Project Procurement: Building or Buying?

15 June, 2015

If you have studied for the Project Management Professional (PMP)® exam, you will remember the “make or buy” analysis that was part of the Plan Procurement Management process. If you read section 12.1.2.1 of the Guide to the Project Management Body of Knowledge (PMBOK® Guide), you will get the impression that resource availability and cost are the main factors you should watch out for, but are they the only ones?

Certainly cost is a factor. In this globalized world, many things can be built in Far Eastern countries for a fraction of what it costs here. But are we factoring in all considerations? How would outsourcing certain tasks affect morale internally? Will the staff fear for their jobs if they see work they did in the past being farmed out to third-parties? This is particularly true when the workers are expected to train up the external teams to do their jobs. The Project Manager needs to remember stakeholder management and ensure that the project team understands the rationale behind the outsourcing decision. It could, as the PMBOK® Guide points out, be simply a case that there are no internal resources available to do the work at this time.

Developing expertise in-house is always a factor to be considered. What are our core competencies as an organization? Project Managers need to be clear about the company’s strategic focus and make sure that all training efforts should be aimed at developing core competencies, while one-off tasks or work that is tangential to the strategic focus of the organization is probably better handled externally.

Outsourcing development work, such as software engineering, to third parties comes at a cost. Accountants compare raw figures, like hourly rates, and push through outsourcing on the basis of estimates for in-house development. However, there can be a certain amount of informality when creating specifications in-house. If the teams are co-located, it is easy for individuals to clarify requirements with the team. However, if a third-party is assigned the work, the specifications must be totally accurate or else what is delivered will not be what is expected. Outsourcing can be compared to working a computer: it does not do what you want it to do; it does what you tell it to do. Many outsourcing companies have infuriated their customers by implementing functionality that conforms exactly to the specification, despite there being obvious flaws in the specification. The Project Manager needs to understand that specification work and support during the development is going to be required and will add to the cost.

The build or buy decision should also consider intellectual property. Do we want third-parties accessing proprietary technology during their work? While it might make perfect sense to outsource aspects of a product’s development – packaging, compliance testing, etc. – it might be better for the company’s long-term future to ensure that the clever parts of the product are not seen outside the company until the product is launched.

Besides actual development work, the Project Manager might have to purchase equipment to support the project. Items like vehicles and machinery can either be bought outright or rented. Again, the Project Manager needs to assess the entire cost of ownership before deciding to purchase an expensive piece of equipment. The most obvious concern is what will happen to the new machine when the project finishes? Is this something that will be generally useful to future projects, or even to the production or operations departments? Also, what are the maintenance overheads associated with such a purchase? For example, a truck needs to be taxed, insured and maintained; it also needs to be fuelled. Would hiring a trucking firm for the duration of the project be a wiser option?

Buying equipment has the attraction of tax write offs due to depreciation – remember straight-line and accelerated depreciation from your PMP® exam days? However, leasing payments can also be offset against tax. The respective figures could tip the balance. Of course, if the vehicle or device needs to be sold off after the project, some idea of residual values is needed too.

The “make or buy” decision is not a straightforward one. There are strategic-, financial- and personnel-related considerations. Or as the boxer Frank Bruno put it: “There are pros and cons for and pros and cons against”.

Velopi’s PMP® exam preparation courses cover Project Procurement Management and are scheduled regularly in Dublin, Cork, Limerick and Galway. For more details, please visit our training page, or contact us directly.

By Velopi Seamus Collins

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