Procurement Decision Strategy: Make-or-Buy Analysis and Contract Selection

PMBOK v8 Definition

The procurement decision strategy begins with the make-or-buy analysis, which evaluates factors such as organizational capabilities, the need for specialized expertise, the desire to avoid expanding permanent employment obligations, and the need for independent expertise. This decision process also includes evaluating the risks involved with each make-or-buy decision. Once the make-or-buy analysis is complete and the decision is made to acquire from outside the project, a procurement strategy is identified, with the objective to determine the project delivery method, the type of legally binding agreement(s), and how the procurement will advance through the procurement phases. This concept is part of Project Procurement Management, which spans the Planning process group.

Why It Matters for the Exam

The make-or-buy analysis and procurement strategy appear frequently in PMI exam questions testing your ability to determine when to outsource versus perform work internally. You will encounter these concepts in situational questions where the project lacks internal resources or expertise, and you must select the appropriate procurement approach and contract type based on risk distribution and cost certainty.

Key Points to Remember (for the exam)

• Main Decision Trigger: Make-or-buy analysis is performed when the organization lacks in-house infrastructure or technologies needed to internally complete the project
• Three Strategy Components: The procurement strategy determines (1) delivery method, (2) type of legally binding agreement(s), and (3) how procurement advances through phases
• Key Factors for Make-or-Buy: Organizational capabilities, need for specialized expertise, desire to avoid permanent employment obligations, need for independent expertise
• Risk Evaluation: Every make-or-buy decision includes evaluating the risks involved with each option
• Contract Tailoring: For buy decisions, procurement tailoring involves selecting the appropriate contract type (fixed-price or time and materials) based on risk distribution and cost certainty
• Financial Implications: The procurement strategy must be tailored with financial processes to minimize the risk of cost overruns
• Common Confusion: Make-or-buy analysis is NOT the same as source selection; make-or-buy determines whether to procure externally, while source selection evaluates which seller to use

Typical PMI Exam Example

Your project requires specialized cybersecurity expertise that your organization does not possess internally. You have completed the make-or-buy analysis and determined that acquiring this expertise from an external vendor is the best approach. You must now develop a procurement strategy that determines the delivery method, contract type, and procurement phases. What should you do next? → Identify the procurement strategy, including the appropriate contract type based on risk distribution.

PMI Exam Traps

• Trap: Confusing make-or-buy analysis with procurement strategy

• Reality: Make-or-buy analysis determines whether to buy; procurement strategy determines how to buy (delivery method, contract type, phases)

• Trap: Thinking all buy decisions use the same contract type

• Reality: Contract type (fixed-price vs. time and materials) is tailored based on risk distribution and cost certainty

• Trap: Ignoring risk evaluation in make-or-buy decisions

• Reality: Every make-or-buy decision must include evaluating the risks involved with each option

• Trap: Assuming make-or-buy only considers cost

• Reality: It also considers organizational capabilities, specialized expertise, avoiding permanent employment obligations, and independent expertise needs

Important PMI Connections

Quick Review Questions

1. What three components must the procurement strategy determine once the make-or-buy analysis is complete?

2. A project manager discovers the organization lacks the in-house technology needed to complete a critical component. What analysis should be performed first?

3. When tailoring procurement for a buy decision, what two factors determine the appropriate contract type?

4. True or False: The make-or-buy analysis only considers financial costs and ignores organizational capabilities.

5. After deciding to acquire from outside the project, what is the objective of the procurement strategy?

PMBOK v8 Reference

Section X4.4 – Procurement Strategy (also referenced in Section 66, Procurement Management)