HKSM

A make-or-buy decision determines whether the project should produce a product or service internally or procure it from an external supplier, based on value, risk, schedule, and capability. It aims to optimize lifecycle cost and strategic fit while meeting project constraints.

Key Points

• Compares internal development versus external procurement to maximize value, not just lowest price.
• Evaluates total cost of ownership, schedule impact, risks, quality, and strategic alignment.
• Uses quantitative tools such as TCO, NPV, breakeven, and sensitivity analysis.
• Documented outcomes feed the procurement strategy, business case, and project plans.
• Cross-functional input from finance, legal, engineering, operations, and security is essential.
• Decisions are revisited when scope, constraints, or market conditions change.

Decision Criteria

• Total cost of ownership across the lifecycle, including acquisition, integration, operations, support, and disposal.
• Time to deliver and impact on key milestones or regulatory deadlines.
• Internal capability and capacity, including skills, tools, and opportunity cost.
• Quality and performance requirements and confidence in meeting them.
• Risk exposure: technical complexity, supplier reliability, cybersecurity, compliance, and single-source risk.
• Flexibility and scalability for future needs and change.
• Intellectual property, confidentiality, data residency, and export control considerations.
• Vendor market maturity, availability of alternatives, and bargaining power.
• Contract type suitability and commercial terms, including warranties and service levels.
• Alignment with organizational strategy and core competencies.

Method Steps

• Define the need, scope boundaries, acceptance criteria, and constraints.
• Identify feasible options: make, buy, hybrid approaches, and phasing.
• Estimate lifecycle costs and schedule for each option, including integration and transition.
• Assess risks and opportunities; perform sensitivity analysis on key drivers.
• Conduct market research and preliminary supplier screening if buying is viable.
• Apply financial analysis (TCO, NPV, breakeven) and non-financial weighting (e.g., decision matrix).
• Select the preferred option, validate with stakeholders, and document assumptions.
• Update procurement strategy or internal delivery plan and obtain governance approval.
• Plan contingencies and trigger points to revisit the decision if conditions shift.

Inputs Needed

• Business case, project charter, and scope baseline or requirements.
• Schedule constraints, key milestones, and resource calendars.
• Cost estimates, rate cards, and historical cost data.
• Risk register, assumptions, and constraints.
• Organizational process assets: procurement policies, templates, and lessons learned.
• Market research, supplier capabilities, and benchmarks.
• Quality standards, regulatory/compliance requirements, and security policies.
• Capability and capacity assessments of internal teams and tools.

Outputs Produced

• Make-or-buy recommendation with supporting analysis and decision rationale.
• Assumptions, constraints, and sensitivity analysis results.
• Updates to procurement strategy and sourcing approach, or internal build plan.
• Impacts to budget, schedule, resource plans, and risk register.
• High-level requirements for solicitations or internal work packages.
• Governance approvals and decision record for future reference.

Trade-offs

• Cost vs control: buying may reduce upfront cost but can limit customization and oversight.
• Speed vs fit: procurement can accelerate delivery, while in-house builds may better match unique needs.
• Short-term savings vs long-term dependency and vendor lock-in risk.
• Capex vs opex: internal build may require capital investment; buying may shift to operating expenses.
• Quality assurance vs integration effort: proven products may still demand integration and adaptation.
• Scalability vs complexity: external solutions may scale easily but add contractual and compliance complexity.

Example

A project needs a specialized analytics component. The team can build it internally over six months with new hires, or buy a proven product that integrates in two months with recurring license fees. Analysis shows the buy option meets performance requirements, saves four months, and has a higher net present value after factoring integration, training, support, and decommissioning costs. The team selects buy, documents assumptions about vendor service levels, and updates the procurement plan and schedule.

Pitfalls

• Focusing on purchase price and ignoring lifecycle and transition costs.
• Underestimating integration, data migration, and change management effort.
• Ignoring supplier risk, single-source exposure, or weak service levels.
• Treating sunk costs as decision inputs, biasing the outcome.
• Failing to include security, privacy, and regulatory obligations.
• Not revisiting the decision when scope or market conditions change.

PMP Example Question

During planning, the team is split on building a component in-house or procuring it due to a tight deadline. What should the project manager do next?

1. Issue a request for proposal to speed vendor selection.
2. Choose the in-house option to maintain full quality control.
3. Perform a make-or-buy analysis comparing lifecycle cost, schedule impact, and risks against success criteria.
4. Escalate the decision to the sponsor for immediate direction.

Correct Answer: C — Perform a make-or-buy analysis comparing lifecycle cost, schedule impact, and risks against success criteria.

Explanation: The appropriate next step is to conduct and document the analysis before soliciting vendors or committing to an internal build, ensuring an evidence-based decision aligned to project objectives.