“We need a guaranteed price for this project. Not a penny more.”

This is a standard request from CFOs, investors, and procurement departments. They crave predictability. They want to know exactly how much money will leave the bank account before they sign the contract.

It seems logical. In almost every other industry, from construction to manufacturing, the price is fixed. You don’t pay a car dealership based on how long it took them to assemble the engine. You pay the sticker price. Why should software be different?

The problem is that software development is not manufacturing. It is research and development.

When you build a house, the physics are known. Bricks don’t change their properties mid-construction. When you build software, the landscape changes daily. APIs update, libraries deprecate, and user feedback shifts the goalposts.

When you demand a fixed price for a complex, innovative product, you are not just buying software. You are buying insurance. And like any insurance policy, it comes with a steep premium.

This guide goes deep into the economics of software pricing. We will explain why paying for “certainty” often costs you 20-30% more than the alternative, why it creates a conflict of interest with your agency, and how to structure a contract that protects your budget without killing your product.

Table of Contents

  1. The illusion of safety: Why CFOs love it and PMs hate it
  2. The mathematics of the “Risk Premium”
  3. The Zero-Sum Game: The conflict of interest
  4. The “Change Request Hell” (How Fixed Price kills speed)
  5. The hidden quality tax: Technical debt
  6. When fixed price actually makes sense
  7. The better alternative: Fixed Budget, Flexible Scope
  8. How devtimate calculates the safe price
  9. Checklist
  10. FAQ

The illusion of safety: Why CFOs love it and PMs hate it

Clients choose fixed price contracts because they believe it protects them from the nightmare scenario: a project that goes endlessly over budget.

The logic is simple: If the agency quotes $50,000 and the project takes longer, the agency eats the cost. I am safe.

On paper, this is true. The financial risk is transferred to the vendor. However, in practice, this safety is an illusion. Software agencies are businesses, not charities. They do not absorb losses; they prevent them.

If a project is halfway done and the agency realizes they are running out of the fixed budget, they don’t just keep working for free with a smile. They enter “damage control mode.” They start protecting their margins instead of building your product.

This leads to a phenomenon known as the Adverse Selection. The agencies willing to sign a strict Fixed Price contract without a huge buffer are often the ones inexperienced enough not to know the risks. The experienced agencies will either refuse or quote a price so high that it covers every possible disaster.

The mathematics of the “Risk Premium”

When you ask an agency for a fixed price, you are asking them to take on 100% of the risk for the “Unknown Unknowns.”

What if the third-party API documentation is wrong? What if the design is harder to implement on mobile than expected? What if a key developer gets sick?

To protect themselves, professional agencies add a Risk Premium (or buffer) to the estimate.

A Tale of Two Contracts

Let’s look at the math for a typical medium-sized project.

Scenario A: Time & Materials (T&M) The team estimates the effort is 500 hours.

Scenario B: Fixed Price The team estimates the effort is 500 hours. But they cannot be sure.

The Result: If you choose Fixed Price, you agree to pay $65,000 guaranteed. If the project goes smoothly and takes 480 hours, the agency still keeps the full $65,000. They make an extra $17,000 profit for taking the risk.

You are effectively paying a $17,000 insurance premium to cap your downside, but you also cap your upside. In a T&M model, you pay for efficiency. In a Fixed Price model, the agency keeps the rewards of efficiency.

The Zero-Sum Game: The conflict of interest

The biggest hidden cost of Fixed Price is not financial; it is relational. It turns the agency-client relationship from a partnership into a zero-sum game.

In a Time & Materials relationship, you and the agency are on the same side of the table.

In a Fixed Price relationship, you are on opposite sides.

The agency is incentivized to do the least amount of work possible to satisfy the contract requirements. Their goal shifts from “Product Success” to “Contract Compliance.”

The “Change Request Hell” (How Fixed Price kills speed)

We touched on this in our guide on why your software project timeline is always wrong, but it is worth repeating. Fixed Price kills agility.

Software development is a process of discovery. You will learn things in week 4 that you didn’t know in week 1. You will want to change a button, add a filter, or tweak the user flow based on early feedback.

In a flexible model, you just say “let’s change this,” and the team does it.

In a fixed price model, the scope is locked in a legal contract. To change anything, you must trigger a formal Change Request (CR) process.

  1. You request a small change (e.g., “Add a ‘Print’ button”).
  2. The project manager pauses work to analyze the impact.
  3. The agency estimates the new cost (e.g., 4 hours).
  4. They send you a formal document to sign for the extra $400.
  5. You have to get approval from your boss.
  6. A contract addendum is signed.
  7. Work resumes.

