Should-Cost Analysis
Should-cost analysis is a cost-estimation technique that builds up the expected price of a product or service from its component costs (materials, labor, overhead, margin) to determine what a buyer should reasonably pay. It shifts negotiation from price-based bargaining to cost-based discussion.
Understanding should-cost analysis
Traditional negotiation relies on competitive tension: get three quotes and pick the lowest. Should-cost analysis takes a fundamentally different approach. Instead of asking what the market will charge, it asks what the item should cost based on engineering inputs, commodity prices, labor rates, and reasonable supplier margins. The methodology breaks a purchased item into its cost components. For a manufactured part, this includes raw material (using current commodity indices), direct labor (using regional wage data and estimated production time), manufacturing overhead, tooling amortization, logistics, and supplier margin. For a service, it includes labor rates by skill level, utilization assumptions, overhead, and margin. The sum of these components is the should-cost estimate. Should-cost analysis is most powerful for complex, high-value purchases where cost structures are opaque and competitive review is difficult. It gives procurement teams a fact-based anchor for negotiation. When you can show a supplier that your model estimates $14.50 per unit based on transparent cost drivers, the conversation shifts from 'your price is too high' to a discussion about specific cost components. This approach also identifies opportunities for value engineering, where design changes can reduce the should-cost itself.
Use It Like An Operator
- Should-cost analysis gives procurement a defensible way to challenge supplier pricing logic.
- It is most useful when the business needs to understand what is driving price, not just argue over the outcome.
- Use it where cost drivers such as labor, materials, logistics, or margin can be explained credibly.
- Focus on categories where the supplier cost structure is knowable enough to support a real conversation.
- Applying should-cost models to categories where the price is mostly commercial positioning or scarce capacity.
- Presenting the model as fact instead of a negotiating hypothesis that needs validation.
- Pick one category where supplier pricing is hard to defend and build a simple driver-based model.
- Use the model to prepare questions, not just a target price.
Example
An aerospace manufacturer used should-cost analysis on a machined aluminum bracket priced at material spend per unit by its sole-source supplier. The model estimated material cost at material spend (based on LME aluminum prices and part weight), machining time at material spend (based on CNC cycle time and regional shop rates), finishing at material spend overhead at material spend and reasonable margin at material spend for a total should-cost of $73. Armed with this analysis, the buyer negotiated the price down to material spend a materially reduction, without switching suppliers.
How Qube helps
Qube provides spend comparison inputs and category-level cost breakdowns that support should-cost analysis. By comparing your spending against industry comparison inputs, Qube highlights categories where you may be paying above current supplier quotes and quantifies the savings opportunity.
Frequently asked questions
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