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Glossary

What is should cost analysis?

Should cost analysis estimates what a product or service ought to cost to deliver, from materials, labor, overhead and margin, so a buyer can test a supplier quote and negotiate from facts.

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How should cost analysis works

The buyer builds a cost model from the bottom up instead of accepting the quoted price. The model breaks the item into its parts: raw materials, labor hours and rates, manufacturing or delivery overhead, logistics, and a reasonable profit margin. The total is then compared with what suppliers have quoted.

It is also called clean sheet costing, cost breakdown analysis or open book costing. The method grew out of United States defense procurement, where buyers must show that a price is fair and reasonable, and spread to industry from there.

The usual steps

  • Collect data. on specifications, bills of materials, process steps and market rates for inputs.
  • Build the model. cost by cost, with clear assumptions.
  • Compare. the model with supplier quotes and find the gaps.
  • Negotiate. using the specific gaps, not a general request for a lower price.

Why it matters

A should cost model turns a negotiation from haggling into a discussion of specific cost lines. It shows where a supplier has room to move, where a price is already fair, and where a specification change would cut cost more than any discount. It also helps when input costs move and a supplier asks for an increase.

How Aavenir handles it

RFPflow can ask suppliers for cost breakdowns in a structured pricing template, so line items can be compared side by side against your own model. The agreed price then flows into the contract in Contractflow.

Keep reading

Bid analysis Bid analysis is the process of evaluating and comparing supplier bids received in a sourcing event against set criteria such...Read more Request for quotation A request for quotation (RFQ) is a process in which a company or public body asks suppliers to quote prices and terms for...Read more Transaction costs Transaction costs are the costs of making an economic exchange beyond the price itself, such as searching, negotiating...Read more

Frequently asked questions (FAQ)

Common questions

What is the difference between should cost and target cost?

Should cost is what an item ought to cost based on its inputs and a fair margin. Target cost is what the buyer wants to pay, often set by the market or budget. Comparing the two shows how realistic a target is. Read about bid analysis.

When is should cost analysis worth doing?

It pays off on high value or strategic purchases, single source items, and categories where input costs move often. For low value or highly competitive commodity buys, comparing several quotes is usually enough. Read about request for quotation.

What data do you need for a should cost model?

You need the specification, the main materials and quantities, labor hours and rates, overhead and logistics assumptions, and a fair margin. Supplier cost breakdowns from a sourcing event help fill gaps. See RFPflow.

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  • 1 A 30 minute walkthrough Built around your team, whether that is procurement, legal, IT or finance.
  • 2 Your contracts, not ours Bring a few sample agreements and watch Aavenir AI extract and review them.
  • 3 ServiceNow or standalone We show the deployment that fits the systems you already run.

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