Should Cost Model

The should cost model is a methodology used to estimate the ‘expected’ or ‘target’ cost of a good or service. The should cost model takes into account all of the known costs associated with producing the good or service, including materials, labor, overhead, and profit margins. The should cost model is used as a benchmark against which actual costs can be compared. If the actual cost of producing a good or service exceeds the should cost, then there is room for improvement.

There are several benefits to using a should cost model in procurement:

1. improved accuracy in estimating target prices for goods and services

2. greater transparency and communication between buyers and suppliers

3. identification of opportunities for cost reduction

4. more effective negotiation with suppliers

5. greater likelihood of achieving contract prices that are aligned with true costs