Should Cost vs Will Cost: What’s the Difference?

Understanding costs is central to informed business and financial decision-making. Two distinct yet interconnected concepts, “should cost” and “will cost,” offer different perspectives on financial expenditures. These approaches provide frameworks for analyzing, planning, and managing resources. While both relate to cost, they serve unique purposes in strategic financial planning and operational execution.

Understanding Should Cost

“Should cost” represents an ideal cost for a product, service, or process, determined by analyzing what the cost should be through efficient practices. This analysis aims to uncover the theoretical minimum cost by examining inputs and processes. The objective is to identify potential savings and areas for operational improvement, rather than reflecting current market prices or supplier quotes.

Methodologies for deriving a “should cost” are bottom-up and analytical. Activity-based costing (ABC) is a common approach, where costs are allocated to specific activities and then traced to products or services based on their consumption of those activities. Process mapping helps identify inefficiencies and waste that contribute to higher costs. Benchmarking against industry leaders provides a comparative standard for identifying cost disparities.

Detailed engineering analysis is a component, involving examination of material costs, labor rates, overhead, and manufacturing processes. This requires specific data such as bills of materials, engineering specifications, labor time standards, machine usage rates, and utility costs. Expertise from industrial engineers, cost accountants, and manufacturing specialists is needed to accurately build these complex cost models. The forward-looking nature of “should cost” analysis helps organizations identify opportunities for cost reduction and efficiency gains by setting a target for what costs could be.

Understanding Will Cost

“Will cost” refers to the actual cost expected to be incurred for a product or service, reflecting current market dynamics. This perspective is grounded in current market conditions and transactions. It accounts for prices offered by suppliers, historical expenditure data, and prevailing market prices, providing a practical estimate of what an organization will pay.

The determination of “will cost” involves competitive bidding processes, where multiple suppliers submit quotes. Supplier negotiations play a direct role in shaping the final “will cost,” as agreements are reached based on market conditions and leverage. Historical expenditure analysis provides a baseline for current cost expectations. Market pricing research, including analyzing commodity prices, labor market data, and geopolitical events, helps inform realistic cost projections.

Factors influencing “will cost” are diverse and can fluctuate. Supply and demand dynamics, global raw material prices, and geopolitical events can all impact the immediate cost of goods. Supplier capabilities, production capacities, and existing contractual agreements also contribute to the final price. This approach is focused on immediate expenditure and reflects the current market environment.

Comparing the Approaches

“Should cost” and “will cost” represent distinct philosophies in cost analysis, each serving a unique purpose. “Should cost” focuses on an ideal expenditure, representing a benchmark or target. In contrast, “will cost” reflects the actual expenditure that an organization anticipates paying, influenced by market conditions and negotiated terms.

The methodologies employed differ. “Should cost” relies on internal analytical processes, such as detailed engineering breakdowns and activity-based costing, to dissect and reconstruct costs. Conversely, “will cost” is determined through external, market-driven mechanisms like competitive bidding, supplier negotiations, and historical data analysis. Data sources for “should cost” involve internal specifications, process flows, and expert assessments. For “will cost,” data primarily comes from external market intelligence, supplier quotes, and past transaction records.

The outcomes derived from each approach diverge. “Should cost” provides a theoretical target for cost reduction and process improvement, highlighting where costs could be. “Will cost,” however, provides a realistic expenditure figure, reflecting the price that will be paid given current market realities and agreements. Therefore, “should cost” serves as a goal for negotiation and efficiency, while “will cost” represents the immediate financial reality.

Integrating Cost Perspectives

Combining “should cost” and “will cost” perspectives creates a robust framework for strategic decision-making across business functions. “Should cost” can serve as an effective negotiation tool, providing a benchmark against which supplier proposals (“will cost”) are evaluated. If a supplier’s quoted price exceeds the “should cost,” it prompts a discussion to understand the discrepancy, rather than simply accepting the quoted price. This allows procurement teams to challenge inflated prices and engage in transparent, data-driven negotiations.

Understanding the gap between “should cost” and “will cost” helps identify opportunities for continuous improvement. A significant difference may indicate inefficiencies in internal processes or highlight areas where suppliers are operating suboptimally. This gap analysis can drive efforts to re-engineer products, optimize manufacturing processes, or explore alternative sourcing strategies. For instance, if the “will cost” is consistently higher than the “should cost,” it might inform make-or-buy decisions, prompting an organization to consider producing components in-house.

In strategic planning, “should cost” can guide long-term sourcing strategies and product development by setting cost targets early in design. This proactive approach enables engineers to design products with cost efficiency in mind, avoiding costly redesigns later. For immediate purchasing decisions, “will cost” provides the financial reality check, ensuring that current expenditures align with budget constraints and market availability. Both perspectives are complementary, with “should cost” providing the aspirational target and “will cost” anchoring decisions in present market conditions.