A should cost analysis template is a spreadsheet that rebuilds what a product or service ought to cost from its parts: materials, labour, overhead and a fair margin. Comparing that figure with the supplier's quote shows how much room you have to negotiate.
It is a bottom-up estimate of a fair price, built line by line from what the supplier has to spend to make or deliver the item. You list each cost driver, put a quantity and a rate against it, add a reasonable margin, and the sheet gives you a should cost per unit.
Buyers run one before a negotiation on a large or repeat purchase, when a supplier raises prices, or when only one supplier can quote. The result is a fact-based anchor: instead of asking for a discount, you can point to the specific line where the quote looks high.
The same layout works as a should cost model template for manufactured parts and, with different drivers, for software and services. Most teams keep the model in Excel or Google Sheets so assumptions are visible and easy to challenge.
Raw material weight or volume, unit price and a scrap allowance, plus any bought-in parts.
Hours per unit for each operation, multiplied by a loaded hourly rate for the supplier's region.
Machine time, setup amortised across the batch, and factory costs such as energy and maintenance.
The supplier's selling and admin costs plus a fair margin, each set as a percentage.
Packaging and freight to your site, which suppliers often bury inside the unit price.
Quote minus should cost, as a value and a percentage, which becomes your negotiation target.
Ready to use in Excel and Google Sheets. Fill it in, save it, reuse it.
Split the item into materials, operations and services. Use drawings, the spec or the statement of work.
Put a quantity and a rate against each driver. Note where every rate comes from.
Add overhead, SG&A, margin and freight to reach a should cost per unit.
Line up the model against the quote or the supplier's own cost breakdown.
Open with the lines that differ most, and set a target and walk-away price.
Start with five rows: Materials, Labour, Overhead, Margin, Freight. One quantity and one rate per row is enough for a first estimate.
The worked example below models a machined aluminium housing quoted at 32.50 per unit. Every row multiplies a quantity by a rate, so you can see and challenge each assumption. Tag each row as Material, Labour or Overhead and the summary tab totals them for you.
| Cost element | Category | Quantity | Rate | Cost per unit |
|---|---|---|---|---|
| Aluminium bar | Material | 0.75 kg | 4.00 | 3.00 |
| Scrap allowance (10%) | Material | 0.075 kg | 4.00 | 0.30 |
| Fasteners and seals | Material | 1 set | 0.40 | 0.40 |
| CNC machining | Labour | 0.25 hr | 32.00 | 8.00 |
| Assembly and inspection | Labour | 0.10 hr | 24.00 | 2.40 |
| Machine overhead | Overhead | 0.25 hr | 36.00 | 9.00 |
| Setup (2 hrs over 500 units) | Overhead | 0.004 hr | 50.00 | 0.20 |
| Manufacturing cost | 23.30 |
Illustrative figures for a fictional part, not real supplier data.
Works in Excel and Google Sheets. Cost Build tab: headers in row 1, data from row 2, formulas copied down.
| Col | Header | Entry or formula | What it does |
|---|---|---|---|
| A | Cost element | Text | One driver per row |
| B | Category | Drop-down: Material, Labour, Overhead | Feeds the summary totals |
| C | Quantity | Number, e.g. 0.75 | Kg, hours or units per finished unit |
| D | Rate | Currency | Price per kg, loaded hourly rate or machine rate |
| E | Cost per unit | =C2*D2 | Quantity times rate |
| F | Source | Text | Index, quote, payroll data or estimate |
Percentages sit on an Assumptions tab: SG&A in B2, profit margin in B3, freight per unit in B4.
| Line | Formula |
|---|---|
| B2 Materials | =SUMIF('Cost Build'!B:B, |
| B3 Labour | =SUMIF('Cost Build'!B:B, |
| B4 Overhead | =SUMIF('Cost Build'!B:B, |
| B5 Manufacturing cost | =SUM(B2:B4) |
| B6 SG&A (8%) | =B5*Assumptions!B2 |
| B7 Profit (10%) | =(B5+B6)*Assumptions!B3 |
| B8 Freight and packaging | =Assumptions!B4 |
| B9 Should cost per unit | =SUM(B5:B8) |
Illustrative. Against a 32.50 quote, the gap is 4.22 per unit.
