There’s a quiet asymmetry in most supplier negotiations: the supplier knows what their cost is, and the buyer knows what their budget is. Those two numbers have no necessary relationship to each other.
Should-cost modeling closes that gap.
What a should-cost model actually contains
At its simplest: a bottom-up estimate of what a part or service ought to cost, built from:
- Material: raw input cost × yield assumption
- Labor: cycle time × labor rate × overhead multiplier
- Overhead: fixed cost allocation per unit
- Logistics & duty: where Incoterms become real money
- Margin: a defensible profit for the supplier
None of these are precise. All of them are defensible. That’s the point.
The shift it creates
Without a should-cost model, the negotiation is: buyer asks for a lower price; supplier explains why their price is justified. With one, it inverts: buyer presents a target cost; supplier explains where the model is wrong.
That second conversation is fundamentally different. Either the supplier proves the model wrong — which gives you new information you didn’t have — or the supplier closes the gap. Both outcomes beat the first conversation.
Where it doesn’t work
Should-cost is weakest where labor is the dominant cost (consulting, creative services) and the labor itself is heterogeneous. In those categories, scope clarity and rate benchmarking do more work than a cost model.
For physical goods, custom manufactured parts, and most direct-spend categories, it remains the single highest-leverage analytical tool you can build.