What Is Should-Cost Modelling and Why Every Procurement Team Needs It

What is a should-cost model?

A should-cost model is a bottom-up estimate of what a manufactured part should cost, built by decomposing it into its individual cost drivers. Instead of accepting a supplier's quoted price as a starting point, you build your own price from first principles.

The goal is simple: arrive at a defensible, evidence-based fair price that you can use as your baseline in any negotiation.

Why it matters for procurement

Without a should-cost model, procurement teams are negotiating in the dark. You know what the supplier wants to charge, but you do not know what the part actually costs to make. That information asymmetry is the single biggest source of margin leakage in manufacturing supply chains.

A good should-cost model shifts the conversation from "Can you do 5% off?" to "Our analysis shows the material cost at current market is £4.12 per unit, conversion is £2.10, and a fair margin is 20%. Your quote is 26% above our model. Let us discuss which assumptions differ."

That is a fundamentally different negotiation, and it produces fundamentally different outcomes.

The five components of a should-cost model

Every manufactured metal part can be broken into five primary cost buckets:

1. Base metal cost

This is the raw commodity price, typically benchmarked against the global commodity markets for base metals or COMEX for precious metals. The calculation is straightforward: weight of metal in the part multiplied by the current market price per kilogramme, adjusted for the specific alloy.

For example, an aluminium 6061-T6 bracket weighing 0.42 kg at an market aluminium price of $2,427 per tonne gives a base metal cost of approximately $1.02.

2. Alloy surcharge

Most parts are not made from pure base metals. They use specific alloys with particular properties. A 7075-T6 aerospace aluminium alloy costs significantly more than commodity-grade aluminium. The surcharge varies by alloy, supplier, and market conditions, but it typically adds 15 to 40% on top of the base metal price.

Nickel-based superalloys like Inconel 718 can carry surcharges of 200% or more above the base nickel price. Getting this right is critical for aerospace and medical parts.

3. Conversion cost

This covers the manufacturing process: machining, forging, casting, stamping, heat treatment, surface finishing, and quality inspection. Conversion costs vary enormously by region, process complexity, and volume.

A CNC-machined aerospace bracket in the UK might cost £35 to £50 per hour in machine time, while the same operation in China might be £12 to £18 per hour. The key is knowing the cycle time and the appropriate regional rate.

4. Freight and logistics

Shipping costs depend on origin, destination, mode of transport, and Incoterms. FOB Shenzhen to CIF Southampton for a pallet of aluminium brackets might add £1.20 to £2.50 per unit for a typical order quantity. Air freight for urgent aerospace parts can be ten times that.

Many buyers underestimate freight, and many suppliers over-allocate it. A good should-cost model uses current freight rates for the specific route and mode.

5. Tariffs, duties, and margin

Import duties vary by product classification, origin country, and current trade policy. US Section 232 tariffs on steel and aluminium add 25% to the metal content. EU anti-dumping duties on Chinese fasteners add further complexity.

Finally, margin. Every supplier needs a fair margin to stay in business, invest in quality, and maintain capacity. But "fair" varies by industry:

• Aerospace: 18 to 25% margin is typical, reflecting quality requirements, certification costs, and liability.
• Automotive: 8 to 15% margin, driven by volume and competitive pressure.
• Construction: 6 to 10% margin for commodity-grade parts.
• Medical: 25 to 35% margin, reflecting regulatory burden and traceability requirements.

The temporal dimension

One of the most overlooked aspects of should-cost modelling is timing. Metal prices move daily. A supplier who quotes you today likely purchased raw material 60 to 90 days ago. The relevant market price for your should-cost model is not today's price. It is the price on the date the supplier most likely procured the material.

This temporal mismatch is one of the most common ways suppliers capture additional margin. When market drops after they purchase, they quote based on their actual (higher) cost. When market rises after they purchase, they quote based on today's (higher) market price, not their actual (lower) cost. Either way, the buyer pays more than the should-cost.

A robust should-cost model accounts for this by benchmarking against both current market and the likely purchase-date market, giving the buyer a range rather than a single point estimate.

Manual versus automated should-cost

Building a should-cost model manually is possible but painfully slow. A skilled cost engineer typically needs 1.5 to 2 hours per part to:

• Identify the metal grade and alloy.
• Pull current market pricing.
• Estimate material weight and scrap rate.
• Research regional conversion costs.
• Calculate freight for the specific route.
• Apply relevant tariffs and duties.
• Determine an appropriate margin band.

For a 40-line BOM, that is 60 to 80 hours of work. For a 100-line BOM, it is weeks. Most teams simply cannot afford to should-cost every part, so they focus on the top 10 to 20 items by spend and hope the rest is roughly fair.

Automated should-cost changes this entirely. SupplyVerse's Agent Midas builds a complete should-cost model in under 60 seconds per part, and it processes entire BOMs in parallel. Every line gets benchmarked, not just the high-value ones.

How Agent Midas builds should-cost models

When you give Midas a part number, description, or supplier quote, it follows a systematic process:

• Part identification: Parses the part number, description, and any associated standards (NAS, AMS, ASTM) to identify the metal, alloy, and manufacturing process.
• market benchmarking: Pulls live market pricing for the base metal and calculates alloy surcharges based on current market data.
• Cost stack assembly: Builds the full should-cost model: material, conversion, freight, tariffs, and margin, using industry-specific parameters.
• Verdict generation: Compares the should-cost to the quoted price and delivers a clear verdict with percentage variance.
• Counter-offer drafting: If the part is overpriced, Midas drafts a counter-offer email citing specific market prices and cost components.

The entire process runs against live data, so the model is never stale. And because every assumption is transparent, suppliers can verify the logic themselves, which makes negotiations more productive and less adversarial.

Getting started

If your team is not using should-cost models today, you are almost certainly overpaying on a significant portion of your metal parts. The question is not whether should-cost modelling adds value. It is whether you can afford to do it manually, or whether automation is the only practical path to full coverage.