Fixed Price vs. Time & Material: Time Tracking Matters
by Alexander Huber
When IT service providers talk about project invoicing, the question almost always comes up:
Fixed price or time & material (T&M)? Both models are legitimate and both can fail if the foundation is missing: precise project time tracking.
In our daily practice, we experience both. Some clients insist on a fixed price because they need predictability. Others rely on T&M to remain flexible. But regardless of the model: Without clean time data, projects cannot be managed, risks cannot be identified, and margins cannot be secured. Time is the most objective currency a project has.
Fixed Price and Time & Material – What’s Behind Them?
Fixed Price
With a fixed price, the service provider commits to delivering a defined outcome at a predetermined price. For the client, this means budget certainty, the price is set, regardless of how much effort is ultimately required.
For the provider, however, it means risk: any misjudgment, scope change, or delay eats into their margin. The key lies in clear specifications, well-defined acceptance criteria, and effective change management.
Fixed price projects make sense when the scope is clearly defined, and conditions are stable, such as in migrations, rollouts, or standard recurring services. But as complexity and uncertainty increase, the model becomes fragile.
Time & Material
The time & material model works the opposite way: billing is based on actual effort, usually in hourly or daily rates. The client bears the budget risk but gains maximum flexibility. Requirements can change, priorities can shift, and new insights can be implemented immediately.
For IT service providers, T&M is especially attractive in exploratory projects, such as innovation, research, or agile software development. However, T&M requires trust and transparency. Without comprehensible time records, mistrust can arise: “How did you spend 120 hours?” – a question every project manager has heard.
Why Time Tracking Is Indispensable in Both Models
Legally, the situation is clear: the European Court of Justice requires an objective, reliable, and accessible system to measure daily working hours; Germany’s Federal Labor Court (BAG) confirmed in 2022 that all working time must be recorded. The German Federal Ministry of Labor (BMAS) explicitly emphasizes this obligation in its FAQ. Time tracking is therefore not just best practice but a legal requirement (WEKA). See also this article on the legal situation in Austria.
💡 Time data is doubly valuable: It fulfills legal requirements and creates the foundation for robust project management.
Economic Perspective
- For fixed price, accurate actual times protect the margin. Only those who know the real effort can assess whether the calculation holds and whether additional charges are justified.
- For T&M, time data is the basis for invoicing. Without precise tracking, there is no legitimation towards the customer, and trust suffers.
Management and Learning
Time tracking is also a learning tool. Historical time data shows how realistic estimates were, which activities consumed disproportionate effort, and how productivity developed over time. It forms the basis for reference class forecasting, a concept that bases forecasts on empirical data and thus reduces estimation errors (Controllingportal).
What Research Says About Success Rates
A Norwegian study of 35 public software projects reports a clear difference: 83% of T&M projects were rated successful, but only 38% of fixed price projects (criteria included benefit realization, budget/timeline, and quality). The authors link this to more frequent deliveries and active benefit management (jsoftware.us).
Broader research (two studies including Norwegian and international outsourcing projects) shows direct and indirect correlations between contract type and outcome with a higher failure risk for fixed price compared to T&M (ResearchGate).
Regardless of contract type, systemic risk in IT projects is high: A McKinsey/Oxford analysis of 5,000+ IT projects found an average of +45% cost, +7% time, and −56% benefit (McKinsey). Additionally, an HBR analysis of 1,471 projects found a “fat tail”: one in six became a Black Swan (~+200% cost, ~+70% time) (HBR).
🔍 Insight: No model is superior by default. Under uncertainty and agile methods, flexible or hybrid models are more successful. Transparency about time, effort, and results is key.
Our Experience: Pros and Cons of Both Models
Fixed Price
Pros:
- High budget certainty for clients
- Clear acceptance and contract logic
- Easier procurement and cost planning
Cons:
- Significant risk for the provider in case of misestimation
- Change and estimate risks impact margin
- Incentive to minimize scope rather than maximize value
- Requires renegotiation if requirements change
In our experience, fixed price works well when requirements are stable, for instance, in standard migrations or clearly defined software modules. But as soon as complexity or ambiguity enters the picture, fixed price can become a risky gamble.
