Businesses are in business to make a profit. That's no surprise. But profitability depends on many factors — including the way a service provider contracts with its customers. Two common contracts are fixed-price and time and materials (T&M). How to choose? This guide breaks down which contract makes the most sense for project-based work — be it a home renovation, the construction of a new apartment complex or the development of new software — as well as the pros and cons of each contract type.

Fixed-Price Contracts vs. Time and Materials (T&M) Contracts

Under a fixed-price contract, a service provider determines a set price for a project and the customer agrees to pay that amount. This type of contract tends to be used when the scope of a project and its necessary expenses are well known. For example, a contractor experienced in building two-car garages knows the price of materials and labor for such a project typically costs $8,000. As a result, that contractor may be more inclined to use a fixed-price contract that, after building in a margin for profit, sets the project's total cost at $9,200.

A T&M contract comes into play for larger projects with less up-front certainty about the full scope of work. Take, for example, a software developer tasked with building a new mobile application. Under a T&M contract, the software developer and client agree to specific prices for particular elements of the project — namely, the time (labor) and materials (tools) to build the applications — but the final price, which builds in the provider's profit, isn't determined until the job is complete. To protect itself, the client may stipulate a “not-to-exceed” clause to set a maximum amount on how much it will spend on the project.

Fixed-Price Contract T&M Contract
Project Requirements
Determined at the start of a project. Typically evolves during the course of a project.
Fixed at the start of a project. Labor rates and cost of materials are determined at the start of the project, but the full cost is determined at the end.
Scope of Work
Typically small and well defined. Larger projects whose requirements are hard to pin down at the outset of a project.
Set once project requirements are determined. Based on the costs of time and materials for the duration of the project; may include a not-to-exceed-clause to keep costs in check.
Fixed. Variable, depending on final cost of the project.

Comparison of fixed-price vs. time and materials contracts.

Fixed-Price: Fixed-price contracts are suitable for projects whose scope is well understood — often because the provider has done the same or a similar project many times before. When determining whether a fixed-price contract is suitable for a particular project, it is important to weigh its pros and cons.

  • Fixed-price contract pros:
    • All parties understand what goods or services will be delivered and how much the total project will cost.
    • The project's scope of work, including specific phases and deadlines, is typically well defined.
    • The service provider knows the amount of its profit.
    • Fixed-price contracts tend to be easier to administer and require less tracking of expenses because the project's total cost is fixed at the outset.
  • Fixed-price contract cons:
    • If unexpected obstacles arise that require more time or materials than originally anticipated, the provider must cover the costs, which decreases profits.
    • If client requirements change, the contract will need to be amended or a change order will be required, either of which can delay the project.
  • When to use a fixed-price contract:
    • Fixed-price contracts make sense when the scope of a project can be clearly defined up front.
    • The service provider is relatively certain that the time and materials needed for the project won't change.
    • Fixed-price contracts are suitable when the scope of a project is small, well defined and/or the company has done similar work for other customers.

Time and Materials

T&M contracts are suitable for a variety of projects, especially ones that are large in scope and/or whose scope is not clearly defined. As with any contract type, it is important to weigh the pros and cons before drafting — or entering into — such an agreement.

  • T&M contract pros:
    • Prices for labor and materials are defined at the start of the project.
    • Changes can be made as a project progresses and needs change over time.
    • Set prices for time and materials provide transparency and make it easier to increase a project's scope.
    • The service provider's profit increases if the scope of work increases.
  • T&M contract cons:
    • Contracts can be more complicated to set up and manage.
    • Individual expenses must be carefully tracked and documented, which can be time-consuming when handled manually.
    • Customers may be concerned about being taken advantage of, without a not-to-exceed clause in place.
  • When to use a T&M contract:
    • T&M contracts are best suited for longer-term projects where exact requirements and costs are hard to estimate.
    • This type of contract also offers flexibility in case requirements change.

Choosing Fixed-Price or Time and Materials: Which Is Best?

Like most aspects of business, determining which contract is “best” depends on a variety of factors. Fixed-price and T&M contracts are similar in that they both include a project's scope, labor wages and cost of materials, with profit baked into those prices. Their key difference is when the project's overall price is determined.

When to choose fixed-price: If a project meets the following criteria, a fixed-price contract may be suitable:

  • The project is small in scope.
  • The scope of the project can be clearly defined.
  • The service provider has completed similar projects for other customers.
  • The time and materials required to complete the project are unlikely to change.

When to choose time and materials: If a project meets the following criteria, a T&M contract may be suitable:

  • The project is large and/or will require a relatively long period of time to complete.
  • The requirements for the project are not well known at the outset.
  • The project is new to the service provider.
  • The requirements for the project are likely to change over time.
When to Choose a Fixed-Price Contract When to Choose a T&M Contract
The project is small. The project is large and/or long-term.
The project's scope can be clearly defined up front. The project's requirements are not well known at the outset.
The service provider has completed the same project for other customers. The project is new to the service provider.
The time and materials needed for the project are not likely to change. The project's requirements will likely change over time.

When to choose a fixed-price or T&M contract.


From building a garage to developing a mobile application, projects come in all manner of breadth and cost, making project accounting and financial management software that automates tasks and helps track costs important. For some projects, a fixed-price contract, where the total cost is determined from the start, may make more sense; for others, an open-ended T&M contract may be better suited. Choosing the right contract for the right job can maximize a service provider's profit and a client's satisfaction.

#1 Cloud
Accounting Software

Free Product Tour

Fixed-Price vs. Time And Materials Contracts FAQs

What is time and materials (T&M) pricing?

T&M pricing is one way a service provider can bill for a project. Under a T&M contract, prices for time and materials are established from the start, but the project's final cost is ascertained at completion.

Is time and materials a fixed-price contract?

Time and materials are components of a fixed-fee contract. They contribute to how much the project will cost, which is determined at the beginning of a project. There is also a type of contract called a time and materials (T&M) contract, which doesn't determine a project's total cost at its outset — only fixed prices for time and materials. This type of contract is useful when it's difficult to predict a project's full scope or duration.

What is the difference between cost-plus and time and material?

With a cost-plus contract, the service provider is paid for its direct and indirect costs plus an added fee representing its profit. With a time and materials model, the contractor builds a markup into costs that represents its profit.