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.