Should-cost is the result of cost modeling done by a customer to determine what it should cost them to purchase a product, service or system support . Should-costing is based on the customer’s accounting and their understanding of the product or service. When a customer knows a product or service’s should-cost, then they know what they should pay for it.
Why is should-cost a thing? For many common products, market competition protects the customer from significant overpayments (assuming the customer shops around or allows the market compete for their business). However, for unique products and services (e.g., military programs, contracted services, etc.), where there is no market competition that sets prices at fair levels, knowing the should-cost is critical when a customer wishes to guard against overpayment.
A common alternative to should-costing is strategic sourcing, which is the process of comparing price quotes from different sources. Alternatively, should-costing would start from an analysis of labor, materials, overhead, profit margin, etc., to estimate what the price should be. Strategic sourcing is used for commodity items (e.g., if you are going to buy a washing machine, you shop around), while should-costing is used for highly engineered systems and services where there are few suppliers (e.g., a new aircraft carrier). A commonly used example is the purchase of a car. A strategic car buyer goes to multiple dealers to see who will give them the best price. A should-cost buyer researchers the dealer’s invoice price and how dealers determine their markups and then tells the dealer what price they will pay for the car.
The car buying example aside, in the real world should-cost should be thought of as leverage, not a prediction . Any should-cost analysis you perform will be wrong – there are thing you simply don’t know. Most people have the expectation that the predictive power of should-cost alone will have the strength to cause the negotiated price to equal the price determined from the should-cost estimate - this is a great goal, but it is not typically realistic. The point of should-cost is that it gives you leverage to push a quoted price toward your should-cost estimate.
 Carter, A. B. and Mueller, J. (2011). Should cost management: Why? How?, Defense AT&L: Better Buying Power, Sept-Oct, pp. 14-18.
 Hiller, E. A. (2012), “Your Should-Cost Number is Wrong, But it Doesn’t Matter,” Industry Week, October 21, http://www.industryweek.com/procurement/your-should-cost-number-wrong-it-doesnt-matter Accessed July 17, 2017.