Should-Cost Analysis

Should-Cost Analysis is a procurement technique used to estimate the cost of a product or service based on its underlying components, materials, labor, overhead, and profit margins. This bottom-up approach helps buyers assess the reasonableness of supplier pricing and identify negotiation leverage.

Steps in should-cost analysis typically include:

• Deconstructing the product/service into cost elements
• Researching market prices for materials and labor
• Estimating manufacturing or service delivery overheads
• Applying reasonable profit margins
• Comparing the estimated 'should cost' to supplier quotes

Procurement teams use should-cost models during supplier negotiations to challenge pricing assumptions, identify potential cost savings, and ensure they are paying a fair market price based on transparent cost drivers rather than just accepting initial supplier quotations.