Fixed Price (FP) vs Time and Materials (TM) Contract

A Fixed-Price model allows you to leave all of the work to the developers until the product is ready.

Time and Material, on the other hand, requires constant supervision of task progress, materials used, and budget spent, as well as frequent meetings with the development team.

The FP contract price includes all known risks that can happen during project performance. These risks may occur or may not. Still, the customer always pays for them.

The fixed price contract is a precise agreement on a particular time and cost, where a service provider guarantees to deliver the described results on specified terms.

Such a system allows service providers to predict project delivery dates, rates, and requirements. The product owner gets a clear picture of the work scope and its pricing.

Under TM contract, the customer will pay only for real project work. One doesn’t overpay for the risks which may not occur, but in case they take place, contrary to FP, it’s the customer who bears additional costs.

Time and materials pricing uses hourly rates as a billing basis.

Here, the development team does an estimate of the work scope based on hour count and provides the hourly rate for a particular service. The additional report covers the cost of materials — tools, hardware, additional expenses.

When can we go for FP contract?

1. For small and medium size project
2. When project requirement is fixed and won't change
3. No need meeting, set expectations to development team
4. When there is no major risks
5. When you have limited budget

When can we go for T&M contract?

1. The scope of the project is not small
2. The requirements are not fully known
3. The requirements may change during the course of the project
4. The you wants flexibility to modify scope or change features while the project is underway
5. When you have higher budget
6. When you have time for supervision of task progress, materials used, and budget spent