Software has almost no material cost, so the model swaps materials and machining for people and infrastructure. Development cost is shared across all of the vendor's customers, which is why software margins run far higher than manufacturing ones. Use the result to test whether a quote is in a sensible range, then check it against market pricing.
| Cost driver | Basis | Quantity | Rate | Annual cost |
|---|---|---|---|---|
| Hosting and infrastructure | Per user per year | 120 users | 60.00 | 7,200.00 |
| Customer support | Share of a support FTE | 0.25 FTE | 80,000.00 | 20,000.00 |
| Implementation and development | Consultant days | 40 days | 800.00 | 32,000.00 |
| Account management | Share of an AM FTE | 0.10 FTE | 90,000.00 | 9,000.00 |
| Delivery cost | 68,200.00 |
Illustrative: Orbit Analytics quoting 132,000.00 for 120 users, year one.
| Line | Formula |
|---|---|
| Delivery cost (E6) | =SUM(E2:E5) |
| Target margin on price (B8) | 40% |
| Should cost price | =E6/(1-B8) |
| Quote (B10) | 132000 |
| Gap | =B10-E6/(1-B8) |
| Gap % of quote | =(B10-E6/(1-B8))/B10 |
A total gap of 4.22 is hard to argue; a 1.60 gap in overhead is easy. Lining up the two breakdowns turns the analysis into a short list of questions for the supplier. Then set three prices before the meeting: where you open, where you aim to land and where you walk away.
| Cost element | Supplier breakdown | Should cost | Gap | Question to ask |
|---|---|---|---|---|
| Materials | 3.90 | 3.70 | 0.20 | Which alloy index and scrap rate? |
| Labour | 11.20 | 10.40 | 0.80 | Cycle time per operation? |
| Overhead | 10.80 | 9.20 | 1.60 | Machine rate and batch size? |
| SG&A and profit | 5.80 | 4.38 | 1.42 | Margin on a 6,000-unit order? |
| Freight and packaging | 0.80 | 0.60 | 0.20 | Can we collect or consolidate? |
| Total per unit | 32.50 | 28.28 | 4.22 |
Illustrative figures from the worked example.
B9 is should cost, B10 is the quote, B13 is annual volume.
| Line | Formula |
|---|---|
| Gap per unit (B11) | =B10-B9 |
| Gap % of quote (B12) | =B11/B10 |
| Annual opportunity | =B11*B13 |
| Opening position | =B9 |
| Target price (should cost plus 25% of gap) | =B9+0.25*B11 |
| Walk-away price (should cost plus 50% of gap) | =B9+0.5*B11 |
On 6,000 units a year, a 4.22 gap is 25,320.00 of annual opportunity. The target works out at 29.34 and the walk-away at 30.39. Read more on supplier negotiation strategy.
Suppliers will challenge your rates, so each one needs a source you can name. The sensitivity table answers the obvious objection: what if aluminium or labour costs more than you assumed? If the gap survives a 20% swing in the biggest input, your position is strong.
| Input | Value | Source | Date checked |
|---|---|---|---|
| SG&A % (B2) | 8% | Supplier's published accounts or category norm | Sep 2026 |
| Profit margin % (B3) | 10% | Category norm for contract machining | Sep 2026 |
| Freight per unit (B4) | 0.60 | Carrier quote, full pallet | Sep 2026 |
| Aluminium price per kg | 4.00 | Metal price index plus supplier premium | Sep 2026 |
| Machinist loaded rate | 32.00 | Regional wage data plus on-costs | Sep 2026 |
Illustrative values. Replace each source with the one you used.
Change one input at a time and record the new should cost.
| Scenario | Change | Should cost | Gap to 32.50 |
|---|---|---|---|
| Base case | As modelled | 28.28 | 4.22 |
| Aluminium +20% | 4.80 per kg | 29.06 | 3.44 |
| Aluminium -20% | 3.20 per kg | 27.50 | 5.00 |
| Labour rates +10% | 35.20 and 26.40 per hr | 29.52 | 2.98 |
| Smaller batches | 250 units per setup | 28.52 | 3.98 |
Illustrative. The gap stays above 2.98 in every scenario, so the quote is high on any reasonable assumption.
