What is a fixed price contract?
A fixed price contract is a pricing model in which the total cost of a software project is agreed upon before work begins.
The vendor commits to delivering specific deliverables for a predetermined amount, regardless of the actual time or resources required.
It’s most effective when the scope, requirements, and timeline are clearly defined.
How fixed price works
In this model, the project is planned in detail before kickoff. The vendor provides an estimate and agrees to deliver the agreed scope for a fixed fee.
Payments are usually tied to milestones, and any additional requests require a formal change request.
Example:
- Total agreed budget: $60,000
- Duration: 12 weeks
- 3 milestones at $20,000 each
- Each milestone tied to acceptance of specific deliverables
If new features are requested mid-project, the scope and price must be renegotiated.
When to use fixed price
Fixed price contracts work best when:
- requirements are complete and stable
- scope of work (SOW) is clearly documented
- timeline is short or well defined
- client has a fixed budget
- low technical risk and predictable execution
- change requests are expected to be minimal
Advantages of fixed price
For clients
- budget certainty - total cost is known upfront
- less management effort - limited need for tracking hours
- simpler approvals - predictable milestones and invoices
- clear deliverables - easy to compare vendors
For vendors
- predictable cash flow - milestones tied to payments
- process efficiency - stable scope and schedule
- stronger planning - work can be structured precisely
- fewer billing disputes - pricing clarity from the start
Disadvantages of fixed price
For clients
- limited flexibility - changes require new contracts
- risk of overpaying - price includes vendor risk buffer
- quality trade-offs - vendors may rush to protect margin
- less transparency - limited visibility into hours spent
For vendors
- higher delivery risk - underestimation eats profit
- scope creep tension - frequent boundary discussions
- upfront work required - detailed estimates and planning
- less adaptability - difficult to pivot mid-project
Best practices for fixed price projects
1. Define everything upfront
- finalize requirements and acceptance criteria before signing
- document deliverables, assumptions, and exclusions
2. Use milestones
Break the project into stages tied to clear outcomes:
Design - Development - QA - Launch
Each milestone should include:
- deliverables list
- acceptance criteria
- payment amount
3. Include a change management clause
Even in fixed price projects, changes happen.
Define how requests will be evaluated, estimated, and approved.
4. Estimate accurately
Include contingency (10-20%) for unexpected issues but avoid over-padding it makes bids uncompetitive.
5. Communicate frequently
Regular progress updates prevent surprises and mistrust, especially on timelines and scope.
Example fixed price structure
PROJECT: SaaS Dashboard Platform
TOTAL BUDGET: $80,000
MILESTONES:
1. UX Design and Wireframes (3 weeks) - $15,000
2. Core Development (6 weeks) - $40,000
3. QA and Launch (3 weeks) - $25,000
CHANGE REQUESTS:
All out-of-scope changes will be estimated separately.Fixed price vs. time and materials
| Aspect | Fixed price | Time and materials |
|---|---|---|
| Cost | Fixed upfront | Variable, based on hours |
| Scope | Locked and defined | Flexible, evolving |
| Risk | Vendor bears risk | Client bears risk |
| Flexibility | Low | High |
| Transparency | Lower | Higher |
| Best for | Predictable, short projects | Complex or changing scope |
| Billing | Milestone-based | Hourly or monthly |
Hybrid approaches
1. Discovery + fixed price
Start with a paid discovery phase to clarify requirements, then define a fixed price based on the results.
2. Fixed price MVP, T&M later
Fix the cost for the minimum viable product (MVP), then switch to T&M for future phases.
3. Fixed price per sprint
Set fixed prices for each sprint (e.g., $10,000 per 2-week sprint) while allowing flexibility within each cycle.
4. Fixed price with change budget
Include a small flexible buffer (e.g., 10%) to handle minor adjustments without renegotiating.
Managing risks in fixed price projects
- invest time in detailed discovery and estimation
- clearly document out-of-scope items
- agree on change request procedures early
- communicate progress regularly
- monitor assumptions and dependencies
Common fixed price mistakes
- insufficient discovery - rushing to quote before understanding scope
- ambiguous SOW - unclear deliverables cause disputes
- no change process - chaos when new features appear
- underestimation - leading to loss or poor quality
- scope creep - client expectations expanding mid-project
FAQ
What is a fixed price contract in software projects?
It’s a pricing model where the vendor agrees to deliver a defined scope for a pre-agreed total cost.
When should you use fixed price contracts?
When the project has clear requirements, minimal risk, and a fixed budget or timeline.
What are the pros and cons of fixed price?
Pros: cost predictability and simplicity.
Cons: limited flexibility and higher risk for the vendor.
How can you reduce risks in fixed price projects?
Do a paid discovery phase, document assumptions clearly, and set change request procedures upfront.
What’s the difference between fixed price and T&M?
Fixed price locks budget and scope in advance; T&M charges based on actual time and effort, offering more flexibility.