This process can take 3-5 days for a 4-hour task. If you have 10 changes during a project, you have added weeks of administrative delay. This bureaucracy kills momentum and demoralizes the team.

The hidden quality tax: Technical debt

This is the cost you don’t see until a year later.

When a development team is working under a Fixed Price cap and they hit a technical hurdle, they have two choices:

  1. The Right Way: Refactor the code, clean up the architecture, and build a scalable solution. (Takes 20 hours).
  2. The Fast Way: Hard-code a solution, skip writing automated tests, and use a “hacky” workaround. (Takes 5 hours).

If they are running out of budget, they will choose The Fast Way.

They will deliver the software on time and on budget. It will look exactly like the designs. But underneath, the code is brittle. When you try to add new features six months later, everything breaks.

You saved money on the initial contract, but you will pay double later to fix the “Technical Debt” they created to stay within your fixed price constraints.

When fixed price actually makes sense

Does this mean you should never use a fixed price? No. It is a valid tool, but only for specific situations where the “Cone of Uncertainty” is very small.

Good candidates for Fixed Price:

Bad candidates for Fixed Price:

The better alternative: Fixed Budget, Flexible Scope

There is a way to give your CFO certainty without killing the project. It is called Fixed Budget, Flexible Scope (sometimes called Agile Fixed Price).

Instead of fixing the scope (which is hard to predict), you fix the budget (which is easy to control).

How it works:

  1. The Agreement: “We have a strict budget of $100,000.”
  2. The Backlog: We estimate the “Must Haves,” “Should Haves,” and “Nice to Haves.”
  3. The Execution: We build the “Must Haves” first.
  4. The Trade-off: As we get closer to the $100k limit, we look at the remaining “Nice to Haves.” If we are running low on funds, we cut the low-priority features to stay on budget.

Why this wins:

This model aligns incentives. Both sides want to build the best possible product within the available funds.

How devtimate calculates the safe price

If you must provide or request a fixed price, it needs to be based on data, not a guess.

Agencies use devtimate to calculate the risk buffer precisely, rather than throwing a random “30%” on top.

devtimate uses the PERT (Program Evaluation and Review Technique) method automatically.

This allows the agency to tell you: “For a Fixed Price contract, we need to use the Pessimistic estimate of $75,000 to cover our risk. If you choose Time & Materials, the Realistic estimate is $60,000.”

This transparency helps you make an informed decision: do you want to pay for the risk transfer, or do you want to keep the risk and potentially save money?

Start calculating risk-adjusted estimates with devtimate.

Checklist

✅ Only use fixed price if you have a complete, detailed specification (no “TBD” items).
✅ Expect the price to be 20-30% higher than a T&M estimate (Risk Premium).
✅ Define a clear “Change Request” process before signing to avoid disputes.
✅ Ensure the timeline includes explicit buffers for feedback and QA.
✅ Consider a “Fixed Budget, Flexible Scope” model for better alignment.
✅ Verify that the estimate breaks down costs by feature, not just one lump sum.

FAQ

1. Why is the fixed price quote higher than the hourly estimate?
Because the agency is taking on the financial risk. If the project takes longer than expected, they lose money. The extra cost (Risk Premium) is the price you pay to transfer that risk from your company to theirs.

2. Can we switch from Fixed Price to Time & Materials later?
Yes. A common strategy is to do the MVP (Minimum Viable Product) on a fixed price to control the initial launch budget, and then switch to Time & Materials for ongoing maintenance and new features. This is often recommended to ensure long-term quality.

3. What happens if the project is finished early?
In a pure fixed price contract, the agency keeps the difference. This is their reward for efficiency. If you want to pay only for the actual hours used, you should choose a Time & Materials model.

4. Does devtimate support fixed price proposals?
Yes. devtimate allows you to define a fixed cost for the entire project or specific sections (like a “Discovery Phase”). It also helps you calculate the internal cost versus the client price to ensure your profit margin is protected.

5. Is a fixed price better for investors?
Investors like predictability, so they often prefer fixed price budgets in the early stages. However, smart investors prefer a successful product over a predictable failure. A flexible scope often delivers a better product-market fit, which is what investors actually care about in the long run.

Certainty is a product you can buy, but it is expensive.

By understanding the true mechanics of a fixed price contract, you can decide if the insurance premium is worth it, or if you would rather invest that extra 30% into more features, better quality, and a healthier partnership.

Get the numbers right before you sign. Use devtimate to build estimates that protect your margins and your timeline.