The most dangerous way to buy is “Blind Quoting.” You send a drawing to three suppliers. One quotes $50, one quotes $80, and one quotes $120. You pick the $50 option and think you got a deal. But what if the part actually costs $20 to make?
Should-Cost Modeling is the process of building up a price estimate from the bottom up—Material, Labor, Overhead, and Profit—so you know the “fair market value” before you ever talk to a supplier. It shifts the power dynamic from “What is your price?” to “Here is what I think this costs; let’s discuss the gap.”
The 4 Components of Price
Every manufactured part, from a plastic widget to a jet engine, is composed of four cost buckets. To build a model, you need to estimate each one.
1. Material Cost (The Easy Part)
Formula: (Gross Weight x Cost per Lb) - Scrap Value.
How to find it: Check commodity indexes (e.g., LME for metals, PPI for plastics). If you are buying a 1lb steel bracket and steel is $0.80/lb, your material floor is $0.80. If they quote $10.00, you know the rest is labor/overhead.
Material cost sources by commodity:
| Commodity | Index / Source | Update Frequency |
|---|---|---|
| Steel (hot-rolled, cold-rolled) | CRU Steel Price Index, Platts | Weekly |
| Aluminum | London Metal Exchange (LME) | Daily |
| Copper | LME, COMEX | Daily |
| Plastics (PE, PP, ABS) | ICIS, PPI | Monthly |
| Stainless Steel | Surcharge indexes (Ni, Cr, Mo) | Monthly |
| Rubber / Elastomers | Rubber Study Group, SICOM | Monthly |
Watch for material markup. Suppliers rarely pass through raw material cost at index price. They buy from distributors (who add a margin), they carry inventory (which has a holding cost), and they generate scrap (which has a recovery value). A typical material markup chain looks like:
- Index price: $0.80/lb
- Distributor markup: +10-15%
- Cutting/prep waste: +5-12% (depends on geometry)
- Scrap recovery credit: -2-5%
- Effective material cost to supplier: $0.90-$1.00/lb
Understanding this chain prevents you from anchoring your model too low and losing credibility in the negotiation.
2. Labor Cost (The Variable)
Formula: Cycle Time (Hours) x Shop Rate ($/Hr).
How to find it: Estimate cycle time based on complexity. A simple laser cut might be seconds; a complex 5-axis mill might be hours. Shop rates vary by region ($60-$120/hr in the US, significantly less overseas).
Shop rate benchmarks by process:
| Process | Typical US Shop Rate | Cycle Time Range |
|---|---|---|
| CNC Turning (2-axis) | $65-$85/hr | Seconds to minutes per part |
| CNC Milling (3-axis) | $75-$100/hr | Minutes to hours per part |
| 5-Axis CNC | $100-$150/hr | Minutes to hours per part |
| Laser Cutting (flat stock) | $150-$250/hr (machine rate) | Seconds per part |
| Welding (MIG/TIG) | $60-$90/hr | Minutes per joint |
| Sheet Metal Fab (brake/punch) | $55-$80/hr | Seconds to minutes per part |
| Assembly (manual) | $35-$55/hr | Varies widely |
| Painting / Powder Coating | $40-$70/hr (+ materials) | Batch-dependent |
These rates include the operator, the machine, and basic shop overhead. They vary significantly by region — a machine shop in rural Ohio will have a lower rate than one in the San Francisco Bay Area, driven primarily by real estate and labor cost differences.
Setup time matters. A part with a 2-minute cycle time sounds cheap until you learn the machine setup takes 45 minutes. On a run of 10 parts, that setup is amortized at 4.5 minutes per part — more than doubling the effective labor cost. On a run of 1,000, setup is negligible. This is why quantity drives price non-linearly, and why your should-cost model needs to account for batch size.
3. Overhead (The Black Box)
What it is: Rent, electricity, machine depreciation, SG&A.
Rule of Thumb: Usually applied as a percentage of labor (e.g., 150-200%).
