Project Procurement Make or Buy Analysis
A key element of the Project Procurement Management process is planning and documenting project purchasing decisions. The project procurement process includes identifying which project components can (or must be) externally procured and those which can (or must be) procured internally. Such decisions require well thought out make or buy analysis. Some projects and organizations will require only a financial make or buy analysis, while others may require inclusion of other factors such as, for example, risk, time to market, quality or market perception.
The following project procurement make or buy analysis spreadsheet considers two straightforward options: procuring from a 3rd party supplier and procuring internally. Keep in mind that many projects will face additional procurement options and considerations. The attached make or buy procurement analysis example includes a basic analysis using NPV and IRR, as well as a graphical representation of payback over time.
Link to the project procurement make or buy analysis example (in Excel format)
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Month 1 |
Month 2 |
Month 3 |
Month 4 |
|
|
5 Year utilizing 3rd party provider |
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|
Revenue Increase (recurring monthly) |
$6,000 |
$4,000 |
$4,000 |
$4,000 |
|
Total Revenue |
$6,000 |
$10,000 |
$14,000 |
$18,000 |
|
Operating Expense |
$9,500 |
$9,500 |
$9,500 |
$9,500 |
|
EBIDA |
($3,500) |
$500 |
$4,500 |
$8,500 |
|
Depreciation |
$6,453 |
$6,453 |
$6,453 |
$6,453 |
|
Interest |
$7,148 |
$7,148 |
$7,148 |
$7,148 |
|
Net Income |
($17,100) |
($13,100) |
($9,100) |
($5,100) |
|
Cumulative Contribution |
($17,100) |
($30,201) |
($39,301) |
($44,402) |
|
Capital Expenditures |
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|
Facilities |
$705,812 |
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|
Electronics |
$151,900 |
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|
Total Capital Expenditure |
$857,712 |