It’s hard enough to choose between software companies based on their merits, but it’s even harder to choose between them when they offer two different types of contracts. Startup CEO/CTOs probably get a dozen emails a day from software vendors. How will they figure out which vendor will deliver the best quality product at the best price?
This article will review just one of the many considerations that go into vendor selection, which is choosing between the two types of vendor contracts– fixed bid and cost-plus.
This means the outsourcer will quote you a single price for an agreed-upon Scope Of Work (SOW), usually broken into smaller installment payments. This seems like a great option, right? If I choose this option, then can’t I just send out a Request For Proposal (RFP) to as many vendors as possible and then select the vendor with the lowest price?
Well, yes, you can. However, it’s not always that simple. Why not?
First of all, a vendor will only agree to a fixed-price bid if you both can agree on a DETAILED, and I mean REALLY detailed, scope of work document. This document will have to define every single feature in detail. You’ll have to provide them with what every component on every page in the entire app is supposed to do. This will be a very long and tedious exercise, and do you actually know this level of detail on your product idea?
Secondly, the vendor will give you exactly what you asked for, even if it makes no sense at all. So you may get your final build and then discover that several of the feature ideas looked great to you when you were doing the SOW, but when you see them actually built, they turn out to be bad ideas.
Third, when working on a fixed-bid project, it may be months or even years between when you start the project and when the vendor delivers the finished product. There is no collaboration between. So what happens if you learn something new about the marketplace two months after starting a project? You don’t get to implement those changes until the entire agreed-upon SOW is done.
Changing project scope after it starts requires a "Change Order." It's time-consuming and costly. The vendor can charge as they see fit because you're already committed.
In summary, a fixed bid contract has its advantages because it's clear what you’re getting and what you’re paying. But if you choose this option, you'd better make sure you: a) know how to define your product completely and thoroughly, and b) trust that your vendor isn’t going to gouge you if you need to make a change order.
This model essentially makes an outsourcer an extension of your internal team. The vendor will charge you the amount they pay for the resource, plus a percentage to cover their overhead.
Sounds simple, right? You don’t have to spend countless hours defining the scope of work, and you can modify your scope along the way as you build, test, and tinker with the product. Furthermore, it is easy to compare vendors because you can just pick whoever has the lower hourly rate, right?
Simpler but less incentive. Vendor efficiency and deadlines may suffer. After all, they receive payment regardless of whether you release your product, correct? Additionally, while you can compare hourly rates, it can be challenging to determine who will complete the job most efficiently. Choose the model carefully. The wrong vendor needs effort. Manage projects and clients. Meet deadlines and optimize productivity.
You may want to read: Product Focused vs. Project Focused: What better option to outsource your project?
In summary, a cost-plus contract encourages collaboration, reduces administrative paperwork, and offers greater flexibility.
Choose honest vendors. Check work ethic. Ensure accountability. Meet deadlines and deliver commitments.
In a no-risk discovery we look at how your work moves between your systems today and show what one connected system would do differently. You pay only if you proceed. Or see how we approach it.
More on the same problem:
Time and Materials vs Fixed Price Software Contracts: How to Choose (article)
Zoho CRM Plus Cost in 2026: What the Bundle Actually Runs You (article)
They are close relatives. Time and materials bills an hourly or daily rate that already includes the vendor's margin. Cost plus bills the vendor's actual cost for each person plus an agreed percentage or fee for overhead and profit, so the client can see the two parts separately. In software outsourcing the terms are often used loosely for the same thing: the client pays for effort as it is spent and controls scope as the project goes.
When the scope can be written down completely and will not change: a defined integration, a migration with a known data set, a short project with a clear end. The client gets price certainty and the vendor carries the delivery risk. It is the wrong choice for a product that is still being discovered, because every lesson learned becomes a change order and the vendor's incentive is to build exactly what was written, not what works.
Agree the change order process and rates before signing, not when the first change arrives. Ask the vendor to show a past project's change order history. Keep a contingency of your own for changes you will want. And ask what happens when the vendor's estimate is wrong: a vendor who absorbs their own estimating errors has priced the bid honestly, while one who recovers them through change orders has priced it to win.
Rates measure cost per hour, not cost per outcome. Ask each vendor to estimate the same first milestone in hours and to explain the team they would use. A higher rate with a smaller, more senior team often finishes sooner for less. Then check references for whether estimates held and deadlines were met, because on a cost plus contract the vendor's efficiency and honesty are what you are actually buying.
Yes, and the combination is common. A short fixed-price discovery or first milestone sets the scope and proves the working relationship, then the build proceeds on cost plus with the scope controlled sprint by sprint. Some vendors offer a guaranteed estimate within a cost plus arrangement, absorbing the overrun if their estimate is wrong. That gives the client most of the certainty of a fixed bid with the flexibility of the other model.
"Something isn't working." "We're outgrowing our tools." "We're afraid to make the wrong move." No-Risk Discovery is a short, practical conversation that gets you clarity before you commit to anything big. We'll tell you if we're a fit. If we're not, we'll tell you that too.
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