projects to run on time and materials, but the data did not bear that out. One manager put risky projects on a fixed price on purpose, preferring to pay the vendor's risk premium rather than go back for more budget. Some clients knowingly pay extra for certainty.

Who carries which risk

This is why a fixed price is never just your estimate times your rate. It is your estimate plus a buffer for the risk you have taken over. The Australian consultancy SSW says it adds a 20% premium to its release estimates for fixed-price work and compares it to an insurance premium. Your own buffer depends on how well you know the work, the technology and the client; pricing a website from estimate to contingency shows how to size it for the unknowns you can already see.

The risk is real. PMI's PM Network reported that 52% of projects completed in the previous 12 months, in PMI's 2018 Pulse of the Profession survey, experienced scope creep or uncontrolled changes. On a fixed price, every unpriced change comes out of your margin; on T&M it lands on the client's bill.

The same project priced both ways

The studio, the client and every amount below are made up. Replace them with your own figures.

Example

The project. Studio Delta, a four-person web studio, is asked to build a new website with a members' area for a professional association. Its blended day rate is €600 excluding VAT.

The estimate.

Phase	Days	Amount (excl. VAT)
Discovery and design	10	€6,000
Build, including the members' area	22	€13,200
Content entry and testing	4	€2,400
Project management and calls	4	€2,400
Subtotal: the estimate	40	€24,000
Risk buffer (20% of €24,000)	8	€4,800
Total fixed price	48	€28,800

Priced as a fixed price. €28,800 excluding VAT for the agreed scope, paid in three parts.

Payment	Amount (excl. VAT)
On signing (40% of €28,800)	€11,520
Designs approved (30% of €28,800)	€8,640
Launch (30% of €28,800)	€8,640
Total	€28,800

Priced as time and materials. €600 for each day worked, invoiced monthly with a timesheet. The estimate is 36 to 44 days (€21,600 to €26,400), with a review when 32 days are used, which is 80% of the 40-day estimate. There is no risk buffer, because the client carries the overrun.

What happens in three outcomes.

Days the work actually takes	Client pays: fixed price	Client pays: T&M	Studio earns per day worked: fixed price
36	€28,800	€21,600	€800.00
48	€28,800	€28,800	€600.00
56	€28,800	€33,600	€514.29

The break-even is 48 days: the estimate plus the buffer. Below it, the fixed price pays the studio more than its day rate; above it, less. On T&M the studio earns €600 a day whatever happens, and the client's bill moves instead.

A change halfway. In week four the association asks for an events calendar with online registration: five days of work.

	Fixed price	T&M
Before the change (price or estimate)	€28,800	€24,000
Events calendar, 5 days at €600	€3,000	€3,000
Total	€31,800	€27,000

On the fixed price, the calendar is a change request, approved in writing before work starts. On T&M it is five more days on the invoice, but the studio still sends a new estimate and gets a yes first, because a T&M client expects the estimate to mean something.

Adding a cap. If the association needs a ceiling for its board, Studio Delta can offer T&M capped at €30,000, which is 50 days. If the work then takes 56 days, the client pays €30,000 and the studio absorbs the 6 days above the cap, €3,600 of its own time. A cap hands risk back to the studio, so it only offers one on a scope it mostly knows.

Two lessons come out of the numbers. For the client, a fixed price costs more unless the work runs past the estimate plus its buffer, and T&M costs less unless it does. For you, a fixed price rewards good estimating and a tight scope, while T&M gives steady income for every day worked but never more than that. If you have no reliable day rate yet, start with the sum behind a freelance day rate, because both models are built on it.

How to choose: a decision table

Answer each question for the project in front of you.

If four or more answers land in one column, use that model. If they split, use one of the mixed models below. And if the work never really ends, such as care, updates and small changes after launch, it is neither: it is a monthly arrangement, covered in writing a monthly retainer proposal. I have learned to name the costs that continue after launch in the proposal itself, whichever model the build uses, rather than in an email afterwards.

Mixed models that work

1. Paid discovery, then a fixed price. Charge a small fixed fee for workshops and a written scope, then quote the build once the unknowns are known. How to write a scope of work covers what that scope must hold.
2. A fixed price per phase. Fix the price of phase one, estimate the rest, and quote each later phase when you get there.
3. Time and materials with a cap. The client gets a ceiling, you get paid for the actual time up to it. Set the cap above your estimate, and agree that a change in scope means a new cap.
4. A fixed core with T&M for the unknowns. A fixed price for the website, T&M for an integration with a system you have not seen yet.
5. A monthly team. For long product work, a team billed each month for the time it spends: T&M organised by the month.

Protect yourself in either model

Neither model saves a vague proposal. Whichever you choose, I write the scope as a list of what is included and what is not, so the client feels nothing is missing and both sides can see where the line is. I also put my hourly rate for work outside the proposal in the proposal itself, because extra requests come in both models. When they do, answer each one with a price and a date rather than a bare yes or no.

On a fixed price, write down the assumptions the price rests on, such as content dates and feedback rounds. On T&M, report the budget before the client asks.

Pricing clauses you can copy

Fill in the brackets and put the clause for your model in the terms of your proposal.

Template

Fixed price The price for the work described in this proposal is [amount] excluding VAT. It covers the deliverables listed under "Included" and assumes that [you supply all page texts by date], [two rounds of consolidated feedback per design] and [decisions within five working days]. Work outside this scope, or extra work caused by a change to these assumptions, is priced as a change request at [rate] per hour excluding VAT and starts after your written approval. Payment: [40]% on signing, [30]% on [milestone] and [30]% on [milestone].

Time and materials We invoice the time we spend at [rate] per day excluding VAT, plus agreed costs such as licences at cost. Our estimate for the work described is [range] days ([amount range] excluding VAT). This is an estimate, not a fixed price. Each monthly invoice comes with a timesheet, and we will tell you before [80]% of the estimate is used, with a forecast to finish.

A cap (optional, with time and materials) Our fees for the work described will not exceed [amount] excluding VAT. If you change or add to the scope, we agree a new cap in writing before the extra work starts.

When the scope is not clear yet We propose a paid discovery phase of [number] days for [amount] excluding VAT. At the end you receive a written scope and a fixed price for the build, which you are free to accept or not.

This is general information, not legal or tax advice. For your situation, ask a lawyer or accountant.

How Propozit helps

When you start a proposal in Propozit, you pick the type of work. Two of its engagement templates match this guide: a fixed-price project, priced by who works on it and paid in parts, and a monthly team, billed monthly for the time spent. You can see all the types in your first proposal in eight steps. For a fixed-price project you pick people from your price list and set their days, and the day rates come from the price list. Time and materials is one of the six product types in the price list too.

In the deck you can offer payment plans the client picks, set the days within which invoices are due, and state your rate for extra work, so the price of a change is agreed before the project starts: see how pricing works in a deck. Before you send, Propozit checks for a team or a length that does not match the prices and the timeline. Propozit does not track time or send invoices, so for T&M work your timesheets and accounting tool still do that.

Propozit is in early access and free to start.