Breaking it down further: Overhead is the hardest component to estimate because it varies enormously between shops. A newer facility with CNC machines still under financing will have higher depreciation than an older shop with paid-off equipment. But the older shop may have higher maintenance costs and lower efficiency.
| Overhead Component | Typical Range (% of labor) | Notes |
|---|---|---|
| Facility (rent, utilities, insurance) | 30-60% | Higher in urban areas |
| Machine depreciation | 20-50% | Higher for newer/specialized equipment |
| Quality / Inspection | 5-15% | Higher for aerospace, medical, defense |
| SG&A (sales, admin, quoting) | 15-30% | Smaller shops have higher % due to fixed costs |
| Total Overhead | 100-200% | 150% is a reasonable midpoint for general machining |
4. Profit (The Motivation)
Target: 10-20% for manufacturing.
Strategy: You want your supplier to make a profit so they stay in business. You just don’t want them to make excessive profit due to inefficiency.
Profit margins vary by industry, specialization, and competition. Commodity machining in a competitive market may run 8-12%. Specialized processes (EDM, tight-tolerance grinding, exotic alloys) command 15-25% because fewer shops can do the work. If you are sourcing a niche capability, accept a higher margin — squeezing a specialty supplier on price when there are only three shops in the country that can do the work is a losing strategy.
Worked Example: CNC Machined Bracket
A concrete example makes the model tangible. Say you are quoting a custom aluminum bracket: 6061-T6 aluminum, 3-axis CNC milled, quantity 200 pieces.
Step 1 — Material:
- Billet size: 3” x 4” x 1” = 12 cubic inches
- Aluminum 6061 density: 0.098 lb/in³ → 1.18 lbs per billet
- Aluminum price (LME + distributor): $3.50/lb
- Scrap recovery (assume 40% material removed): ~$0.16 credit
- Material cost per part: $3.97
Step 2 — Labor:
- Setup: 30 minutes (one-time) = 0.15 min/part at qty 200
- Cycle time: 8 minutes per part (3-axis milling, moderate complexity)
- Deburr/finish: 2 minutes per part
- Shop rate: $85/hr
- Labor cost per part: (10.15 min / 60) × $85 = $14.38
Step 3 — Overhead:
- 150% of labor
- Overhead per part: $21.57
Step 4 — Profit:
- 15% margin
- Profit per part: $5.99
| Component | Cost Per Part | % of Total |
|---|---|---|
| Material | $3.97 | 8.6% |
| Labor | $14.38 | 31.3% |
| Overhead | $21.57 | 47.0% |
| Profit | $5.99 | 13.0% |
| Total Should-Cost | $45.91 | 100% |
If a supplier quotes $48, you are in the right range — the 4.5% premium over your model likely reflects minor differences in shop rate or material cost. If they quote $85, you now have specific questions to ask: Is the cycle time much longer than your estimate? Are they quoting a different material grade? Did they assume a tighter tolerance that requires additional operations?
How to Use the Model in Negotiation
The goal isn’t to be perfect; it’s to be directionally correct. If your model says $15 and they quote $18, that’s reasonable. If they quote $40, you have a conversation starter.
The Script:
“Thanks for the quote of $40. My internal should-cost model puts this closer to $15 based on $5 of material and 10 minutes of machine time. Can you help me understand what cost drivers I’m missing? Are there tight tolerances driving up the cycle time?”
Why this works: It doesn’t accuse them of gouging. It asks for collaboration. Often, they will reveal that your drawing has an unnecessary spec (e.g., a super-tight tolerance) that is tripling the cost. You change the spec, the price drops to $15, and you both win.
Common Cost Drivers That Models Miss
When your model diverges significantly from the quote, the gap usually falls into one of these categories:
Tolerance and surface finish. A general tolerance of ±0.010” is standard machining. Tightening to ±0.002” on a critical dimension may require a secondary grinding operation, a slower feed rate, or a more rigid fixturing setup. Ask your engineer whether the tight tolerance is functionally necessary or a legacy spec carried forward from an older drawing.
