Comparison
Fixed price vs time and materials: choosing a public contract model
How fixed-price, time and materials, capped and outcome-based pricing compare on public IT contracts, who carries the risk, and which suits which kind of work.
Public buyers choose a pricing model for each contract, and sometimes let you propose one. Understanding the trade-offs helps you price well and spot risky contracts.
Side by side
| Model | Buyer pays | Who carries overrun risk | Best for |
|---|---|---|---|
| Fixed price | An agreed total, often by milestone | Supplier | Well-defined scope: a known website, a product install |
| Time and materials | Actual hours or days at agreed rates | Buyer | Uncertain or evolving work, discovery, ongoing support |
| Capped time and materials | Actual time up to a ceiling | Shared | Agile delivery with a fixed budget |
| Fixed price per phase | A fixed price for each phase, agreed in turn | Shared | Discovery, then build, then run |
| Outcome-based | Payment tied to results | Supplier, mostly | Mature services with clear measures |
| Unit price | Per user, per ticket, per device | Depends on volumes | Managed services, licences |
Fixed price
For you: a good margin if you estimate well, and a simple story for the buyer. Against you: every misunderstanding is your cost. Fixed price needs a clear scope, clear acceptance criteria and a change request process.
Time and materials
For you: you're paid for the work you do. Against you: buyers worry about open-ended costs, so they may score it lower or cap it, and you'll need careful timesheets and reporting.
The middle ground
Capped time and materials and phased fixed price are increasingly common for public digital projects because they fit agile delivery. The buyer knows the most they'll spend, and scope flexes within the budget.
How to choose, if it's your choice
- Is the scope clear and stable? Fixed price may work.
- Is it unclear or likely to change? Propose a priced discovery followed by capped delivery.
- Is it ongoing support? Monthly fixed fee plus unit prices for extras.
Common questions
Which pricing model is best for a small IT firm?
It depends on the work, but capped time and materials or phased fixed price usually balance the risk better than a single large fixed price on uncertain work.
Can I propose a different pricing model than the tender asks for?
Usually not. Most tenders require the buyer's model, and proposing another may make your bid non-compliant. Ask a clarification question if you think another model would be better.
What is a ceiling price?
It's the maximum the buyer will pay under a time and materials contract unless the contract is formally amended.