Should-Cost Modeling and Total Cost of Ownership

Updated October 13, 2026

Should-cost and total cost answer different questions

A should-cost model estimates what a part ought to cost if it is made efficiently, built up from material, machine time, setups, outside processing and inspection. Total cost of ownership (TCO) adds everything a part costs you after the price is agreed: escapes, expedites, inspection travel, inventory and obsolescence. Use should-cost to understand a quote and TCO to choose between quotes.

The federal acquisition rules give a clear statement of the should-cost idea. FAR 15.407-4 describes should-cost reviews as a specialized form of cost analysis that does not assume a contractor's historical costs reflect efficient operation, and instead looks at the economy and efficiency of the work force, methods, materials, equipment and management. It separates a program should-cost review, aimed at direct costs such as material and labor, from an overhead should-cost review of indirect costs. Commercial buyers rarely get that level of access, but the same logic applies: model the direct work you can see, and treat overhead and margin as a structure you respect rather than a number you demand.

This page is about building and using the model. For the cost drivers themselves, such as tolerances, setups and finishing minimums, see our aerospace machining cost guide.

The structure of a should-cost model for a machined part

A defensible machined-part model has six blocks, each built from inputs you can estimate or measure: material, machine time, setup and programming, outside processing, inspection and documentation, and a burden and margin factor. Keep one-time costs separate from per-part costs, because the GAO cost guide warns that mixing recurring and nonrecurring costs skews any learning or quantity analysis.

Written as a formula, the unit should-cost for a lot is: one-time costs divided by lot quantity, plus material per part, plus the sum of cycle hours times machine rate for each operation, plus setup hours times rate divided by lot quantity, plus outside processing lot charges divided by lot quantity, plus per-part inspection, all multiplied by a burden and margin factor. Running it at two or three quantities shows how much of the price is setup and how much is real per-part work.

We deliberately give no hourly rates here. Rates vary with machine class, region and quality system overhead. Use rates from your own quote history for comparable work, and treat the rate as a sensitivity variable rather than a fact.

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Adapting the model to fabricated parts

Sheet metal and welded parts use the same six blocks with different drivers. The material block is driven by nesting yield on the sheet, not by bar stock. The machine block becomes cut time on a laser, waterjet or punch, bend count on the press brake, and weld length and joint type for welding. Inspection grows with weld inspection and any nondestructive testing, and outside processing usually includes heat treat after welding and finish.

• Nesting yield. Ask what sheet size the part nests on and how many parts per sheet. Small runs often waste most of a sheet.
• Bends and setups. Each distinct bend setup on a brake is a setup in the model, even if the part is small.
• Welding. Certified welders, procedure qualification to a specification such as AWS D17.1, fixturing and distortion control are real costs. See our sheet metal and welding page.
• NDT. Penetrant or radiographic inspection of welds is often priced per part or per lot by a separate processor.

Learning curves, at the level a buyer needs

Learning curves describe how recurring labor falls as cumulative quantity rises: each time quantity doubles, unit cost or hours fall to a fixed percentage of their previous value, called the slope. They matter for repeat production of labor-heavy assemblies and much less for short runs of automated CNC parts.

The GAO Cost Estimating and Assessment Guide (GAO-20-195G, March 2020) describes the two standard forms:

GAO's unit example: with a first unit cost of $1,000 and an 80 percent slope, b is about minus 0.322, and units 2, 3 and 4 cost about $800, $702 and $640. Its cumulative average example: if the first 10 units average $100 on a 90 percent slope, the first 20 average $90 and the first 40 average $81. The two forms give different answers from the same data, so always ask which one a supplier or estimator used.

GAO also lists conditions that should hold before learning curves are applied: substantial manual labor, continuous production or adjustments for breaks, complex processes, minimal technology change between lots, continuing process improvement, and a known program environment. It notes that more automated tasks show less learning, that learning applies to recurring costs only, and that production breaks lose learning, which analysts estimate with methods such as the Anderlohr approach. GAO also describes a rate term for production rate effects, since unit costs can rise when quantities fall or when capacity is exceeded.

For buyers of machined and fabricated parts, the practical use is narrow. Expect real improvement on hand-finished, assembled and welded items across early lots, and expect most of a CNC part's improvement to show up as setup and program refinement after the first article. Do not apply an aircraft-industry slope to a five-axis part made twenty at a time.

Total cost of ownership: what the price leaves out

The lowest price is often not the lowest cost. TCO adds the costs that land on your side of the dock, most of which are driven by supplier quality and delivery rather than by the unit price.

Put your own numbers in the right-hand column. A TCO model built on your records is far more persuasive internally than any published average, and it shows which suppliers are expensive in ways the price never shows. Our supplier scorecards page covers the delivery and quality metrics that feed these lines.

