When you plan a project, you often face a fundamental question: should your team build something, or is it smarter to buy it? This dilemma is more than a budgeting exercise. It touches on skills, quality, timing, and long-term strategy. The Project Management Professional (PMP) exam even tests your ability to weigh these choices.
This blog post demystifies the make-or-buy analysis for the PMP exam and other practical uses. It explains the concept, provides a practical example, and demonstrates its application to both exam preparation and day-to-day project work.
You will learn what a make or buy analysis is, why it matters, how to weigh direct and indirect costs, and when it makes sense to produce goods or services in-house or outsource them. You will also find a simple decision framework, a numerical case study, a few frequently asked questions, and a call to action for those preparing for the PMP exam.
Let’s get started.
What is Make or Buy Analysis?
In project management, a make-or-buy analysis is a structured approach to deciding whether to produce a deliverable internally or purchase it from a supplier. The Plan Procurement Management process includes two key definitions that you should know:
- Make-or-buy analysis is the process of gathering and organizing data on product requirements and comparing internal production with external purchasing.
- Make or buy decisions are the decisions made regarding the external purchase or internal manufacture of a product.
This analysis asks whether we have the time, skills, and resources to build this item ourselves. If yes, can we do it at a reasonable cost and with acceptable quality? If not, would hiring a vendor or buying a ready-made component be quicker or less costly? The PMP exam requires you to understand these definitions and their place in the procurement process.
When to Perform It
A make-or-buy analysis is most useful during project planning, before major commitments are made. It helps project managers avoid surprises, align decisions with strategic goals, and communicate trade-offs to stakeholders. It is not limited to manufacturing. Software development, marketing campaigns, and even training programs can involve make-or-buy decisions.
Why Make or Buy Matters
The choice between building in-house and outsourcing has become more complex due to rapid technological change and a global shortage of skilled talent. According to this industry report, the global outsourcing market is expected to reach $854.6 billion. More than 57% of Global 2,000 companies use outsourcing, and many do so to access specialized skills.
At the same time, outsourcing is not always about cutting costs. Research shows that 42% of companies outsource to access skilled talent, while cost reduction as the primary driver fell to 34% in 2024. These figures highlight how common it is for organizations to seek external expertise or capacity when they lack such resources.
Yet, outsourcing is not a cure-all. Many companies have brought previously outsourced work back in-house; approximately 70% of businesses have done so. The reasons include tighter quality control and the desire to build strategic capabilities. This back-and-forth movement means make-or-buy decisions must be revisited regularly.
In short, the make-or-buy analysis has evolved from a cost calculation to a strategic assessment. Understanding the current landscape helps you weigh the benefits and risks of each option.
Factors to Consider During the Make or Buy Decision
No two projects are the same. Still, a few common factors will influence whether it makes sense to make a product or buy it. These factors can be divided into two broad categories: reasons to make in-house and reasons to buy or outsource.
Reasons to Make In-House
- Cost Control: Keeping production internal enables tighter cost control. You can prioritize spending and avoid vendor mark-ups. However, internal production must still fit your budget.
- Protecting Intellectual Property: If the work involves proprietary technology or sensitive data, keeping it in-house reduces the risk of exposing trade secrets.
- Developing Skills: Building new capabilities internally may benefit future projects. The investment in training can pay off over time.
- Quality Control: Controlling specifications and processes can reduce rework and ensure consistency.
- Reliability: Internal teams are often more reliable than external suppliers because they share the same priorities and schedules.
Reasons to Buy or Outsource
- Lack of Expertise: If your team lacks specialized skills, developing them in-house may not be worthwhile. Buying from a supplier gives you immediate access to expertise.
- Cost Efficiency: Outsourcing can be cheaper when the direct and indirect costs of in-house production add up. For example, you avoid the expense of equipment and ongoing maintenance.
- Capacity Constraints: A surge in demand may exceed your production capacity. Outsourcing can help you meet deadlines without overextending your staff.
- Quality Benefits: Vendors that specialize in a product or service often deliver higher-quality results than teams learning on the job.
- Low-Volume Needs: If you only require a small quantity, it may not be worthwhile to invest in equipment and training.
- Learning Opportunities: Buying a product from a supplier can allow your team to reverse-engineer it and later build similar items.
Visualizing the Make or Buy Decision Factors
An easy way to compare the factors is through a simple visual. The infographic below contrasts reasons to make in-house versus reasons to buy or outsource.
Understanding Cost Components
When comparing make and buy options, you must account for direct, indirect, and quality costs.
