SiliciumHex FieldKit

Design to Cost · Breakdown

Should-Cost Model

Build the bottom-up cost the product should have: materials at market, process times at standard, plus overhead and a normal margin.

  • Time1 h 30
  • FormatSolo
  • StageBreakdown

Should-Cost Model: what it is and why it works

A should-cost model builds, from first principles, the cost a part or module ought to have if it were made efficiently: material bought at market prices, process times at a reasonable standard, labor and machine rates typical of a capable supplier, plus explicit overhead, scrap and a normal profit. You define the scope precisely, including geometry, material, tolerances and volume, calculate each cost element, and then compare the result with the actual quote or internal cost. Every gap between the model and the quote is listed and explained.

The value of a should-cost model lies less in the final number than in its transparency. Because every assumption is written down, the gap list becomes a precise agenda: some gaps are negotiation topics, such as a high machine rate or an inflated margin; others are design topics, such as a tolerance that forces an extra operation or a geometry that needs an additional setup. That makes the conversation with suppliers factual instead of adversarial. The method grew up in procurement engineering and defense cost estimating and sits at the center of design-to-cost work: it refines the cost breakdown structure, gives teardown analysis a way to price competitor parts, and provides the reference figures that open-book discussions with suppliers are built on.

What you need

  • A defined scope: drawing or 3D model, material specification, tolerances, finish and annual volume
  • Current material prices and typical scrap or yield factors
  • Process routings with estimated cycle and setup times
  • Machine and labor rates representative of the supplier's region and equipment
  • Reasonable assumptions for overhead, SG&A and profit margin
  • The current supplier quote or internal cost for comparison

What you get

  • A line-by-line should-cost with every assumption visible
  • A gap list comparing the model with the quote, element by element
  • A split of gaps into negotiation topics and redesign topics
  • A reusable model that can be updated when volumes, prices or designs change

When to use it

When designs are quoted but never costed independently.

How to do it, step by step

  1. Define the part or module scope: geometry, material, tolerances, volume.
  2. Build the cost from first principles: material weight, cycle time, machine rate, labor.
  3. Add overheads and scrap with explicit assumptions.
  4. Compare the model to the current quote and list every gap.
  5. Use the gap list as the negotiation and redesign agenda.

Worked example: Machined aluminum housing for a dosing pump

Illustrative scenario — figures are realistic but not from a real company.

A pump manufacturer bought a machined 6061 aluminum housing at $84 per piece, 5,000 pieces a year. The price had been accepted for years without challenge. A cost engineer built a should-cost model before the contract renewal.

  1. The scope was fixed from the drawing: bar stock, one precision bore, 14 tapped holes, clear anodize, 5,000 pieces a year in batches of 250.
  2. Material: 4.6 lb of bar at $3.10 per lb, about $14.30. Machining: 14 minutes on a 4-axis machine at $95 an hour, $22.20. Setup: two hours per batch spread over 250 parts, $0.80. Deburr and wash: $2.40. Anodize: $4.50. Inspection: $2.00.
  3. Adding 3 percent scrap, 12 percent overhead and SG&A, and 8 percent profit gave a should-cost of about $57.
  4. Comparing with the $84 quote, the engineer listed the gaps: the supplier probably ran three setups on a 3-axis machine, which could explain around $20; a bore tolerance of plus or minus 0.0005 inch implied a honing operation worth about $4; roughly $3 remained unexplained.
  5. Engineering checked the bore and found that it located a cover, not a bearing, so a tolerance of plus or minus 0.002 inch was sufficient.

Result. With the relaxed tolerance and a supplier fixture change to two setups on a 4-axis machine, the new price was agreed at $66, a saving of about $90,000 a year. The engineer noted that the most valuable line in the model was the tolerance question, which purchasing alone could never have raised.

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Common pitfalls and how to avoid them

  • Presenting the model as the truth and demanding the supplier match it.Use it as a structured set of questions; let the supplier explain gaps and update the model when they are right.
  • Hiding assumptions inside a single rate or percentage.Show material, cycle time, rates, scrap, overhead and profit as separate, labeled lines.
  • Using machine rates or labor costs that do not match the supplier's region or equipment.Calibrate rates with benchmark data and past negotiations for the relevant region and process.
  • Treating every gap as a price negotiation.Classify gaps: some come from the design, and redesign is often worth more than a discount.

Frequently asked questions

Is a should-cost model the same as a cost estimate?

Not quite. A cost estimate predicts what something will cost, often using historical data or supplier quotes. A should-cost model calculates what it ought to cost if made efficiently, from material, process time, rates, overhead and a fair margin. It is used to challenge quotes and designs, so its assumptions must be explicit and reasonable rather than simply matching history.

How accurate is a should-cost model?

Accuracy depends on the quality of cycle time, rate and material assumptions. A well-calibrated model is often close enough to identify meaningful gaps, but it should not be treated as precise to the cent. Its real strength is showing which assumptions matter most, so the team knows exactly where it might be wrong and what to verify with the supplier.

Should you share a should-cost model with suppliers?

Sharing the structure and the key assumptions often leads to more productive discussions, because the supplier can correct wrong assumptions and point out design features that drive cost. Many buyers share the gap list rather than the full model. Whatever you share, the aim is to find cost that can be removed on both sides, not to squeeze margin blindly.

Origin

Should-cost analysis — procurement engineering practice; US Department of Defense cost-estimating tradition.

Used in these playbooks

Should-cost negotiation pack 2 days

Two days to walk into the negotiation with a model, a normalized comparison and a prepared plan — then open the books with the chosen supplier.

  1. Should-Cost Model
  2. Quote Comparison Grid
  3. Negotiation Preparation
  4. Open-Book Costing

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