There are three primary ways that we engage in a software project with a customer:

• Time and Materials
• Fixed Cost
• Estimated Cost

Time and Materials
The more popular option for customers is Time and Materials. This allows us to start the project almost immediately and to show actual results soon after. There is less talking, less planning, and more doing. We can get to a working product quickly and continue to add features as needed. Very often these types of projects end up being the least expensive.

Fixed Cost
Fixed cost projects (i.e., cost-not-to-exceed projects) provide a custom software application at a specific cost. This allows you to be sure the cost won't exceed $X.

But, these types of projects always require us to spend more time planning and documenting the project to ensure that we can complete the project within the defined costs. This time planning and documenting is a part of the project, and is therefore billable.

This time, plus other required work involved, drives up the cost of the project. Therefore, these projects often cost more than time and materials projects.

Estimated Cost 
This is a hybrid of the two projects above, which is also popular with our customers. We will do some planing and documenting but limit it. We then create an estimated cost but will allow ourselves to go over the estimate (if we run into unexpected issues, mis-estimate on some small issues, etc.).

This allows us to do some planning and documenting but not so much that we need to bill for that work before coming up with the estimated project costs. This limites the project cost.

What keeps us honest with our estimates is the tension between the fact that we want the project but we don't want unbillable time.

We will create our estimate to the best of our ability with moderate knowledge of the software to create. But since we don't bill for the planning and estimating time until we get the project, we don't spend an excessive amount of time doing that planning such that we risk a lot of billable time for which we won't be paid.

These projects are also often lower than fixed cost projects.