Most weak should cost models fail on data, not formulas. A missing scrap allowance or an unsourced labour rate gives the supplier an easy reason to dismiss the whole analysis. Tick these off before the model leaves your desk.
Buying software? Spendflo's pricing benchmarks show what similar companies pay before you negotiate.
See pricing benchmarksWhat an item ought to cost an efficient supplier, built bottom-up from its cost drivers.
What it is likely to cost given the supplier's current methods, waste included.
The price you need to hit for your own product or budget to work, set top-down.
Purchase price plus running, support and exit costs over the life of the item.
Another name for building a should cost from a blank sheet rather than from past prices.
Margin is profit as a share of price; markup is profit as a share of cost.
| Conversion | Formula |
|---|---|
| Markup from margin | =Margin/(1-Margin) |
| Margin from markup | =Markup/(1+Markup) |
| Price from cost and margin | =Cost/(1-Margin) |
| Price from cost and markup | =Cost*(1+Markup) |
| Margin on price | Equivalent markup on cost |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 40% | 66.7% |
| 50% | 100.0% |
Arithmetic conversions, not benchmarks.
An index, a payroll survey or a past quote, with the date you checked it.
Use their likely machines, batch sizes and region, not your own plant's.
Request it with the quote so you can compare line by line instead of in total.
Test the two largest drivers at plus and minus 20% before you rely on the gap.
Feed agreed rates back into the model so the next estimate starts closer.
A supplier that cannot make a fair profit will cut quality or walk away.
Rates typed straight into formulas cannot be checked or updated by anyone else.
Both look small per unit but often explain most of a small-batch gap.
The effort pays off on large, repeat or single-source purchases, not on one-off orders.
Choose a large, repeat or single-source purchase where a few percent matters.
Break it into materials, operations and services using the spec or SOW.
Enter quantities and rates on the Cost Build tab, each with a source.
Paste the quote or breakdown into the gap tracker and set opening, target and walk-away prices.
Northwind Components quoted 32.50 per housing for 6,000 units a year. The should cost came to 28.28, a 4.22 gap. The buyer questioned the machine rate and the margin on a repeat order, and settled at 29.60, saving 17,400.00 a year. Figures are illustrative.
Every part on this page, in Excel and Google Sheets, with the examples filled in.
Use the full cost build with machine rates, setup and scrap. Ask suppliers for cycle times to sharpen the labour lines.
Model hosting, support, implementation effort and margin, then check the result against what peers pay for the same product.
Build cost from roles, day rates, days and expenses. Compare the blended day rate with the supplier's rate card.
Best for detailed models and scenarios.
Best when several people supply rates.
One tab with formulas and no sample data.
$3.7B in software spend processed through Spendflo, at 30% average savings.
See your savingsThe model is only as strong as its rates, so source every one and test the biggest. Bring the line-by-line gap to the table and you negotiate on facts, not on a percentage pulled from the air.
Materials, labour, overhead, margin and freight, each as quantity times rate.
Open the cost build →2Compare line by line and set target and walk-away prices.
Open the gap tracker →3Run sensitivity so the gap holds up when the supplier pushes back.
Open assumptions →Quick answers to what people ask most about the should cost analysis template.
A should-cost analysis estimates what a product or service ought to cost by adding up its materials, labour, overhead and a fair margin. Buyers compare the result with a supplier's quote to find where the price is high. Download the template to build one with the formulas already in place.
Include every cost driver with its quantity and rate, overhead, SG&A, profit margin, freight and a named source for each assumption. Add a sensitivity check on the largest inputs so the result holds up. The download includes a checklist covering each of these.
A should cost model suits supplier negotiations, a cost-benefit analysis suits investment decisions and a total cost of ownership model suits comparing options over several years. This page covers the should cost version. Download it free in Excel or Google Sheets.
A cost-benefit analysis lists costs and benefits by year, discounts them and compares the totals, usually with a net present value and payback period. It answers whether to spend, while a should cost answers what to pay. Download our separate cost-benefit analysis template for that format.
You can download it free from this page, in Excel or Google Sheets. It includes the cost build, a software model, a price gap tracker, an assumptions tab with sensitivity and a checklist.
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For software, Spendflo's pricing benchmarks and managed negotiation show what a deal should cost. Spendflo has handled 15,000+ agreements.
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