Your clients often want the certainty of a fixed price arrangement. Fixed price arrangements work well when there is little ambiguity in the scope of services and the functionality of the finished project. If the client team has clearly identified their needs and they are set in stone for the duration of the project then a fixed price works well. A fixed price arrangement does not work well if the client’s scope and functionality requirements are not clear from the beginning of the project. As the project develops, the client will inevitably be introducing new elements and desires; you will have to analyze these changes in scope and requirements for their impact on effort, cost, and timelines. You may be able to trade off scope items with the client to accommodate their additional requests; while you are trying to manage the project within the confines of the fixed price arrangement the client may feel that they are being shortchanged on the project.
With the change in scope and requirements, you are placed in the uncomfortable position of constant negotiation with the client in regard to the requested scope changes and the additional fees that you will need for a profitable project. You should consider using a Time and Material arrangement for an engagement where the clients scope and functionality are not clear from the beginning of the project. With a Time and Material arrangement, you can dedicate the right amount of resources to get started on the project and, if the client is adding scope and functionality requirements, accommodate those requests on a time and material basis. You still need to manage the project closely and communicate with the client about the costs they will incur with the changes they are requesting. However, you are not constantly negotiating the additional scope and the accompanying additional fee.