The Should-Cost: what the product should cost
Objective: Understand the should-cost concept, its 3 maturity levels and the data sources for building an independent cost model.
The Should-Cost is an independent estimate of what a product or service should cost under normal market-efficiency conditions. It is the factual negotiator's ultimate weapon.
The fundamental formula
Gap = Supplier price - Should-Cost
If the gap is positive, the supplier is charging more than the theoretical cost. The gap can come from an excessive margin, production inefficiency, or a structural extra cost. It is the basis of the negotiation.
The 3 maturity levels of the Should-Cost
| Level | Method | Accuracy | Skill required |
|---|---|---|---|
| Junior | Price comparison across suppliers and external benchmarking | +/- 15-20% | Buyer with access to market data |
| Confirmed | 7-item breakdown with market prices for each component | +/- 8-12% | Experienced buyer with technical expertise |
| Expert | Full bottom-up model: routing, machine time, material, overhead, market margin | +/- 3-5% | Multidisciplinary team (procurement + engineering + finance) |
Data sources for the Should-Cost
The quality of the should-cost depends on the quality of the data used:
- Raw materials: LME (London Metal Exchange) for metals, ICIS for polymers and chemicals, oil indices (Brent/WTI)
- Labour: Eurostat for labour costs by country and sector, ILO data, sector pay surveys
- Energy: Spot electricity and gas prices per geographic zone, EDF/Engie indices
- Transport: Upply and Freightos indices for sea freight, IRU for road
- Sector margins: Annual reports of the supplier's competitors, financial databases (Bureau van Dijk, Diane)
🏢 Confirmed-level should-cost example
For the machined mechanical part at EUR 45:
- 316L stainless steel: LME price + premium = EUR 13.50 (vs. EUR 15.75 invoiced, i.e. +17%)
- Labour: 0.5h x EUR 16/h fully loaded (eastern France) = EUR 8.00 (vs. EUR 9.00, i.e. +12%)
- CNC machine: 0.3h x EUR 15/h = EUR 4.50 (vs. EUR 5.85, i.e. +30%)
- Overheads: 12% of production cost = EUR 3.12 (vs. EUR 4.50, i.e. +44%)
- Quality: 5% = EUR 1.56 (vs. EUR 2.70, i.e. +73%)
- Logistics: EUR 2.00 (vs. EUR 2.70, i.e. +35%)
- Market margin: 8% = EUR 2.62 (vs. EUR 4.50, i.e. +72%)
Total Should-Cost: EUR 35.30 vs. supplier price EUR 45.00 = gap of EUR 9.70 (22%)
💡 Key takeaway: The should-cost is the independent estimate of what a product should cost. There are 3 maturity levels (junior, confirmed, expert). The confirmed level (7-item breakdown with market prices) offers a good effort/accuracy ratio and is enough for most negotiations. The gap between supplier price and should-cost is the terrain of factual negotiation.