Matching your billing model to your cash flow

Most software and IT services firms can deliver the same project under more than one contracting model. The choice is usually framed as a commercial or risk question, but it is just as much a cash-flow question. Each model decides when money arrives relative to when you spend it, and getting that rhythm wrong can starve working capital on a project that is perfectly profitable on paper.

This guide compares the three common models from the firm's cash seat: time-and-materials, fixed-price and milestone billing. It is a decision framework rather than a deep dive into any one model; the timing risk inside milestone gates and the currency risk inside fixed-price work each have their own detailed guides you can follow on from here.

Time-and-materials: regular but trailing

Under time-and-materials you bill for hours or days worked, usually monthly in arrears. The cash rhythm is the most regular of the three: you invoice steadily and your revenue tracks the team's effort closely. The catch is the word arrears. You pay salaries and contractors for the month as it happens, then invoice after it ends, then wait out the client's payment terms on top.

So even a smooth time-and-materials engagement leaves you funding roughly one to two months of team cost ahead of the cash for it. The risk is manageable but constant: your working capital is permanently lent to the gap between doing the work and being paid for it. It scales linearly, which makes it predictable, but it never goes away.

Fixed-price: risk and cash at completion

A fixed-price contract agrees a total fee for a defined scope. Commercially it concentrates delivery risk on you, because overruns come out of your margin. From a cash angle, the danger is concentration in time: if the bulk of the fee is due on completion, you fund the entire build from your own resources and only recover it at the end.

That makes fixed-price the most demanding model for working capital, especially on longer projects. An upfront deposit softens the start, but the deeper you get, the more cost you are carrying against a single large payment that lands only when the work is accepted. Scope creep makes it worse, because extra effort is unpaid until it is renegotiated. Fixed-price suits firms with a buffer and disciplined scope control; it punishes firms that are already tight.

Milestone: cash clusters at gates

Milestone billing splits the fee across deliverables, each invoiced when the client accepts it. It sits between the other two: more frequent than a single fixed-price completion payment, but lumpier than steady time-and-materials invoicing. Cash clusters at the gates, so your runway rises and falls with the milestone calendar rather than flowing evenly.

The specific hazard is that each gate depends on client sign-off, so a contested or delayed acceptance withholds a chunk of cash while your costs carry on. That timing risk is significant enough to warrant its own treatment, covered in the dedicated guide on acceptance gates. As a model, milestone billing rewards firms that map team cost against realistic sign-off dates and reserve for the gaps between gates.

Choosing for your firm, not just the client

The right model depends on your cash position as much as the client's preference. A firm with a healthy buffer can take on fixed-price work and absorb the concentration risk for a better margin. A firm that is tight is usually safer with time-and-materials or short milestone cycles, where money returns more often even if each engagement earns less per unit of risk.

Whatever you pick, the discipline is the same: know when cash will actually arrive under that model, set it against when your costs fall, and reserve for the gaps. Mixing models across your client base can smooth the overall picture, with steady time-and-materials work cushioning the lumpier fixed-price and milestone engagements. The mistake is choosing a model on commercial terms alone and discovering the cash rhythm only when payroll is due.

How Altery fits

Once you have chosen a model, the work is managing its rhythm, and that is where Altery's accounts can help. Real-time balances let you see exactly where you stand at any point in the cycle, which matters most under fixed-price and milestone work where the position swings. Ring-fenced pots let you reserve for the gaps deliberately, setting aside team cost or tax against incoming fees rather than spending from one blended balance and being caught short between payments.

If you bill foreign clients, a multi-currency account lets you receive in USD, EUR or GBP under any of the three models and hold it in that currency, converting on your own timeline rather than at the moment each payment lands. That keeps the cash rhythm you planned for from being disturbed by exchange timing. Altery is not a bank and provides general information, not advice; the right contracting model for a given engagement is a commercial decision to confirm with your own adviser.

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