Lapasar
Spend & Cost Management

Should-Cost Analysis

Also known as: Cost breakdown 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.

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Rather than accepting a supplier's quoted price, should-cost analysis builds up an independent estimate of the underlying cost — raw materials, processing, labour, overheads and a reasonable profit. This gives buyers a fact-based position for negotiation and reveals where a quote may carry excess margin.

It requires effort and market knowledge, so it is reserved for significant or strategic categories. Done well, it shifts negotiations from haggling to a transparent discussion about real cost drivers.

Frequently asked questions

What is should-cost analysis?
Should-cost analysis estimates what a product should cost to produce by breaking down its materials, labour, overhead and margin, giving buyers a fact-based basis for negotiation.
When is should-cost analysis worthwhile?
For significant or strategic purchases where the effort of building a cost model pays off in stronger negotiation and better pricing.

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