Fixed price vs time and materials, and what each one costs you

Who carries the risk that the work runs long. A fixed price is one number for an agreed scope, settled before the work starts, and the studio absorbs whatever the work costs past it. Time and materials bills for the time the work takes, plus anything bought for your project, and you pay what that comes to.

A fixed price, on the day you sign

You know the bill. Whether the work comes in under it or over it stops being your problem, because the studio gains or loses the difference. Anything added to the scope later gets priced on its own.

Time and materials, on the day you sign

You know the range and what the work covers. The bill is whatever the work takes, and you find out where it lands as the invoices come in. A change of direction goes on the bill like any other work.

The work running long, because it’s agreed before anyone knows where in the range the work will land. The less that’s settled, the nearer the top it has to sit, which what a studio needs to quote you covers. In the estimator, the bottom of a range assumes a clean connection to every other system, quick answers from your side and no surprises. The top assumes the ordinary amount of trouble with each.

The app here is for a company that manages about forty apartment buildings. Tenants say what’s broken, take a photo of it and see when somebody’s coming. Staff assign the work from a web portal of their own. New requests have to go into a system a developer built for the office twelve years ago, and the existing records have to come across from it. Nobody has looked at that system yet, and the records haven’t been checked.

Those two are open questions, and the estimator prices them on the top of the range only. Every range gets 8% of its middle added to the top for the things nobody has listed. Each question somebody has named but nobody can answer yet adds another 3.5%, up to 15%. How the estimate is built has the method.

The same app, with both questions answered

$41,000 – $59,000. Somebody has been through the old system and the records, so neither one is a question anymore.

The same app, with both still open

$41,000 – $62,000. The bottom hasn’t moved. The top is $3,000 higher, which is what the estimator adds in case either one goes badly.

Most of the $21,000 between the ends is there with nothing open at all, because every piece of the work has a range of its own. Describe the same app loosely and the range spreads at both ends, which the guide to writing a brief prices. Under a fixed price the studio carries all of it, and the number pays for carrying it.

Whatever the work takes, billed as it’s done. On the repair app the estimator puts the work between $41,000 and $62,000, over 14–21 weeks, and on the first day there’s no telling where in that span it’ll finish.

The old system has a way in, the records are tidy, and the rest goes cleanly

The bill heads for the bottom, near $41,000 and 14 weeks. You don’t pay for a bad outcome that never came.

Both questions bring the usual trouble, and so does the rest

It heads for the top, near $62,000 and 21 weeks. A fixed price would’ve had to be ready for this from the start.

Either question can also turn out worse than ordinary. An old system with nowhere safe to test can take a month to connect to, and records with years of exceptions in them can be a job of their own. Then the bill can pass the top. Under time and materials that’s yours to pay, and under a fixed price it would’ve been the studio’s.

The one that matches how settled the scope is. Among the cases the federal rules give for a fixed price is work where “performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing assumption of the risks involved” (FAR 16.202-2). The same rules allow time and materials only when “it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence” (FAR 16.601).

• 01

  A fixed price fits when you can say what finished looks like: every kind of user, what each one does, what the app connects to and what already exists, with nothing on that list marked “nobody knows.”

• 02

  Time and materials fits when part of the job is finding out. An old system that’s never been opened up, records that haven’t been checked, or a first version you expect to change once people start using it.

For you, a fixed price buys a number you can take to whoever signs off on the budget. For the studio, it’s a promise it can keep when the scope is settled enough to price. When the scope isn’t, time and materials suits both sides, because nobody has to put a price on a guess.

Yes. One build can do both: a fixed price on the part that’s settled, and time for the part that isn’t. On the repair app, the tenant app and the staff portal on their own come to $38,000 – $53,000, with nothing left open. Add the connection to the old system and the records, and it’s $41,000 – $62,000.

Those two pieces lift the bottom of the range a little and the top by $9,000. That’s what open work looks like in an estimate, and it’s the part a fixed price would have to guess at.

The other route is to answer the open questions before anybody fixes a price. Once somebody has looked at the old system and the records, the whole build can go on one fixed price.