Time & Material
Pros:
- High flexibility and agility
- Adapts to changing requirements
- Continuous prioritization based on value
- Fits iterative methods like Scrum, Kanban, DevOps
Cons:
- Budget risk lies with the client
- Potential for wrong incentives (“time over results”)
- Requires active management and trust
T&M works best when clients and providers collaborate as partners and deliver in short feedback cycles. The budget is understood as a corridor, e.g., “capped T&M” – a cost ceiling with transparency and regular reviews.
Why Hybrid Models Work Best for Us
Many successful organizations combine elements of both worlds. One example is the fixed-price sprint concept:
A sprint (e.g., two weeks) is offered at a fixed price, while the overall scope remains flexible, balancing predictability with adaptability.
Alternatively, capped time & material is ideal. A T&M contract with a maximum cost. This allows clients to maintain budget control while giving teams flexibility.
Payment-by-results is also gaining traction: payment is based on measurable outcomes (e.g., user adoption or performance improvement), not just time spent.
💡 Hybrid models like “capped T&M” or “fixed-price sprints” combine the best of both worlds, predictability and flexibility. At Time Cockpit, we typically use the “capped T&M” model. The client knows the cost but doesn’t need to specify the scope down to the last detail. This leaves room for ideas and keeps risk in check for both sides. Communication is key: if the scope changes and the cap is at risk, we inform the client early.
Practical Aspects
Time tracking protects margin and trust.
Even in fixed price projects, accurate actual times are essential for claims and learning. Only those who track time can improve their calculations.“Capped T&M” is a buffer, not a risk.
Many companies use this model to balance cost control and agility.
Clients can steer within the budget without blocking changes.Time data is strategic knowledge.
Over time, a valuable data set emerges. It shows how teams actually work, which activities recur, and which customer segments are more profitable. These insights improve project control, estimates, and forecasts.
Choosing the Right Model
When the scope is stable
- Example: ERP upgrade, defined rollout, legally required adjustment
- Recommendation: Fixed price, with mandatory time tracking, plan/actual comparisons, and transparent change management
When uncertainty or innovation dominates
- Example: New product development, proof of concept, software modernization
- Recommendation: T&M or hybrid model e.g. fixed-price sprints or capped T&M
Important: tight controlling, regular reviews, and open communication
Time Tracking as an Enabler for Both Models
Regardless of contract type, time tracking is the foundation for management, learning, and compliance.
In practice, this means:
- Clear project structure: Defined hierarchy from client → project → work package
- Automated tracking aids: Integration with calendar, ticket system, or IDE to reduce effort
- Key metrics: Burn rate, flow efficiency, plan/actual deviation, billable ratio
- Regular reviews: Don’t just track time but analyze it as well
A professional tool like Time Cockpit not only allows you to record time but to interpret it: Who’s working on what? How’s velocity developing? Where are the bottlenecks? With this, time tracking becomes a strategic management tool, not just admin overhead.
Lessons Learned – Best Practices from Projects
- Design your time tracking: Track effort with enough detail to assess it, but not so much that employees feel overwhelmed
- Transparency as a culture: Time data is not for control, it’s a tool for joint decision-making
- Automation: Interfaces to Jira, Azure DevOps, Outlook, or ERP avoid duplicate entry
- Reflection: Regular analysis of plan/actual variances improves estimate accuracy
- Keep compliance in mind: Fulfill legal requirements and use them to show professionalism
- Iterate: Even time tracking can improve iteratively. Get team feedback, adapt processes. A customizable solution is key. No need to change tools every time needs evolve.
Conclusion
Fixed price or time & material is not just a contract choice, it’s a strategic decision about risk, management, and trust.
Fixed price offers predictability, T&M allows flexibility and but both only work with reliable time tracking.
Research shows: Projects with flexible contracts are more successful because they can adapt to change. But without clean time data, they’re as blind as any poorly managed fixed price project.
In the end: Time tracking is the common foundation.
It protects margins, builds trust, provides data for better decisions and reveals what would otherwise remain invisible in day-to-day project work.
📈 In summary:
- Time tracking = Compliance + Control + Learning
- Fixed price = Security, but risk in estimation errors
- T&M = Flexibility, but need for transparency
- Hybrid models = Best of both worlds
- Success = Data, not gut feeling