Should costing is an analysis, conducted by a customer, of the supplier’s expenses involved in delivering a product or service or fulfilling a contract. The purpose of should-cost analysis is assessing an appropriate figure to guide negotiations or to compare with a figure provided by a supplier. Should costing is often used in procurement.
The processes in should-cost analysis can be labor-intensive. In a large organization, the engineering department typically arrives at a “should” cost for a product. Often this estimate is achieved by reverse engineering to determine the cost of parts. Then the additional costs of labor, materials, overhead and profit margin are added to that estimate.
Should costing can complement strategic sourcing or be used as an alternative method. In strategic sourcing, the traditional means of pricing, a company compares the quotes of at least three competitors for a product.
Developed by the United States Department of Defense (DoD), should costing has become an integral part of the government procurement process with its inclusion in the Federal Acquisition Regulations (FAR).