Direct Vs Indirect Costs
Direct costs are expenses that are explicitly incurred in creating or acquiring the product. They include materials and labor. Indirect costs are support expenses that benefit more than one project, such as shared software licenses, utilities, or equipment.
Cost of Quality
The cost of quality includes both conformance costs and non-conformance costs. Conformance costs cover prevention and appraisal activities, including training, documentation, inspections, and testing. Non-conformance costs include scrap, rework, warranty claims, or legal issues if products fail to meet requirements. Considering quality early can save money later.
Step-by-Step Process for Make-or-Buy Analysis
Performing a make-or-buy analysis involves more than plugging numbers into a formula. Below is a straightforward approach you can follow:
- Define Your Requirements: Identify the exact deliverable, desired quality level, and deadline.
- List Alternatives: Determine whether your team has the skills and resources to build the product, or whether credible vendors can supply it.
- Estimate Costs: Calculate direct and indirect costs for both options. Remember to ignore sunk costs—money already spent should not influence your decision.
- Consider Intangible Factors: Assess strategic value, control over intellectual property, potential learning benefits, and risk tolerance.
- Compare and Decide: Create a simple table or spreadsheet comparing the two options, then choose the one that aligns with your budget, timeline, and strategic goals.
- Review Periodically: Market conditions, technology, and team capabilities change. Revisit your decision regularly, especially if the project timeline is long.
This process is simple enough for exam questions yet robust enough for real projects.
Example of Make or Buy Decision: Payroll Processing Case Study
Imagine your company needs to process employee payroll monthly. You have two options: handle it in-house (using software and staff time) or outsource to a specialized payroll provider.
Cost Comparison:
| Company Size (Employees) | Make In-House Total Annual Cost | Buy (Outsource) Annual Cost |
| 10 employees | Software ($2,000) + training ($1,500) + staff time ($6,000) = $9,500 | $6,000 |
| 50 employees | Software ($2,000) + training ($1,500) + staff time ($15,000) = $18,500 | $18,000 |
| 200 employees | Software ($2,000) + training ($1,500) + staff time ($40,000) = $43,500 | $60,000 |
Fixed costs (software and training) remain constant, while staff time rises with company size. For small teams (10–50 employees), outsourcing is cheaper. For larger teams (200+), in-house becomes more cost-effective as fixed costs are spread across more employees.
This shows economies of scale: low volumes favor outsourcing to avoid setup costs, but higher volumes make internal handling cheaper.
PMP Exam Tips
The PMP exam tests your understanding of make or buy analysis, but rarely asks you to perform complex calculations. Keep these points in mind:
- Know the Definitions: Remember that the analysis occurs during Plan Procurement Management and compares internal production with external procurement.
- Consider both Direct and Indirect Costs: do not forget training, overhead, or other indirect expenses.
- Ignore Sunk Costs: Exclude money you have already spent from your comparison.
- Understand Quality Costs: Distinguish between prevention, appraisal, and non-conformance costs.
- Think Strategically: The best answer often depends on time, budget, risk tolerance, and long-term benefits.
If you practice these concepts and review similar examples, you will feel confident on exam day.
FAQs
Q1. What is the difference between a make or buy analysis and a procurement plan?
A make-or-buy analysis compares the costs and benefits of internal versus external production. A procurement plan outlines how you will acquire products or services, including the contract types and vendor selection criteria.
Q2. Do I need to know formulas for the PMP exam?
For make-or-buy decisions, the PMP exam focuses on understanding definitions and concepts. You rarely need to perform calculations.
Q3. How do direct and indirect costs affect my decision?
Direct costs are tied to the production of a single item, whereas indirect costs are incurred across multiple projects. Both influence the total cost of ownership and should be included in your analysis.
Summary
Choosing whether to make a product or buy it is both an art and a science. The make-or-buy analysis helps project managers weigh costs, skills, quality, and strategic value. By considering direct and indirect costs, understanding the cost of quality, and using a step-by-step framework, you can make informed decisions that support project success.
As global outsourcing trends continue to evolve—more than half of Global 2000 companies outsource some functions—it is essential to revisit these decisions regularly. When in doubt, involve stakeholders, examine long-term implications, and keep learning.
Further Reading:
- What is a Contract?
- What is a Procurement Contract?
- What is Project Procurement Management?
- What is a Bidder Conference?
- 24 Essential Procurement KPIs
References:
This topic is important from a PMP examination perspective.
I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.
