At some point in the first or second conversation the question comes up: will you do it for a fixed price? Behind it is an understandable wish. You want to know what you are letting yourself in for, and not receive a final invoice nobody expected.
Whether a fixed price meets that wish depends less on the price than on the description behind it. This article explains the usual models, what each one requires and how to recognise fair terms. How the effort itself is estimated is covered in How a software estimate is made.
Fixed price
With a fixed price you agree on a piece of work and a price for it. Once the work is delivered, the agreed amount is due, whether the supplier needed more or less effort than expected.
That works well when it is precisely clear what will be delivered: every screen, every rule, every exception, every connection. Then the fixed price is clear for both sides.
It gets difficult when the description has gaps. With software it almost always does, because a lot only becomes apparent once the first screens can be seen. Then one of two things happens:
- The supplier adds a risk premium. They know something unknown will come up and build a buffer into the price. You pay for it even if it is not needed.
- Every change becomes an argument. Is this exception still part of the agreed work, or is it a change that costs extra? That question costs both sides time and trust.
So a fixed price does not simply shift the risk to the supplier. It makes the work more expensive, or it moves the risk into the discussion about scope.
Time and materials
With time and materials you pay for the work actually done, at the rates agreed in the quote. The basis is an estimate that shows what you should expect. The estimate is not a fixed price, though.
This fits when not everything is settled yet or when things are meant to change along the way. With software that is the rule: whoever tries out the first screens notices what is missing, what is unnecessary and what should work differently. With time and materials this can be taken on board without negotiating an addendum each time.
The legitimate concern is: who keeps the effort under control? Fair terms answer that with three things:
- Records. The work is recorded in a way you can follow, and you see what you are being billed for.
- Regular invoicing. Monthly or when an agreed stage is complete, not only at the end.
- A warning before an overrun. If it becomes apparent that the estimate will be clearly exceeded, you hear about it before further costs arise, and you decide how to proceed.
Hybrid models
Between the two models there are ways of combining their strengths:
| Model | How it works | Fits when |
|---|---|---|
| Fixed price per stage | A clearly described stage, such as the process analysis or the first area, gets a fixed price. | one part is already precisely defined and the rest is not |
| Time and materials with a cap | Work is billed on time and materials, but an agreed budget is not exceeded without your approval. | you want flexibility but still need a firm limit |
| Fixed budget per stage | Each stage has a budget. Within it you decide together what gets done first. | priorities are allowed to shift along the way |
What they all share is the decision point at the end of a stage. You see what has been produced and decide whether and how to continue. That limits the risk to the stage currently under way.
Who carries which risk
| Fixed price | Time and materials | Time and materials with a cap | |
|---|---|---|---|
| Something unknown comes up | the supplier, usually via a premium in the price | you | you up to the cap, then your decision |
| You change something | you, via an addendum | you, without renegotiation | you, within the budget |
| It goes faster than expected | the supplier benefits | you benefit | you benefit |
No model is free of risk. The question is where the risk sits and whether you can always see where things stand.
Changes during the project
Changes come up in every project, and that is a good thing. They show that someone is seriously trying out the software. What matters is how they are handled:
- Changes are written down, with the changed scope, the cost or the basis for calculating it, and the effect on the schedule.
- You decide before the change is made.
- Useful is not the same as commissioned. What the supplier considers sensible is not billed without your approval.
With a fixed price, this is where things often get stuck. The more precise the description at the start, the less often there is an argument. What such a description looks like is shown in High-level and detailed concept and Requirements or functional specification.
The approach that has proved itself
Many projects do well with a sequence that uses both:
- Map the process first. A manageable, clearly described stage that lends itself well to a fixed price.
- Broad for the whole, precise for the first area. A high-level concept sets the direction, and a detailed concept describes the first area precisely enough for its effort to be estimated reliably.
- Then area by area. Each area with its own estimate and its own decision point, billed on time and materials, with a cap if you wish.
That way you know before every step what you are committing to, and nobody has to pretend that everything is settled on day one.
Contract for work or contract for services
Behind the billing models there are also legal questions, for example whether a finished piece of work is owed and has to be accepted (in German law a Werkvertrag) or a service (Dienstvertrag). A contract can contain elements of both. What that means for acceptance, warranty and payment is a question for your lawyer. For planning purposes it is enough to know that it is not the label in the quote that decides this, but what has actually been agreed.
Checklist
- How precisely is it described today what is to be developed?
- Which part is already settled and which is not?
- Who carries which risk in the model on offer?
- How are changes described, priced and approved?
- Do you receive records of the work done, and how often are you invoiced?
- Will you be warned before an estimate is clearly exceeded?
- Are there stages after which you decide whether to continue?
