Software Development Contracts: Fixed-Price vs. Time-and-Materials – An Analysis

software development contract

Selecting the appropriate contractual framework is a critical decision when embarking on a partnership with a software development firm. The objective is to avoid the bureaucratic trappings of contract negotiations that can impede progress. The ideal contract is one that is adaptable, allowing for the client to have control over the direction of the development while maintaining agility in operations. In pursuit of a deeper understanding of software development contracts, insights were sought from Ethan Head of Service Delivery at Dev Station Technology. His expertise also contributes to our comprehensive guide on software development outsourcing, which is recommended for a broader strategic perspective.


Fixed-Price Contracts: Assessment and Concerns

Definition and Structure

A fixed-price contract is a pre-defined agreement that stipulates the development of a specific product within a set timeframe and at a fixed cost. It is designed for those with a fixed budget and clear objectives regarding timelines, costs, and deliverables.


Advantages and Limitations

Despite its clear budgetary benefits, the fixed-price model often entails extensive planning, sometimes more arduous than the development process itself. One inherent drawback is the presumption of a fixed scope, which does not account for the dynamic nature of software development where changes are inevitable due to new ideas, user feedback, market shifts, and other variables.

The rigidity of fixed-price contracts can hinder the incorporation of valuable new features, necessitating a formal change request process that can be cumbersome and time-consuming.


The Illusion of Certainty

The largest misconception in fixed-price contracts is the assumption that initial specifications will align perfectly with the end-users’ needs. In practice, unforeseen challenges can render some features difficult to implement or necessitate additional functionality, potentially leading to budget overruns or a compromised product.

The feedback loop is often elongated under fixed-price models, further delaying the development process and making it less responsive to change              Time and Materials vs. Fixed Price: What's the Difference? | TIGO Software Solutions

Time-and-Materials Contracts: A Flexible Alternative

Definition and Advantages

Time-and-materials contracts offer a more dynamic approach, billing for the actual time and resources expended by the development team. This model supports a general scope and roadmap rather than a rigid deadline and fixed scope, thus enabling scaling, iterative development, and timely termination if necessary.
The benefits include:
  • Ease of accommodating changes.
  • Accelerated development start.
  • Faster delivery to end-users for validation.
  • Prevention of “overdesigning” through iterative development.
  • Enhanced control over feature prioritization.
Despite concerns over potential budget overruns, a time-and-materials contract allows for a focus on business value, which can lead to more efficient development and earlier realization of a minimum viable product (MVP).

Establishing Requirements

Time-and-materials contracts allow for an Agile approach, starting with a short-term plan developed in collaboration with the development partner. This iterative planning process continuously evolves to maximize business value.

Business Value as a Priority

In a time-and-materials engagement, it’s imperative to allocate the “labor budget” effectively. This is achieved through business value estimation, prioritizing features that deliver the most significant impact on the business’s bottom line.


Best Practices for Time-and-Materials Contracts


  • Embrace the flexibility to adjust the project timeline as needed.
  • Engage actively with the development team to establish priorities.
  • Trust but verify the effectiveness of the time spent on development.
  • Avoid excessive feature expansion and maintain a focus on simplicity and value.
  • Monitor the development team’s motivation and address any concerns promptly.



While this article may appear to favor time-and-materials contracts, it is because they often offer superior flexibility and alignment with the dynamic nature of software projects. Trust is a cornerstone of this approach, and software development firms are keen to establish it through demonstrations of expertise.
For those considering software development contracts and the nuances of outsourcing, additional resources such as our C-level guide to software development nearshoring are available, and we invite direct inquiries for more personalized advice.


How we can help

We are an expert mobile app development company that specializes in building native iOS and Android applications.

You’ve already read this far and know roughly what we charge and how it increases the price, so no need to be scared and just shoot us a message.

If you’d like any help scoping out your project, developing your apps, or requiring some advice, get in touch, and we’ll be delighted to help you.


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