Procurement Management: Make-or-Buy Analysis, Strategy, and Contract Types

PMBOK v8 Definition

Procurement management covers the overall procurement flow, strategies for effective procurement management, make-or-buy analysis, source selection processes, and various contract types. It includes planning procurement, conducting procurements, and controlling procurements, with procurement audits, claims administration, and alternative dispute-resolution methods as key components. Procurement strategy determines the project delivery method, the type of legally binding agreement(s), and how procurement advances through procurement phases.

Why It Matters for the Exam

Procurement management questions appear frequently in the PMI exam, particularly in situational questions where you must decide between making or buying, select the appropriate contract type based on risk distribution, or determine the correct procurement strategy. The exam tests your ability to apply procurement concepts to real project scenarios, especially regarding make-or-buy analysis, source selection, and claims administration.

Key Points to Remember (for the exam)

• Main Decision Point: Make-or-buy analysis evaluates costs, capabilities, need for specialized expertise, desire to avoid expanding permanent employment obligations, and need for independent expertise, including risk evaluation for each decision.

• Procurement Strategy Components: Three key elements—delivery methods (different for professional services vs. construction projects), type of legally binding agreement(s), and procurement phases.

• Contract Type Selection: Tailoring involves selecting fixed-price or time and materials (T&M) contracts based on risk distribution and cost certainty, with implications for project financials.

• Make-or-Buy Drivers: Buy decisions occur when organizations lack in-house infrastructure or technologies needed to internally complete the project.

• Procurement Phases Include: Sequencing or phasing of procurement, description of each phase, specific objectives, and procurement performance indicators and milestones for monitoring.

• Common Confusion: Make-or-buy analysis is NOT a one-time decision—it connects to procurement strategy and requires tailoring financial processes to minimize risk of cost overruns.

• Centralized vs. Decentralized: Leveraging established processes, policies, and vendor relationships ensures consistency and economies of scale; specialized projects may have dedicated procurement teams with autonomy.

Typical PMI Exam Example

A project requires specialized software development expertise. The project manager evaluates internal team capabilities, costs of hiring permanent staff, and vendor quotes. After analysis, the decision is to buy because the organization lacks in-house infrastructure. The procurement strategy selects a fixed-price contract to minimize cost risk. What is the project manager performing? → Make-or-buy analysis.

PMI Exam Traps

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

• Reality: Make-or-buy analysis determines whether to produce internally or purchase externally; source selection analysis evaluates and chooses among vendors after the buy decision is made.

• Trap: Assuming fixed-price contracts are always the best choice

• Reality: Fixed-price contracts transfer risk to the seller but may not be appropriate when scope is unclear; T&M contracts are better when requirements are uncertain.

• Trap: Treating procurement strategy as independent of financial processes

• Reality: Procurement strategy must be tailored with financial processes to minimize risk of cost overruns.

• Trap: Thinking procurement phases only apply to large projects

• Reality: Procurement phases with sequencing, objectives, and performance indicators apply to all projects with external acquisitions.

Important PMI Connections

Quick Review Questions

1. What three elements must a procurement strategy determine according to PMBOK v8?

2. A project manager decides to outsource because the organization lacks in-house technologies. What type of analysis supports this decision?

3. When should a project manager select a time and materials (T&M) contract instead of a fixed-price contract?

4. What factors should be considered during make-or-buy analysis beyond cost?

5. What information should procurement phases include for monitoring purposes?

PMBOK v8 Reference

Section X4 - Procurement Management (Appendix X4, Pages 245-254)