Make or Buy Analysis

During Project Planning, the company needs to make a decision whether to do the work of the project

themselves or outsource some or all the work.  The lack of the company ability to do some particular

activities or work packages within the project drives the project manager to outsource the work;

another reason for outsourcing can be the time and cost gain of outsourcing to experienced reputable

vendor that can meet the quality requirement for the that particular work of the project.  In many case,

some works need to be outsourced to seller that hold a patent for that type of work.  All cost related to

managing the procurement must be taking into consideration when making the Buy-Make Analysis since

this cost may be significant in many cases and outweigh the cost saving of outsourcing the work to a

particular seller.

Make-Buy analysis is a tool to help the project manager to make a financial decision whether to make

the product or services within the company our purchase that product or services. Successful decision

must take into consideration the direct and indirect cost related to planning and managing the

procurement of purchasing those products and services.

PMP Exam may examine your experience with a lease or buy question.  Lease-Buy analysis helps mostly

with equipment and machine that is required to do the work of the project to produce the product. For

example, the company may decide to lease bulldozer if it only going to use it for short time. In this type

of analysis the procurement department calculate how many days, weeks, months, years it takes for the

cost of leasing to be equal to cost of buying a piece of equipment. That calculation help to determine

whether to lease or buy that equipment depending on the life of the project.

Example:  Project manager trying to decide whether to lease a piece of equipment that is required to his

project and cost 15000 $ to buy and 500 $ / month to maintain, or to lease that equipment for 2500 $

down payment and 1500 $ a monthly lease until the equipment is return. How long will it take to break

even?

Answer: Let M represent the number of months. To break even you need to have the cost of buying = to

the cost of leasing.

$15000 + $ 500 M = $2500 + $1500 M

$15000 – $2500 = $1500 -$500M

$12500 = $1000 M

M = 12.5 months

No if you intend to use that piece of equipment less than 25 months, it is better to lease it than buy. If

you plan to use it more than 25 months then you may consider buying it to save money for the project.

Do understand how this technique help the project manager to optimize the cost of the project and save

money by choosing the best alternative.

  1. A Project manager of a construction project with a time line of 24 months is trying to decide the

feasible alternative of buying a machine that cost $100,000 besides $1000/ month to maintain

or leasing that machine with $5000 / month and $20000 down payment. Which alternative

should he use and how many months that machine should operate to be a feasible buying

choice?

  1. Lease, 20 months
  2. Lease, 24 months
  3. Lease, 30 months
  4. Buy it

Answer is D

Explanation: Let M equal the number of months where leasing break even with the buying

option.

$20,000 + $5000 M = $100,000 + $1000 M

$4000 M = $80,000

M = 20 months. Therefore, buying will be the cheaper option after 20 months and since the

machine is needed for 24 months, then buying decision is justified.