Secondary operations. Heat treatment, anodizing, plating, passivation, and specialty coatings all add cost that your base machining model will not capture. Get quotes for secondary operations separately so you can model them accurately.
Inspection and certification. If the part requires a First Article Inspection (FAI), material certifications (mill certs), or dimensional inspection reports (CMM data), these add labor and documentation time. Aerospace and defense work often adds 10-20% to the base cost in quality overhead alone.
Minimum order charges. Many shops have a minimum charge per setup ($250-$500 is common). On a run of 5 parts, that minimum may dominate the per-part cost. On a run of 500, it is irrelevant.
Packaging and shipping. Custom packaging (foam-lined trays, VCI bags for corrosion protection) and freight (especially for heavy or oversized parts) can add 3-8% to the landed cost.
Quantity Price Breaks: Modeling the Curve
Should-cost models are not static — they change with quantity. The primary drivers of price-break curves are setup amortization and material buying power.
| Quantity | Setup Cost/Part | Material Cost/Part | Total Should-Cost/Part |
|---|---|---|---|
| 10 | $4.25 | $4.20 | $62.00 |
| 50 | $0.85 | $4.10 | $48.50 |
| 200 | $0.21 | $3.97 | $45.91 |
| 1,000 | $0.04 | $3.70 | $42.30 |
| 5,000 | $0.01 | $3.40 | $39.50 |
Notice that the largest price break occurs between 10 and 50 units (setup amortization), with diminishing returns beyond 200. If a supplier offers a significant price break at 5,000 pieces but your annual usage is 600, the inventory carrying cost of buying 5,000 may erase the unit cost savings. Model both sides of the equation.
When to Use It
Don’t model everything. Use Should-Cost modeling for:
- High-Spend Items: Your top 20% of parts by annual cost.
- Sole-Source Parts: Where you have no competitive quotes to benchmark against.
- Custom Fabrications: Where “market price” is hard to define.
- Price Increase Requests: When a supplier asks for an increase, a should-cost model tells you whether the request is driven by real cost changes (material indexes, energy) or margin expansion.
- New Product Introductions: Before a part goes into production, model the target cost. This sets the negotiation anchor for all future sourcing.
- Make-vs-Buy Decisions: Comparing your internal cost structure against a supplier’s quote requires a should-cost model on both sides.
When Should-Cost Models Fail (and What to Do)
No model is perfect. Recognize the limitations:
Highly specialized processes. If only 2-3 shops in the country can do the work (e.g., electron beam welding, large-format additive manufacturing), the market is not competitive enough for cost-based negotiation to be effective. In these cases, relationship management and long-term agreements matter more than cost modeling.
Volatile commodity markets. When material prices swing 20% in a quarter, a static model becomes outdated quickly. Build commodity index escalation clauses into contracts rather than trying to lock in a point-in-time price.
Bundled services. When a supplier provides design assistance, inventory management, kitting, or logistics in addition to manufacturing, isolating the “part cost” from the “service cost” becomes difficult. Request itemized quotes that separate manufacturing from value-added services.
Building a Should-Cost Library
The real power of should-cost modeling is compounding knowledge over time. Each model you build becomes a reference point for the next similar part.
Organize models by process family (CNC machining, sheet metal, casting, injection molding) rather than by project or customer. Over time, you build a library of shop rates, cycle time benchmarks, and overhead multipliers that can be applied to new parts with minimal effort.
Track actual prices paid against your models. If your models consistently underestimate by 15%, your assumptions need calibration. If they consistently overestimate, you may be leaving negotiation leverage unused.
Summary
Should-Cost Modeling transforms you from an “Order Placer” into a “Cost Manager.” By understanding the physics and economics of what you buy, you unlock savings that competitive bidding alone can never find. The model does not need to be perfect — it needs to be close enough to change the conversation from “take it or leave it” to “let’s figure out why we see this differently.”