Cost Modelling
Cost modelling is the practice of building a structured estimate of what a product or service should cost by breaking it into its component cost elements.
A cost model decomposes a price into materials, labour, machine time, overhead, logistics and margin, using assumptions about quantities, rates and yields. It gives buyers an independent view of what an item ought to cost, which strengthens negotiation, exposes where a quote looks inflated, and helps compare suppliers on a like-for-like basis rather than on headline price alone.
Cost models range from quick estimates to detailed engineering-based builds, and their accuracy depends on the quality of the input data. Kept up to date with current material and labour rates, a model becomes a reusable tool for should-cost analysis, target costing and understanding how movements in key cost drivers will flow through to price.
Key points
- Breaks a price into materials, labour, overhead, logistics and margin.
- Gives an independent, evidence-based view for negotiation.
- Underpins should-cost analysis and target costing.
Frequently asked questions
- What is cost modelling?
- Cost modelling is building a structured estimate of what a product or service should cost by breaking it into component elements such as materials, labour, overhead and margin.
- Why is cost modelling useful in procurement?
- It gives buyers an independent view of what an item should cost, strengthening negotiation, revealing inflated quotes and enabling like-for-like comparison between suppliers.
Related terms
Should-Cost Analysis
Should-cost analysis is a method of estimating what a product should cost to make, by breaking down its materials, labour, overhead and margin.
Read definitionTarget Costing
Target costing is a method that sets a maximum allowable cost for a product or service by working back from a competitive market price and required margin.
Read definitionCost Driver
A cost driver is a factor that causes the cost of an activity or product to rise or fall, such as volume, complexity or raw-material prices.
Read definitionTotal Cost of Ownership (TCO)
Total cost of ownership (TCO) is the full cost of acquiring and using a product or service over its life, not just its purchase price.
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