Why Fixed-Price Projects Are a Recipe for Trouble

We all know clients have specific budgets and want certain results for their money. That’s completely understandable. But the problem with set-price projects is that nothing is ever truly “fixed.”

Here’s the reality: when you lock everything down in a set price model, both sides lose value. As soon as a project kicks off, something will change. It could be the client’s needs evolving or unexpected delays popping up. In either case, the result is usually frustration.

The client either gets less than expected or has to deal with higher costs and longer timelines. Meanwhile, the vendor is stuck absorbing the additional costs of adapting to those changes, often on its own dime. I’ve seen this scenario play out time and again – there’s almost always a change that throws the original plan out the window.

In my experience, I haven’t seen a single fixed-price contract succeed unless there was an enormous budget buffer to absorb all the inevitable changes. And let’s be honest, how often does that happen?

At first glance, a fixed-price contract seems like a dream: a clear budget, specified deliverables, and a defined timeline. Sounds great, right? But once you dig deeper, you realize this rigidity comes at a cost. The world doesn’t stand still, and neither do your project requirements.

Anyone who’s tried to build a product knows it’s nearly impossible to identify and specify every feature from the start. Some elements will always need to change because they are either harder to build than expected or turn out to be essential to the final product’s usefulness.

What do you do then? Working within a fixed-price contract may either blow your budget or cause you to end up with a product that’s not quite right. And that’s the real danger.

So, what’s a more practical alternative?

I’ve found that a time-and-materials (T&M) model is much more realistic. You have general goals and requirements, but you’re not boxed in by a rigid timeline or deliverables list. This flexibility allows the project manager to adapt as business needs or market conditions change. It’s the core principle of Agile development – you build, test, and refine as you go.

T&M isn’t without its challenges, of course. One of the biggest concerns is the fear of runaway costs. But here’s the thing: in T&M, you can scale your development effort as needed, and each sprint allows you to evaluate whether the project is delivering real business value. You might even finish faster than you expected.

From my perspective, if you’re dealing with a complex or evolving project, a T&M contract is the way to go.

So, how can we approach project management if we decide not to deal with fixed-price contracts?

The project should move forward in an Agile manner, allowing us to adapt to changing needs as they arise. No one can predict everything from day one, and this method gives us the ability to adjust the scope of the project without it becoming a problem.

First, we do some upfront planning of the scope of work and prepare rough cost estimates – what I like to call ballpark numbers. But here’s where it gets interesting: we keep things flexible. Here is how.

Of course, budget planning should include some contingency – just in case we need to respond to unexpected changes. And if they turn out to be significant? That’s where the Pareto principle comes in. It means focusing on the 20% of the work that delivers 80% of the value so we can get the most bang for our buck without derailing the whole project.

Personally, I recommend a Time & Materials model with a capped budget. This way, we maintain flexibility with the project scope but ensure the project cost doesn’t shoot through the roof. It’s the best of both worlds – you get adaptability without the worry of budget overruns.

At the core of the debate between fixed-price and flexible models is something more fundamental: trust. No matter how well you structure a pricing model, even the best plans can fall apart without transparency and trust. In my experience, building a solid relationship with the client (based on open communication and regular updates) goes further in ensuring a project’s success than any contract ever will.

With a flexible approach like T&M, both sides must stay committed to ongoing conversations about progress, costs, and value. Regular check-ins and reviews help keep everyone aligned and address potential issues before they spiral out of control.

When we’re working with flexible pricing models, like Time & Materials, the role of the Product Owner becomes even more crucial. In this setup, decisions are made on the fly to keep up with the project’s changing needs.

But for that to actually work, the Product Owner must be empowered to make those critical decisions. You can’t have someone in that role who’s hard to reach or doesn’t have the authority to set priorities.

Without a strong Product Owner, the flexibility you gain from a T&M contract can quickly lead to chaos.

A person in this position who understands how the project flows and can react to shifting demands is essential to making a flexible pricing model work. The ability to pivot when needed and the freedom a flexible model provides is the key to success, assuming both sides, especially stakeholders, are aligned and communicate effectively.

Fixed-price projects don’t allow much flexibility, so constant communication and decision-making might seem less urgent. But the reality is that no matter which type of contract you choose, successful delivery always comes down to intuition, collaboration, and being able to adjust to changing priorities.

Things change. Requirements shift, timelines evolve, priorities get redefined. The only way to manage that reality is by staying flexible. With a Time & Materials model and an economical price adjustment cap, you keep costs under control while being free to adapt as needed.

More importantly, with mutual trust, proper expertise, and solid experience, the T&M approach combined with Agile methodologies can be more cost-effective. Between change requests, business approvals, legal consultations, adjustments, etc., with fixed price, you’ll end up paying more for operations than actual development. You decide which is more worth your money. I think there is a better way.

Real success comes from flexibility – both from the software provider and the client. Embrace adaptability, and you’ll deliver better results without worrying about losing money.