What Is Should-Cost Analysis? Know a Fair Price Before You Negotiate
Should-cost analysis estimates what a part or service ought to cost by building it up from its parts: raw materials, conversion (machine and labour time), overhead, scrap, logistics and a fair supplier margin. Comparing that estimate with the supplier’s quote shows exactly where the price looks high, so you negotiate on facts rather than percentages.
- Should-cost builds a fair price from materials, conversion, overhead, scrap, logistics and margin.
- The gap between should-cost and the quote shows exactly where to negotiate.
- Fact-based discussions protect supplier relationships better than demands for blanket price cuts.
- Start with high-spend parts where materials make up most of the cost.
How a should-cost model is built
Start with the bill of materials: the weight and grade of each material, priced at current market rates. Add conversion cost — the machine hours and labour minutes each process step needs, multiplied by realistic local rates. Then add scrap, packaging, freight, the supplier’s overhead and a reasonable profit margin.
The result is a transparent estimate of what an efficient supplier would charge.
Illustrative example.
Using should-cost analysis in a negotiation
Compare the model line by line with the supplier’s quote. If the gap sits in materials, ask which grade and price they assume. If it sits in conversion, ask about cycle times and machine rates. The aim is not to squeeze margin to zero; it is to remove inefficiency and agree a price both sides can explain.
How to run a should-cost analysis
Process- 01
Choose the parts
Pick high-spend, single-source or newly quoted parts where a fair-price check pays back.
- 02
Break down the part
List materials, weights and process steps from the drawing and bill of materials.
- 03
Apply current rates
Price materials at market rates, and machine and labour time at realistic local rates.
- 04
Add overhead and margin
Include scrap, packaging, freight, supplier overhead and a fair profit margin.
- 05
Compare and negotiate
Set the model beside the quote, line by line, and discuss the biggest gaps first.
- 06
Keep it current
Update material rates regularly so the model flags when prices should fall.
- 01
Choose the parts
Pick high-spend, single-source or newly quoted parts where a fair-price check pays back.
- 02
Break down the part
List materials, weights and process steps from the drawing and bill of materials.
- 03
Apply current rates
Price materials at market rates, and machine and labour time at realistic local rates.
- 04
Add overhead and margin
Include scrap, packaging, freight, supplier overhead and a fair profit margin.
- 05
Compare and negotiate
Set the model beside the quote, line by line, and discuss the biggest gaps first.
- 06
Keep it current
Update material rates regularly so the model flags when prices should fall.
When should-cost is worth the effort
Should-cost takes time, so use it where it pays: high-spend parts, new parts before the first award, single-source items where competing quotes are not possible, and requests for price increases.
It also works in reverse. A model linked to material price indices shows when a reduction is due because input costs have fallen.
How AI makes should-cost practical
Building models by hand needs cost engineers and current rate data, so many teams cover only a handful of parts. AI can read bills of materials, suggest likely process steps and keep material rates current, extending should-cost to many more parts. Owllys SourceNest brings should-cost into award decisions this way, with buyers reviewing each estimate before it is used.
Questions people ask
What is the difference between should-cost and target cost?
Should-cost estimates what a part ought to cost given its design, materials and manufacturing process. Target cost starts from the selling price and works backwards to what the part must cost for the product to earn its required margin. Use target cost to guide design and should-cost to test supplier quotes.
Will suppliers accept a should-cost model?
Most suppliers engage when the model is shared openly and treated as a starting point for discussion. It often surfaces genuine differences, such as a different process or a higher scrap rate, that both sides can work on. Using it to demand cuts without listening tends to damage the relationship.
How accurate does a should-cost model need to be?
It needs to be accurate enough to show where the gaps are, not exact to the last cent. A model within a few per cent of an efficient supplier’s true cost is very useful. Be open about your assumptions, and update them when the supplier shows evidence of different process conditions.