Make or Buy? How to Decide Before Procurement Begins
The decision gets taken twice on most projects. Once, properly, in a meeting with the numbers on the table. And once, quietly, weeks earlier, when somebody says that engineering has no capacity this quarter, and the project starts writing a specification for the market without anybody recording that a choice was made.
Make-or-buy analysis is the structured version, and the PMBOK® Guide Eighth Edition sets it out in Appendix X4.3 as one of the analyses a project performs before it commits. The reason to do it deliberately is that the decision shapes everything downstream: the procurement route, the contract type, the skills the organisation holds in five years, and how much it costs to change course.
Four questions before the money
Can we actually do it, and when? Capability and capacity are separate questions and both matter. An organisation that has the skill but not the availability has a scheduling problem that may be solvable, and one that has neither is looking at a longer and riskier internal route than anybody usually assumes.
Is this something we should hold? Some capability is worth keeping in the organisation because it underpins the business, carries knowledge that is expensive to reacquire, or is how the company differentiates itself. Buying it once is a commercial decision; buying it three times in a row is how a capability quietly leaves a company, and nobody ever made that decision explicitly.
What is the whole cost of each route? Internal work carries supervision, recruitment, tooling, training and the opportunity cost of what those people will not be doing. External work carries specification, tendering, contract management, acceptance and the cost of the interface. Comparing a supplier's quoted price with an internal estimate of labour alone is the single most common error in this analysis, and it favours buying every time.
How do we get out? Both routes have exits and they are priced differently. Ending an internal effort costs the sunk work and some disruption. Ending a supplier relationship can cost termination terms, the return of data and tooling, and the reacquisition of a skill you no longer have, and the last of those is the one that never appears in the business case.
Where the analysis goes wrong
Comparing prepared numbers with unprepared ones. A supplier quote is a considered commercial position, built with overheads, contingency and margin. The internal figure it is compared against is frequently a day rate multiplied by an optimistic estimate, with no management time, no facilities and no contingency. The two are not the same kind of number, and putting them side by side in a table makes them look as though they are.
Assuming risk transfers with the contract. A contract can allocate liability and it cannot move capability or consequence. Where a supplier is too small to absorb the loss, or where the real consequence is an operational outage that no damages clause repairs, the risk has stayed with you and you have paid a premium for the impression that it moved. The question worth asking of any risk transfer is what actually happens on the day it occurs.
A test rig, and the reason it was built in-house
A vehicle manufacturer needed a durability test rig for a new suspension component, ahead of pre-production. Two routes existed: buy a proprietary rig from a specialist supplier, or build one in the test engineering department, which had built four in the previous decade.
On price the supplier was competitive and the internal estimate looked cheaper by about fifteen per cent, which was immediately suspect: the internal figure covered materials and engineering hours and nothing else. Rebuilt properly, with supervision, fixture design, calibration and the six weeks of a senior test engineer who was already committed to two other programmes, the two routes came within about four per cent of each other.
What decided it was not cost. The supplier's lead time was twenty-two weeks and the component change that drove the test was expected to iterate twice during the programme, each iteration needing a fixture change. In-house, a fixture change was a fortnight. Bought in, it was a variation order, a quote, and eleven weeks. Over three iterations the difference was most of a year.
The decision was recorded, which turned out to matter more than the decision. Eight months later, when the internal build was running late and somebody proposed buying after all, the record showed the choice had been made on iteration speed rather than price, and the question became whether iteration was still expected. It was. The build continued, and the third fixture change went through in twelve days.
The crated supplier rig in the next bay, bought for a different programme with a stable design, was the right decision for that programme. Both were correct, for opposite reasons, in the same building.
Deciding before procurement begins
Settle it while both routes are open. Once a specification has gone to market, a great deal of organisational momentum stands behind buying, and the internal option quietly stops being prepared. The honest sequence is analysis, decision, then procurement route, and the procurement approach should follow from the decision rather than arriving alongside it.
Write down the basis, not just the outcome. One paragraph recording what the decision turned on, and what would change it, converts a choice into something that can be revisited intelligently. Projects that record only the outcome find themselves relitigating the whole question every time the chosen route has a bad month.
For a PMP® candidate, the point to hold is that the analysis covers capability, whole cost, strategic position and exit, so a scenario framed as a price comparison is usually missing most of the decision. A response that selects the cheaper quoted option has compared two numbers prepared on different bases. Situations where the cheaper route is also the slower one to change come up more than once in a structured PMP exam preparation course.
Take whatever you are about to put out to market and write two lines: why this is being bought rather than built, and what would have to be true for the answer to change. If the first line is about capacity this quarter, that is a real reason and a short-term one, and it deserves to be recorded as such so that the same reason is not used again by default next year.
Interested in going further?
Make-or-buy is a governance decision wearing a procurement costume, and the consequences outlast the project that took it. Omega's PMP® Exam Preparation works through sourcing decisions where the cheapest answer and the right answer are different.
Make-or-buy analysis is among the appendices of the PMBOK® Guide Eighth Edition.
Ad · Amazon affiliate link.
References
A246: Procurement Strategy: Decide How You Will Buy Before You Go to Market
A247: RFP vs RFQ vs IFB vs ITT: Which Procurement Document Should You Use?
A248: Choosing a Supplier: Cheapest Is Not the Same as Best
A249: Fixed-Price vs Cost-Reimbursable vs Time-and-Materials Contracts
A250: Outcome-Based Contracts: Buying Results Rather Than Activity
PMP and PMBOK are registered marks of the Project Management Institute, Inc.
