Fixed price or time and materials: is your contract priced the right way?

Every services contract has a pricing model. It decides how the supplier is paid and, more importantly, who carries the cost when things change. Many contracts start with a sensible model. The trouble is that the business changes and the pricing model stays the same.

Why the pricing model matters

The pricing model shapes behaviour on both sides. A fixed price rewards the supplier for working efficiently. Time and materials rewards them for spending more time. Neither is good or bad on its own. What matters is whether the model suits the work as it is today.

Fixed price

You agree a set price for a defined scope. It works well when the scope is clear and stable, such as running a known service to agreed service levels.

Watch for:

• Volumes that have fallen. If you now use much less of the service, a fixed price means you still pay for the old level.
• A vague scope. If the scope is not clear, many requests become "out of scope" and are charged as extras.
• No link to performance. A fixed fee with weak service levels gives the supplier little reason to improve.

Time and materials

You pay for the time and resources the supplier uses. It suits work that is hard to define up front, such as discovery or early design.

Watch for:

• No cap or end point. Without a limit, cost can grow with no clear finish.
• Long-running use. Time and materials that has run for years on stable work is often a sign the model should change.
• Rates and grades. Check that the people doing the work match the grades you are charged for.

Other models

Unit or consumption pricing links cost to use, such as per user, per device or per transaction. It can be fair when volumes move, as long as the unit prices and the way usage is counted are clear. Outcome-based pricing pays for results. It can align interests well, but only if the outcomes can be measured fairly by both sides.

Signs your model no longer fits

• Your usage has gone up or down a lot since the contract started, but your costs have not followed.
• A large share of the bill comes from change requests and extras.
• You cannot easily explain to your finance team what you are paying for and why.
• The supplier is meeting its targets, but the service does not meet your needs.

What you can do

You do not always need to wait for renewal. Many contracts allow pricing changes through the change process, or include a review point. Start by setting out how you use the service now and what you expect over the next few years. Then compare that with what the current model would charge. The gap tells you whether a change is worth pursuing.