Part II Preparation and vendor selection
Chapter 10: Fixed price, T&M, or something in between?
A fixed price without a finished specification is an illusion: someone always pays for the risk of uncertainty, either as a premium in the proposal or through amendments. A fixed price suits small, well-described engagements. For a new system, a budget cap and a split into stages work well. Within each stage, you then pay for the time worked or per accepted increment.
The risk of uncertainty does not disappear; it only moves
In the idea phase, an estimate can be 0.25× to 4× the actual figure; you only get to about ±10% after a detailed design McConnell, 2006 and 2010 (chapter 1).
If you want a fixed price for a whole system based on a two-page brief, you will get one of two kinds of proposal. Either it will contain a high risk premium, or it will be underestimated and the vendor will make up the difference later with additional work. Neither is a good deal.
Each model just distributes the risk differently. With a fixed price, the vendor formally carries it, but in reality you pay for it in the premium. With time and materials (T&M), you carry it, but you only pay for work actually done. Combined models share the risk: the vendor is responsible for a stage, and you decide what comes next.
Time works against you: each additional year of duration increases cost overruns by 15% McKinsey and Oxford, 2012. So split the project into smaller stages, roughly up to 3 months each. After each one, decide whether to continue.
| Model | When to use | Who carries the risk | Trap |
|---|---|---|---|
| Fixed price and scope | small, short, fully described engagements; migrations, implementation of an off-the-shelf product | formally the vendor, in reality it comes back in the premium | underpriced proposal, disputes over what is “in scope” |
| Time and materials with a cap | a new service, unclear processes, a need for fast feedback | mainly the customer | without a product owner, “burning hours” |
| Fixed price in stages | most new systems; the first stage fixed, further ones as options | shared | for a public authority, only options reserved in the tender documentation |
| Fixed budget and time, variable scope | agile development with a fixed budget | shared; the customer carries what does not fit | without priorities, the scope gets out of control |
| Payment per accepted increment | sprints with a clear Definition of Done | the vendor for what is not delivered, the customer for timely acceptance | slow acceptance blocks payments |
| Fixed monthly fee | long-term further development and operations | the customer (capacity utilization) | unused PD expire |
| Framework agreement | large modular systems, recurring needs | shared; competition keeps the price down | the rules cannot be changed later |
Hybrid: a fixed frame, flexible content
For most companies and public authorities, a combined model makes sense: a fixed budget cap, stages that end with a decision on the next steps, and agile development with a backlog within them. Priorities (MoSCoW, chapter 6) decide the content of a stage, and the price stays under control. The Czech adaptation of the 18F handbook recommends “continuous payments for time and costs (with a cap on total spending)” Česko.Digital, 2022.
It works like renovating an apartment with a fixed budget: you know how much you can spend, and after each room you decide whether to continue the same way or differently.
But time and materials without rules is an open budget. Watch four things:
- a cap that the vendor will not exceed without your consent,
- a monthly overview of budget spend in relation to what has been delivered and accepted,
- the right to stop ordering at any time,
- a product owner who has time to decide on priorities.
Where you have a clear Definition of Done, you can pay per accepted increment: the vendor invoices only the parts you have tested and accepted. This works only if acceptance on your side does not stall. Otherwise, you delay payments and damage the collaboration.
What a person-day and a whole team cost
In the first half of 2026, the median rate per person-day in government contracts ranged from CZK 9,220 for a tester to CZK 13,600 for an architect, excluding VAT MV, overview of ICT rates, July 2026. You will find the table by role in chapter 4. Work with quartiles, not the average, and check whether you are comparing prices including or excluding VAT.
According to Česko.Digital, a team of 5–9 people costs roughly CZK 12–20 million a year, and a single contract should not exceed CZK 40 million a year and 3 years Česko.Digital, 2022. An indicative check: 5 people × 20 PD × CZK 10,500 × 12 months = CZK 12.6 million a year.
Pay only for accepted work
Acceptance is the last moment when you have leverage. So agree on payments only after a stage has been accepted, and retention (retainage) until the end of the warranty, roughly 5–10% of the price. Contractual penalties for missed milestones are typically around 0.05–0.2% of the stage price per day, always with a cap (rule of thumb). Chapter 20 describes how to carry out acceptance. Chapter 18 covers changes during a stage.
Red flags in a price proposal
- A fixed price for the whole system without a list of assumptions.
- A price or rate well below the others, with no explanation.
- One average rate without a breakdown by role.
- T&M without a cap and without a spend report.
- An “agile” project in which every change is handled through an additional order.
- After 2–3 sprints, there is nothing to see.
| How it goes wrong | How to do it right |
|---|---|
| How it goes wrongA fixed price for the whole system based on a two-page brief. | How to do it rightA fixed price for discovery and the first stage, further stages as options. |
| How it goes wrongT&M without a cap, invoiced “for hours worked.” | How to do it rightT&M with a cap and a monthly spend report against the accepted scope. |
| How it goes wrongYou compare rates: CZK 8,000 vs. CZK 11,000. | How to do it rightYou compare the total price of the delivery and the seniority. A cheap rate × more PD = a more expensive project. |
| How it goes wrongA budget without contingency; every change is a crisis. | How to do it rightContingency in the budget and change control with a management decision. |
| How it goes wrongOne contract for 4 years. | How to do it rightStages with a decision gate, a contract for at most 3 years (18F rule of thumb). |
| How it goes wrongThe full price paid at handover. | How to do it rightPayment after acceptance of stages, retention until the end of the warranty. |
- You determine the estimated value under Section 16 of the Public Procurement Act (ZZVZ). The Ministry of the Interior’s overview of typical ICT rates (Přehled obvyklých cen ICT prací) is the standard basis for this MV, overview of ICT rates, July 2026.
- A company can choose T&M and stop ordering at any time. A public authority must choose the model already in the procurement procedure.
- Options for further stages must be reserved in the tender documentation (Section 100 of ZZVZ) and count toward the estimated value. Otherwise, a later extension is a contract modification under Section 222 (chapter 18).
- A framework agreement with several vendors and mini-competitions: according to the knowledge base of the Digital and Information Agency (DIA), for example for 4 years, in practice with 7–15 vendors and a single maximum rate that a vendor can lower in a mini-competition. Preparation takes a long time, drawing on it is then fast, and later changes to the rules are not possible DIA, knowledge base.