Fixed fee vs time and materials is a choice you make on every quote, and most engineering and technical firms make it by habit: whatever the customer asked for, or whatever the last job used. Yet it decides who carries the cost if the job takes longer than planned, when you get paid, and how much of the margin you quoted reaches the bank. This guide prices the same job both ways, shows when each one suits, and sets out the middle options most firms overlook.
Fixed fee vs time and materials: the basic difference
With a fixed fee, you agree a price for a defined scope. If the work takes less time than planned, you keep the saving. If it takes more, you absorb the cost.
With time and materials, you bill the hours actually worked at agreed rates, plus expenses and materials on the terms you set out. The customer carries the risk that the job grows. You carry a different risk: hours being queried, and earning less when your team works quickly.
Neither is better on its own. Each puts the risk in a different place, and the right choice depends on how well you can predict the hours.
The same job priced both ways
Take a made-up firm, Example Drainage Design Ltd, a 16-person civil and drainage design consultancy. It is quoting a job it estimates at 120 hours. Its charge-out rate is £85 an hour, and its full cost per hour (salary, employer costs and a share of overheads) is £65. If you haven’t worked out that cost figure for your own firm, our guide on how to calculate a charge-out rate shows how.
- Fee: 120 hours × £85 = £10,200
- Cost: 120 hours × £65 = £7,800
- Planned margin: £2,400, or 23.5% of the fee
If the job takes 100 hours
- Fixed fee: £10,200 − (100 × £65 = £6,500) = £3,700 margin (36.3%)
- Time and materials: (100 × £85 = £8,500) − £6,500 = £2,000 margin (23.5%)
If the job takes 150 hours
- Fixed fee: £10,200 − (150 × £65 = £9,750) = £450 margin (4.4%)
- Time and materials: (150 × £85 = £12,750) − £9,750 = £3,000 margin (23.5%), provided the customer accepts the extra hours
Where the fixed fee tips into a loss
£10,200 ÷ £65 = about 157 hours. The job can run about 37 hours, or 31%, over its estimate before the fixed fee loses money, and every hour over 120 takes £65 off the margin.
So a fixed fee pays better when you estimate well and work efficiently. Time and materials pays better on jobs that grow. The real question isn’t which contract type is better. It’s how accurate your estimates are.
Check your estimates before you choose
Many firms stop recording time on a fixed-fee job once it’s quoted, so they never learn how far their estimates miss. Pull your last ten similar jobs and compare estimated hours with actual hours.
Say Example Drainage Design’s last ten jobs of this type averaged 135 actual hours against 120 estimated: 12.5% over. Priced on 120 hours, a job that takes 135 makes £10,200 − (135 × £65 = £8,775) = £1,425, or 14%. Priced on 135 hours, the fee is 135 × £85 = £11,475, and the margin is £11,475 − £8,775 = £2,700: the 23.5% the firm meant to make all along.
A quick test for any fixed-fee job is its effective hourly rate: fee ÷ actual hours. Here, £10,200 ÷ 135 = £75.56 an hour, against a charge-out rate of £85. If your fixed-fee jobs keep landing below your charge-out rate, your estimates are the leak. Our guide to checking job margins covers the full quote-versus-actual review.
When a fixed fee makes sense
- The scope is written down and unlikely to move.
- You’ve done several similar jobs and have actual hours for them, not just estimates.
- The customer needs a known price for its own budget, and will pay for that certainty.
- You can bill in stages tied to deliverables, so cash comes in as the work progresses. See our guide to stage payments for engineering projects.
When time and materials makes sense
- Investigation, survey or feasibility work, where nobody knows the scope until you start.
- A customer who is likely to change the brief as the work goes on.
- Open-ended advice or support with no defined end point.
- The first job of a new type, where you have no hours history to price from.
Time and materials has its own costs. The customer sees every hour, so timesheets need clear descriptions or invoices get queried line by line. You earn less when your team is quick. And because you usually bill monthly in arrears, cash lags the work unless invoices go out on the first working day of each month.
The middle options
Fixed fee with stated assumptions
List what the price includes on the quote: the number of design revisions, meetings and site visits, and the information the customer will provide and by when. Anything outside that list is a variation, billed at a rate stated on the quote. This keeps the certainty the customer wants without you absorbing every change.
Time and materials with an estimate
Give an estimate and agree to tell the customer when you reach 80% of it. They get an early warning and a say in what happens next. You keep the right to bill the hours worked.
Capped time and materials: handle with care
A “not to exceed” cap gives you the downside of a fixed fee without the upside. In our example, a cap of £10,200 means the 150-hour job still earns only £450, while the 100-hour job earns £2,000 instead of the £3,700 a fixed fee would have made. Only accept a cap when the scope is clear and the quote says how changes are handled.
Split the job
Bill the investigation or feasibility stage on time and materials, then quote a fixed fee for the design once the scope is known. SaaS businesses can use the same split for implementation work: a fixed onboarding package for standard set-ups, and time and materials for custom integrations.
Wording on variations, caps and payment needs care. Have a solicitor check your standard terms before you rely on them.
What to do this week
- List your last ten finished jobs with contract type, estimated hours and actual hours.
- For each fixed-fee job, divide the fee by actual hours and compare it with your charge-out rate.
- Work out your average overrun by type of job, and price the next fixed fee on actual hours, not estimated ones.
- Make sure your team records time on fixed-fee jobs too. Without it, you can’t run step 2 next quarter.
- Add an assumptions list and a variation rate to your quote template.
- For time and materials jobs, add the 80% warning to your process and send invoices on the first working day of each month.
Find out what your quoting is costing you
Our free leak calculator gives you a rough £ figure for your price gap and the cash held up by late payers and slow invoicing, in about two minutes. If you’d like the full picture, our Insight review ranks every leak in the business by £ value: see how it works, or book a free 30-minute call to talk it through.