How to compare quotes fairly

Normalize quotes before you compare them. Most apparent price gaps between aerospace quotes come from different scope, not different efficiency, and a spreadsheet that lines up inclusions will show it.

1. Same requirement. Confirm every quote is to the same drawing revision, material spec, finish callouts and quality clauses.
2. One-time costs separated. Pull out programming, fixtures, FAI and tooling, then compare per-part prices.
3. Same quantities. Compare at each quantity break, not one supplier's 10 against another's 50.
4. Inclusions. Check material certs, outside processing, FAI, packaging, freight terms and cert pack contents on each.
5. Exceptions. Read every exception and assumption line. A low quote with an exception to your FAI or approved processor requirement is a different product.
6. Lead time basis. After receipt of order or ship date, and whether it depends on material already in stock.
7. Validity and escalation. How long the price holds and what material index, if any, it moves with.
8. Add TCO. Apply your own escape, expedite and inspection history by supplier.

The FAR's list of price analysis techniques in 15.404-1(b)(2) is a good checklist even outside government work: compare competing quotes, compare against prices paid before, apply parametric yardsticks, compare with published market prices, and compare with an independent estimate, which is what your should-cost model is.

What data to ask suppliers for, and what not to ask

Ask for the structure of the price, not the supplier's margin. The FAR draws the same line: price analysis evaluates a price without its separate cost elements and profit, while cost analysis evaluates each cost element and profit. Most commercial machine shops will support the first and resist the second, and they are entitled to.

FAR 2.101 defines "data other than certified cost or pricing data" to include the judgmental factors and mathematical methods used in an estimate and the nature and amount of any contingencies. That is a useful model for commercial requests: ask how the estimate was built, not what the shop earns.

Avoid asking for overhead rates, wage rates, profit percentage or the shop's internal hourly rate breakdown. Requests like that rarely produce honest numbers, they damage the relationship, and they are unnecessary when your model can carry burden and margin as a range. If a quote sits well above your model, the useful conversation is about which block differs, and whether a tolerance, finish or inspection requirement can change.

Using a should-cost gap in a negotiation

A gap between your model and a quote is a question, not an accusation. Go block by block. A material gap usually means a different stock size or spec assumption. A machine-time gap usually means a different setup count or route. An outside processing gap often means a lot minimum that consolidation could remove. An inspection gap may mean the shop read your clauses as requiring more than you intended.

The best savings usually come from changing the requirement, with engineering sign-off, rather than pushing the rate: opening a non-critical tolerance, combining part numbers into one finish lot, or matching FAI and inspection to what the contract actually requires. Share what you learn with the supplier. A shop that sees its quote analyzed fairly tends to quote more openly next time.

What to put on the RFQ or PO

A clean RFQ makes should-cost and fair comparison possible. Include:

• Drawing and specification revisions, material spec and condition, finish and process callouts, and quality clauses by number and revision.
• A request to quote one-time charges separately and to price two or three quantities.
• A request to list material, each outside process and freight as line items, and to state stock size and planned route.
• FAI requirement (full, partial or existing FAI acceptable), inspection and sampling expectations, and the cert pack contents you need.
• Required lead time basis, quote validity and any material escalation basis.
• A request to list all exceptions and assumptions in one place.

Our RFQ builder and the aerospace RFQ checklist cover the full list. For the risk side of choosing between suppliers, read supply chain risk and dual sourcing.

Get a quote you can compare line by line

If you want a machined or fabricated part quoted with one-time charges, material, outside processing and inspection shown separately, send the drawing package through the CNC quote form. We source from qualified suppliers, flow down your material, process, FAI and cert requirements so they are in the price, and deliver with a certificate package. A person replies within one business day, and we sign a mutual NDA before files. Export-controlled data follows the process on controlled programs.

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Related

• Supply Chain Risk, Sole Sources and Dual Sourcing
• How Primes Score Supplier Delivery and Quality
• What Drives Aerospace Lead Time and How to Shorten It
• Receiving Inspection: What Buyers Check and Why Parts Get Held

Sources

• FAR 15.407-4 Should-cost review (acquisition.gov, FAC 2026-01)
• FAR 15.404-1 Proposal analysis techniques (acquisition.gov)
• FAR 2.101 Definitions, data other than certified cost or pricing data (acquisition.gov)
• GAO-20-195G, Cost Estimating and Assessment Guide (March 12, 2020)
• GAO-20-195G, Cost estimating methods: engineering build-up and learning curves
• GAO-20-195G, Unit formulation
• GAO-20-195G, Cumulative average formulation
• GAO-20-195G, Production rate effects and breaks in production