Fixed Price vs Time & Materials for Custom Software (and the Discovery Phase That De-Risks Both)

A fixed price contract sets one agreed price for a precisely defined scope of work before the build starts. If the scope changes, the price changes through a formal change request. You agree a written specification, the builder quotes against it, and payments are tied to milestones. For a founder with a board-approved budget, the appeal is obvious: the number on page one is the number you plan around. The catch is that the definition work has to be real. Only 31% of software projects finish on time, on budget and with satisfactory results, while 50% finish challenged and 19% fail outright (Standish Group CHAOS Report, 2020). A fixed quote written against a vague brief does not remove that risk. It hides it, and the hiding place is usually the change request log. As buyer-side procurement channel Rocksoft puts it: "If you change your mind or the market shifts you might be stuck or end up paying extra for modifications" (Rocksoft, 2026). Fixed price rewards buyers who already know exactly what they are building. At the quote stage, almost nobody does.

Time and materials bills you for the hours actually worked, plus third party costs, at agreed hourly or daily rates. You pay for effort spent, not for a promised outcome. Melbourne agencies typically charge $120 to $250 an hour for senior developers, with most quality mid-market studios sitting between $150 and $200 (13Labs Melbourne pricing data, 2026). The model is honest when the work is genuinely exploratory: integrations with unknown legacy systems, research-heavy AI features, or ongoing product development after launch. The weakness is asymmetry. The builder is paid the same whether the estimate was right or wrong, so the risk of a slow project sits entirely with you. Rocksoft's summary is blunt: "This model does require trust and involvement... you won't have a final price from day one" (Rocksoft, 2026). Time and materials without weekly burn reporting is a blank cheque. With burn reporting, milestone checkpoints and a named senior engineer, it becomes a flexible way to build things that genuinely cannot be specified up front.

Under time and materials, the buyer carries the overrun risk. Under fixed price, the builder carries it, and prices that risk into your quote before you sign. Risk never disappears from a software contract. It only moves. In a time and materials engagement, every underestimated week is invoiced to you. In a fixed price engagement, the builder absorbs the overruns, which is why honest fixed quotes include a contingency buffer, and why a suspiciously cheap fixed quote is the most dangerous document in the room. A builder who underquotes either folds mid-project or recovers the margin later through change requests. The base rate is sobering. Across 2,062 IT projects, only 8.5% hit their original cost and schedule targets, and just 0.5% delivered on cost, schedule and promised benefits together (Bent Flyvbjerg, How Big Things Get Done, 2023). So the question is never which model removes the risk. It is who you want holding it, and what they charged you for the privilege.

Pure versions of both models fail for the same reason: the scope is unclear when the contract is signed, and both contracts pretend otherwise. Inaccurate requirements gathering is named a primary cause of failure in 39% of failed projects (PMI, Pulse of the Profession, 2017). The buyer describes outcomes in business language. The builder hears features. Both sides nod, and the gap between those two understandings is where budgets go to die. Ash Maurya, creator of the Lean Canvas, names the root problem: "Your customers are too busy firefighting to study their own problems" (Ash Maurya, 2026). The same is true of most internal stakeholders. Nobody has done the structured work of turning a business problem into a buildable specification before the quotes go out. Fixed price on unclear scope produces change request warfare. Time and materials on unclear scope produces drift. It is no surprise that 70% of digital transformation programs fall short of their objectives (Boston Consulting Group, 2020). The contract was never the real problem. The missing discovery work was.

A paid discovery phase is a short fixed price engagement, typically two to four weeks, that turns a vague idea into a buildable, costed scope you own before the real money is committed. Rocksoft recommends the hybrid directly: "Start with a small fixed price Discovery phase lasting two to four weeks to define your core needs and create a roadmap. This typically costs 5-10% of the total project budget but gives you much more clarity. Then you can either continue with fixed price... or switch to time and materials" (Rocksoft, 2026). In Melbourne, a serious discovery engagement typically costs $3,000 to $8,000 (13Labs Melbourne pricing data, 2026). Against an MVP build of $15,000 to $60,000, that sits squarely inside the 5-10% band. What you get back is tangible: user stories, a technical architecture, a data model, integration risks, a milestone plan and a fixed quote built on all of it. The critical detail is ownership. The scope document is yours. You can build it with the agency that ran the discovery, take it to a competitor for a rival quote, or hand it to an internal team. Discovery converts your idea from a conversation into an asset. Ash Maurya's alternative to the disposable MVP, demo then sell then build, runs on the same logic of validating before building. His summary: "You go from hoping people will buy your MVP to knowing they will" (Ash Maurya, 2026).

