A fixed-price software development contract does not fix the cost, it fixes the scope. When requirements change during delivery, as they almost always do in financial services IT, the risk does not disappear. It moves into change requests and into the supplier's risk premium. Time and material works where uncertainty is high, but only with transparency and a budget cap. The best compromise is often a fixed-price discovery phase followed by capped time and materials.
In brief
- Fixed price works when requirements are stable, well documented and unlikely to change on the client side either.
- Time and material works when the scope is still taking shape and someone on the client side can make priority calls every day.
- Under fixed price, the supplier prices in the uncertainty and every deviation becomes a change request. Under T&M, the risk stays with the client, so it needs transparency and a cap.
- For banks and insurers, DORA sets requirements for the content of the contract, whatever the pricing model.
As a CIO, I sat through many procurement meetings where fixed price was the safe choice. Finance liked it because one number went into the budget. The board liked it because there was something to point to. By the end of the project, it usually turned out that the fixed price had protected the budget line, not the project.
Fixed price vs time and material: what is the real difference?
Under a fixed-price contract, the supplier commits to a defined scope for an agreed amount and by an agreed date. On paper, the risk sits with the supplier: if the work takes longer, that is their loss.
Under a time and materials contract (T&M), you pay for the effort actually spent, usually as a day rate per specialist. The scope stays flexible and you can reorder priorities along the way, but the cost risk stays with you.
That is the textbook answer. In practice, a different question matters more: who decides what gets built, and when. Under fixed price, you decide once, when you sign. Under time and material, you decide week by week.
A fixed price fixes the scope, not the cost
A fixed-price contract freezes the specification at the point where you know least about the project: the start. Everything you learn later, from user feedback to a new regulatory expectation to a hidden dependency in the core system, becomes a deviation from the contract. Three things follow.
The supplier prices in the uncertainty. No experienced supplier accepts a fixed price without a risk premium, and the vaguer the specification, the bigger the premium. So fixed price is most expensive exactly where uncertainty is highest, which is often where procurement insists on it most.
Change requests become the real price list. After signing, every change needs its own quote, negotiation and approval. The final cost is set less by the original price than by the sum of the change requests. We covered this in more detail in our article on managing scope creep.
The argument shifts from the user to the wording. Under fixed price, each side has an interest in its own reading of the specification: the supplier a narrow one, the client a broad one. The business analyst turns from translator into referee, and the team's energy moves from the product to the contract.
Time and material is not a blank cheque
The most common objection to time and material is that there is no ceiling. That is only true if nobody is watching. Under T&M, control does not come from the contract price, it comes from transparency.
On the Mitigia carbon credit platform, the scope grew during development as investor expectations and market feedback came in. Some of the changes did not even come from the client's team, but from its funders. What kept the project on track was a weekly status email: what we finished, what we commit to next week, what slipped, and why. Those few lines did more than any penalty clause could, because the client saw every week where the money went and could change direction at any time.
T&M also puts work on the client's side. You need someone who is available every day and willing to decide on priorities. Without that person, T&M does get expensive, but the contract is not the reason.
When to choose which: a decision checklist
| Factor | Lean towards fixed price | Lean towards time and material |
|---|---|---|
| Maturity of requirements | Documented, stable, well-known process | Still forming, new product or business model |
| Likelihood of change | Low | High, shaped by the market or investors |
| Client-side decision-maker | Rarely available | Available daily, with authority |
| Integrations, legacy dependencies | Few, well documented | Many, touching the core system |
| What you want to lock in | Budget and outcome | Team, pace and the right to reprioritise |
If the right-hand column fits your project on three or more of the five factors, a fixed price will probably just hide the risk.
The third option: fixed-price discovery, then capped time and materials
In financial services, procurement and the board have a fair need for a number they can approve. The project needs room to learn as it goes. The two fit together if the contract has two stages.
- Fixed-price discovery (1–3 weeks). Business analysis maps the requirements, the dependencies and how ready the business model really is. The output is a scope broken into milestones and a realistic estimate. If visual designs exist, for example in Figma, the milestone breakdown can be built from them at this stage.
- Capped time and materials. Delivery runs on T&M, but with a fixed upper limit and a review at each milestone. Changes go through a change request process agreed in advance, so each change becomes a known decision step rather than an argument.
Procurement gets a ceiling, the project gets flexibility. The discovery phase is also a decision point in its own right: if the idea turns out not to be ready, you can stop at low cost.
What DORA adds to the contract
For banks, insurers and other financial entities, the pricing model does not exempt a contract from its content requirements. Article 30 of the DORA regulation requires every ICT services contract to include, among other things, a clear description of the services, the locations where data is processed, termination rights and cooperation with supervisors. For services supporting critical or important functions, it also requires precise quantitative and qualitative performance targets, audit rights and an exit strategy.
One point affects pricing directly and is easy to miss. If an ICT incident related to the service occurs, the supplier must provide assistance at no extra cost or at a cost determined in advance. So even in a pure time and materials contract, incident support needs a price agreed upfront.
A second consequence is less obvious: a T&M contract cannot be just "day rate times headcount". If the work touches a critical function, the contract still has to describe in measurable terms what the supplier delivers. We wrote about this in more detail in DORA in practice: what your IT suppliers need to know.
What we do differently at FrontX
- We start with business analysis. For a new product or an uncertain scope, we map the requirements and dependencies first, and only then estimate delivery.
- Weekly written status. Every week we write down what we finished, what we commit to and what slipped, with the reason. No empty promises.
- The change request process goes into the contract. We agree upfront how change will be handled, because every project will have some.
- We know both sides. Our team members have worked on the client side at financial institutions, so we know what procurement and the board need before they can approve. That is the basis of our custom software development service.
If you are deciding on the contract model for a new development, we are happy to look at which one fits your project's level of uncertainty: book a free consultation.
Frequently asked questions
What is the difference between fixed price and time and material?
Under fixed price, the supplier commits to a defined scope for an agreed amount and deadline. Under time and material, you pay for the effort actually spent and can adjust the scope along the way. The first locks in the budget, the second gives you flexibility.
When does a fixed-price software development contract make sense?
When requirements are stable and well documented, there are few integrations, and no major change is expected during the project. Digitalising a well-understood process or extending an existing feature are typical examples.
How do you keep time and materials costs under control?
With a budget cap, a review at each milestone and a weekly written status report. You also need a client-side decision-maker who is available every day and can make priority calls.
What is capped time and materials?
A time and materials contract with an agreed upper limit. You pay for actual effort, but total spend cannot exceed the cap without a new decision. It combines the flexibility of T&M with the budget certainty procurement needs.
Does DORA apply to software development contracts?
Yes, if the client is a financial entity and the contract covers ICT services. Article 30 of DORA sets the mandatory content of the contract regardless of the pricing model, and for critical functions it also requires measurable performance targets and an exit strategy.
László Behán is Managing Director and Co-Founder of FrontX Kft. He was previously CIO of Signal Insurance, Head of Development and Data Warehouse at Groupama Insurance, and Operations Director and board member at LeasePlan Hungaria. He has 20 years of IT and business leadership experience in financial services. LinkedIn profile
