5 steps to structuring a “Should Cost Model” for strategic supplier services

By Allan Watton on

should cost modelIncreased accuracy in predicting the costs involved within any complex/strategic project offers significant advantages – whether in negotiations within the procurement process, in developing more collaborative working relationships with your suppliers or in optimising efforts towards shared outcomes.

And, while ‘cost modelling’ has existed for some time as a means to offer more certainty in what may seem to be the chaotic world of cost forecasting, the Should Cost Model has become the best-in-class for contracting organisations and procurement and supply chain professionals, to be able to compare a like-for-like on how lifecycle costs are estimated.

What exactly is a Should Cost Model?

One definition of the Should Cost Model is that provided by the government’s guidance where they state it is “a forecast of what a service, project or programme ‘should’ cost over its whole life”. This not only includes raw material, manufacturing and labour costs, but also looks to take account of all the underlying factors that impact those costs.

Essentially, it’s an informed tool for helping all concerned to better understand the make-up of costs and cost components, and to provide insights into the potential risks associated with those costs.

The advantages of a Should Cost Model

    1. To provide the means by which risks and opportunities of different options may be assessed against the backdrop of whole life costs.
    2. To identify how these risks and opportunities may impact on the project schedule and the budget required.
    3. To provide more accurate information for the delivery model assessment (DMA).
    4. To inform the first business case.
    5. To protect organisations from ‘low-cost bid bias’ as it provides a benchmark to compare all bids against.
    6. To optimise the way your strategic/complex project relationship is managed to drive more productive behaviours between everyone.

Should Cost Models should be used as early in the procurement process as possible for greatest collaborative benefit and should be agreed as part of the planning stage of the business case. Should Cost Models can be utilised for in-house, expected market cost and mixed economy delivery models where cost estimates are required for services that are to be delivered by internal resources, external suppliers or a combination of the two.

It’s considered good practice to create a Should Cost Model for each and every complex project procurement undertaken.

How much detail goes into a Should Cost Model?

Should Cost Models are as sophisticated as they need to be to offer the depth of information and informed cost certainty required for the solution being sourced.

Some will only need a high-level assessment and, therefore, will be relatively quick to produce. Others, where detailed forecasting is required for a business-critical solution, may be very complex indeed, and time will need to be factored in for their planning, design, development and testing on both the client and supplier side during the procurement process.

Your Should Cost Model should evolve and change over time. More complex Should Cost Models will benefit from adaptation as new or more detailed information is received and as your understanding of the factors involved, or which may impact on your costs, come to light.

For example, as your understanding of the procurement and subsequent solution progresses, greater detail, clarity and certainty will become apparent that should be entered into the Should Cost Model. This evolution usually occurs over four phases:

    1. Initial Should Cost Modelling (strategic outline business case).
    2. Development Should Cost Modelling (outline business case).
    3. Evaluative Should Cost Modelling (full business case), and;
    4. Performance Should Cost Modelling (full business case using actual cost data and volumes).

The five stages of Should Cost Model production

Every Should Cost Model for complex/strategic projects, will usually follow these five phases:

  1.   PLAN:

Define why a Should Cost Model is needed and what it’s expected to achieve. Scope the high-level view of your model from the resources required to produce it to where those resources will come from (internally or externally), stakeholders (and their relative authority) and the level of detail required (with an awareness that there is a trade-off between sophistication and time).

This exercise will help you translate requirements into practical development activities. Perform an Initial Model Assessment (IMA) to determine its importance and complexity as well as the governance, procedures, controls, Quality Assurance (QA) and testing required. And a Model Senior Responsible Owner (model SRO) should be appointed with overall responsibility for the Should Cost Model. If you require more specific guidance for your particular circumstances, click here.

  1.   DESIGN:

Determine and document the inputs and outputs of the model, including the formulae to be used. For example, The Cabinet Office has provided generic advice on producing a model specification and design in its SCM Development Guidance. If you require more specific guidance for your particular circumstances, click here.

  1.   DEVELOP:

Follow best practice modelling principles to build and populate the Should Cost Model. An example of this can be found in The Cabinet Office’s SCM Technical Build Guidance. It’s important to remain aligned to the specifications determined in the design phase. If you require more specific guidance for your particular circumstances, click here.

  1.   TEST:

Formal QA and testing is required before model sign-off to ensure that it does what it’s designed to do with enough accuracy and clarity for it to be of use. If you require more specific guidance for your particular circumstances, click here.

  1.   USE:

Appropriate governance and control processes are required to ensure the ongoing accuracy of the model. If you require more specific guidance for your particular circumstances, click here.

It should be noted that one of the most important decisions to make in the production of a Should Cost Model is what time and resources are required to form a successful model.

Resources means either/and:

    • the individuals providing the data required for input into the model
    • those who inform the design of the model
    • those who will be testing it.

While the time spent is largely determined by the complexity of the model you deem necessary for your needs, there may be additional environmental strains which could mean more needs to be done in less time than is comfortable. In turn, this usually requires additional resource investment to step up the timeline.

How we can support you in producing a Should Cost Model

If you are considering looking for support from an experienced practitioner in the planning, design, development, testing and use of a Should Cost Model, then it is important to choose wisely from the relatively small pool of advisors with the appropriate expertise to offer that help.

After more than twenty-five years’ working alongside hundreds of organisations and parties within complex/strategic project relationships, we, at Best Practice Group, have gained a vast amount of experience across all the five stages of delivering a Should Cost Model – from extensive modelling expertise to post-delivery support, bug-fixing and refinements.

Should you have any questions or wish to start an informal, no obligation conversation on this subject, and our position to support you in your Should Cost Modelling endeavours, please contact us on 0845 345 0130.