Ask these questions before signing either contract type. Straight answers signal an honest builder, and evasive answers are the cheapest red flag you will ever find. - Who actually writes the code on my project, and can I meet them before I sign? - What contingency is inside this fixed quote, and what assumptions is it priced on? - Under time and materials, what weekly burn reporting do I receive, and what happens when we reach 80% of the estimate? - Can you show me a real change request from a past project and what it cost the client? - Do you offer a paid discovery phase, and do I own the scope document it produces? - If I take that scope document to another builder, is there any penalty or lock-in? - How many of your last ten projects finished at the quoted price? The first question matters more than it looks. Agency economics push small clients towards junior teams. One insider admits: "You're selling some people that you know you shouldn't sell so you can pay the bills" (MoreMozi, 2026). A named senior engineer on your contract is worth more than any pricing model. Finally, run the overrun arithmetic before you sign. A $60,000 project running at the 45% average overrun adds $27,000 (McKinsey and Company and the University of Oxford, 2012). Whichever model you choose, choose the builder whose answers you would still trust at that number.

13Labs runs exactly the hybrid this guide recommends: a paid discovery phase that produces a scope document you own, followed by a fixed price build quoted from that scope. The discovery phase runs two to four weeks and ends with user stories, architecture, a milestone plan and a fixed price for the build. Because the build is quoted from a document you approved, the fixed price is a real commitment rather than a guess with a buffer. If you proceed, the discovery fee bought the de-risking. If you do not, the scope document is still yours to use anywhere. Founder Callum Holt explains the philosophy: "The number one reason projects fail is scope creep. We start small on purpose. Get the core right, then add features based on what users actually ask for" (Callum Holt, Founder, 13Labs). 13Labs is a Melbourne AI studio building custom production software with senior engineers. The discovery-to-fixed-price model is detailed at 13labs.au/buildAgency. Either way, you keep the scope.

**Is fixed price or time and materials cheaper for custom software?** Neither is inherently cheaper. Fixed quotes include a risk premium because the builder carries the overrun risk. Time and materials is cheaper when the scope is stable and you manage it actively, but large IT projects average 45% over budget (McKinsey and Company and the University of Oxford, 2012), and under time and materials you pay every dollar of that. Most buyers save the most by paying for discovery, then a fixed price. **How much does a discovery phase cost in Australia?** Plan for two to four weeks at 5-10% of the total project budget (Rocksoft, 2026). In Melbourne that is typically $3,000 to $8,000 for MVP-scale projects (13Labs Melbourne pricing data, 2026). If an agency offers to scope a $60,000 build for free in one sales call, the scope is a guess and the quote is padded against it. **Who owns the scope document after a discovery phase?** You should. Discovery is paid work, so the output is your intellectual property: user stories, architecture, estimates and the roadmap. Confirm ownership in writing before the engagement starts, and treat any agency unwilling to hand the document over as a lock-in risk. **Can I start on time and materials and switch to fixed price later?** Yes, and that is often the cleanest path. Run a paid discovery or an initial build phase on time and materials, then convert to a fixed price once the scope is documented and both sides trust the estimates. This is the hybrid Rocksoft recommends for exactly this situation (Rocksoft, 2026). **What happens if my scope changes during a fixed price build?** The change goes through a formal change request: the builder prices the delta, you approve or decline it, and the contract total adjusts. Ask to see an agency's change request history before signing. A builder who claims their projects never change scope is either padding every quote or not telling the truth. Half of all software projects finish challenged (Standish Group CHAOS Report, 2020), and unmanaged change is the usual reason.