Make-or-Buy Analysis: Procurement Decision Framework

PMBOK v8 Definition

Make-or-Buy Analysis is a procurement process used to determine whether a product, service, or result can be produced internally by the project team (make) or acquired from an external source (buy). It is a key component of Procurement Management planning, appearing in Appendix X4.3 of PMBOK v8, and involves evaluating costs, benefits, risks, and organizational capabilities to determine the most efficient procurement approach. This analysis directly supports the development of the Procurement Strategy and informs the overall procurement planning activities.

Why It Matters for the Exam

Make-or-Buy Analysis appears frequently on the PMI exam in questions testing your understanding of procurement planning decisions. It is commonly tested in scenario-based questions where you must determine whether the project should produce deliverables internally or contract them externally. The exam also tests your ability to identify which factors influence this decision, including cost analysis, resource availability, and strategic considerations.

Key Points to Remember (for the exam)

• Primary Decision Point: Determines if work is performed by the project team or procured from external sellers
• Cost Factor: The analysis includes direct costs, indirect costs, and opportunity costs of both options
• Strategic Factors: Considers core competencies, intellectual property protection, and long-term business strategy
• Risk Assessment: Evaluates risks associated with each option, including quality control, schedule impacts, and supplier dependency
• Capacity Evaluation: Assesses whether the organization has the resources, skills, and technology to perform the work internally
• Procurement Documentation Input: Results feed into procurement documentation, bid documents, and contract type selection
• Continuous Process: May be revisited throughout the project as conditions change or new information emerges

Typical PMI Exam Example

A project manager is planning the procurement approach for specialized software development. The team has three experienced developers available, but the software requires niche expertise not currently in-house. The project manager must decide whether to train existing staff (make) or hire an external vendor (buy). The correct decision depends on comparing training costs, timeline impacts, and the strategic value of developing this capability internally versus the immediate availability and expertise of external vendors.

PMI Exam Traps

• Trap: Assuming make is always cheaper than buy

• Reality: Make decisions must account for hidden costs including training, overhead, and opportunity cost of diverting internal resources

• Trap: Confusing make-or-buy analysis with source selection

• Reality: Make-or-buy determines IF to procure; source selection determines FROM WHOM to procure once the buy decision is made

• Trap: Thinking make-or-buy is a one-time decision

• Reality: This analysis can be repeated during the project as scope changes, market conditions shift, or new capabilities emerge

• Trap: Ignoring non-cost factors in the decision

• Reality: Strategic importance, intellectual property, quality requirements, and schedule constraints often outweigh pure cost considerations

Important PMI Connections

Quick Review Questions

1. What is the primary purpose of conducting a make-or-buy analysis during procurement planning?

2. A project manager discovers that a critical component can be manufactured internally at $50,000 or purchased externally for $45,000. What additional factors should be considered before making the final decision?

3. In which procurement management stage does make-or-buy analysis typically occur?

4. How does the make-or-buy decision influence the selection of contract types in subsequent procurement activities?

5. A project team has excess capacity and specialized skills. Based on make-or-buy analysis, what decision is most likely recommended?

PMBOK v8 Reference

Section X4.3 - Make-or-Buy Analysis Appendix X4: Procurement Pages 245-247

This study article is optimized for PMI exam preparation based exclusively on PMBOK v8 content.