We use fixed price model when specifications and scope are clearly defined at the start of a project or project iteration. In this case, it is assumed that estimation and plan are correct and will not be changed. The client pays a fixed price for a complete project, which has been estimated by specifications provided by the customer. This model provides on time and on budget delivery of software, with a clearly defined deadlines and costs.
This model transfers the risk of project underestimation from the client to the provider, and stimulates the provider to work faster. Using Agile method, the project is divided into short stories. The client pays after the completion of a story, based on the estimation during the planning sessions, regardless of the actual hours spent on the story.
If you don’t have specifications and your scope is not clearly defined at the start of the project, this model may suit you the best. The customer pays the agreed man-hour price for the time spent on the project. In this case, the requirements are specified after each short iteration, which offer the customer enough flexibility to balance workload, team size, and the budget.