The Procurement Glossary » Should-Cost Analysis
Should-Cost Analysis
Sourcing & RFx
Definition
A bottom-up estimate of what a product or service ought to cost, built from its materials, labour, overhead and reasonable margin.
Explanation
Should-cost modelling gives buyers a fact-based target before negotiating, exposing where a quoted price is inflated. It underpins strong negotiation because the buyer can challenge specific cost drivers rather than simply asking for a discount.
Example
A should-cost model for a moulded plastic bin — resin, cycle time, tooling amortisation and 10% margin — suggests RM6.20, versus the RM9 quoted.
Related terms
- Total Cost of Ownership (TCO) — The full lifetime cost of a purchase — not just the price, but delivery, installation, operation, maintenance, downtime and disposal.
- Cost Breakdown — An itemised disclosure of the components that make up a supplier's price, such as materials, labour, freight, overhead and margin.
- Negotiation — The discussion between buyer and supplier to agree price, terms and conditions before a contract or order is placed.
- Value Analysis — A systematic review of a product or service to improve its value — cutting cost without losing function, or adding function without adding cost.
Frequently Asked Questions
What is Should-Cost Analysis?
A bottom-up estimate of what a product or service ought to cost, built from its materials, labour, overhead and reasonable margin. Should-cost modelling gives buyers a fact-based target before negotiating, exposing where a quoted price is inflated. It underpins strong negotiation because the buyer can challenge specific cost drivers rather than simply asking for a discount.
Can you give an example of Should-Cost Analysis?
A should-cost model for a moulded plastic bin — resin, cycle time, tooling amortisation and 10% margin — suggests RM6.20, versus the RM9 quoted.
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