Should Cost Models: what they are, when you need one and how to build one

The key facts

• Published in May 2021, the guidance defines Should Cost Models (SCMs), the Sourcing Playbook and Construction Playbook term for whole life cost modelling.
• An SCM forecasts what a service, project or programme should cost over its whole life: the key factor is whole life cost, not initial purchase price.
• For services, SCMs compare In-house (Public Sector Comparator), Expected Market Cost and Mixed Economy delivery options to inform the delivery model assessment.
• It is good practice to produce an SCM for all procurements, agreed at the planning stage before any procurement documents are published.
• Bids more than 10 percent below either the average of other bids or the SCM estimate should be referred to the Continuous Commercial Improvement Team before acceptance.
• An SCM can only be used as formal evaluation criteria if it has been disclosed to bidders, with the scoring approach set out in the procurement documents.
• Model complexity should be proportionate to the complexity and criticality of what is being sourced, and models evolve through Initial, Developed, Evaluative and Performance stages.
• Production follows five stages, Plan, Design, Develop, Test and Use, supported by Cabinet Office tools including an Initial Model Assessment Tool and a Book of Assumptions template.

What this guidance is and who it is for

The Should Cost Modelling Guidance Note, published by the Cabinet Office in May 2021, gives contracting authorities high-level guidance on Should Cost Models, the term used in the Sourcing Playbook and Construction Playbook for whole life cost modelling. The terminology is new but the activity is not: authorities have long built cost models, from simple spreadsheets to complex specialist tools. The SCM label standardises that practice and sets clear expectations of what good looks like.

This note is the first of three Cabinet Office documents: the Guidance Note itself covering what SCMs are and when to produce them, an SCM Development Guidance for teams designing and governing models internally, and an SCM Technical Build Guidance for the people actually building them. A suite of practical tools and templates supports each stage, including an Initial Model Assessment Tool, scoping and specification templates, a QA plan template, a Book of Assumptions and Data Log, a version control log and testing procedures. Practitioners are also pointed to HM Treasury's Macpherson report, the Aqua Book and the Green Book. Effective modelling involves finance, commercial and economic disciplines working together, not a single analyst in isolation.

What a Should Cost Model actually is

An SCM is a forecast of what a service, project or programme should cost over its whole life, irrespective of who delivers it. For public works, that period covers the build phase and the expected design life, including market factors such as risk and profit, and the impact of risk and uncertainty on both cost and schedule. For public services, the model compares delivery options: an In-house option, also called the Public Sector Comparator, covering the whole life cost of internal delivery including assets and capability; an Expected Market Cost option covering procurement from an outside supplier; and a Mixed Economy option combining the two where parts of a service are insourced and parts outsourced.

An SCM is both a financial model and an analytical model. It uses techniques such as unit cost multiplied by unit volume, takes account of uncertainty and relevant risks, uses real data such as day rates and employee numbers, and usually models several options for comparison and sensitivity purposes. Complexity should be proportionate: a simple spreadsheet of key cost drivers may be right for low value, stable requirements, while a high value or complex procurement may justify a detailed financial model taking months to prepare. Models are expected to evolve through the lifecycle, from Initial modelling that informs the strategic delivery model assessment, through Developed modelling supporting the Outline Business Case, to Evaluative modelling capable of assessing supplier returns, and finally Performance modelling using actual cost data for open book contract management.

When you need one and how it is used in procurement

The requirement to produce an SCM for sourcing decisions is set out in the Sourcing Playbook (Chapter 3) for services and the Construction Playbook (Chapter 5) for works. The guidance goes further: it is good practice to produce an SCM for all procurements, with development agreed during business case and procurement planning, before the contract is advertised. Before modelling starts, the service or project should be properly defined, including desired outcomes and key performance indicators, so the model is built at the right level.

The most cited rule concerns abnormally low bids. The three fundamental benefits of SCMs are a better understanding of the costs of different delivery options, insight into potential delivery models, and protection from low-cost bid bias, the tendency to favour the cheapest offer. Where a bid is more than 10 percent lower than either the average of the other bids or the SCM estimate, it should be referred to the Continuous Commercial Improvement Team before acceptance, using the 50 percent confidence interval for probabilistic estimates or the median scenario for deterministic ones.

In competitive dialogue or competitive procedure with negotiation, the SCM is not normally shared with bidders: it informs the authority's negotiation position and its judgement of the robustness and deliverability of bids, prompting targeted discussion where costs look higher or lower than expected. Formal evaluation is different. An SCM can only be used as evaluation criteria for final bids if it has been disclosed to bidders during the procurement, with the scoring approach clearly set out in the procurement documents. Undisclosed models cannot be used to score bids.

Building a model well: five stages, planning and people

Whether simple or sophisticated, production follows five stages. Plan: create a model Scope with provisional Delivery, Data and QA Plans, decide whether to build internally or procure, and confirm stakeholders, timelines and governance. Design: turn the Scope into a written Specification codifying inputs, outputs, key calculations and the overall design, approved before build starts. Develop: build and populate the model following good practice principles, with developer self-testing. Test: formal quality assurance and testing against the QA Plan, drawing on the Aqua Book and HM Treasury's review of quality assurance of government analytical models. Use: put governance and controls in place so the model stays fit for purpose through its life.

Planning is anchored by an Initial Model Assessment, which weighs the criticality of the decision the model supports against its sophistication, informed by the Cabinet Office Tiering Tool, and sets proportionate QA, testing and governance. The model Scope should address six factors: overview and purpose, the full range of costs and benefits to include (from staff, TUPE and licences to overheads, indexation, profit and social value), modelling techniques including scenarios, sensitivity analysis, switching values, optimism bias and possibly Monte Carlo simulation, data and assumptions captured in a Data Plan, tool selection (most models are built in Excel, with databases for large data volumes), and the QA plan. On people, the guidance is direct: models need suitably qualified and experienced people with sufficient time, clear roles from Model SRO through architect, developer, operator, data providers and quality assurers, and a firm separation between those who build models and those who formally test them.

Why it matters in practice

An SCM is one of the few tools that works across the entire commercial lifecycle. Mapped to the Green Book Five Case model, it strengthens the strategic case with credible cost ranges, the economic case with options and value for money analysis, the commercial case by testing market viability for novel requirements, the financial case with whole life affordability, and the management case by providing a cost baseline for reporting. Beyond business cases it supports options analysis, key cost driver analysis, budget setting, negotiation support and, after award, performance review and contract management against a live baseline.

The practical discipline is to start early and keep it proportionate. A model scoped at planning stage shapes the procurement timetable realistically, including the time suppliers need to build their own cost models, and gives evaluators a defensible reference point when a suspiciously cheap bid arrives.

How eSourcing Data helps

A Should Cost Model is only as good as the cost and volume data behind it, and much of that data comes from past procurements. eSourcing Data gives authorities a structured record of historical tender pricing, awarded values and supplier cost breakdowns, providing the evidence base from which realistic assumptions and benchmarks can be drawn instead of starting every model from a blank sheet.

During the procurement itself, the platform's structured evaluation supports the comparisons the guidance describes: bid pricing can be captured in a consistent component structure so it can be set against the SCM estimate, outliers are visible early, and the rationale for referring or challenging an abnormally low bid is documented with a full audit trail. After award, contract and spend reporting help keep a Performance model honest, comparing outturn against the baseline the SCM established.

What to do about it

1. 1Agree SCM development as part of business case and procurement planning, before publishing any procurement documents.
2. 2Run an Initial Model Assessment to set proportionate governance, QA and testing for the model.
3. 3Define the service, outcomes and KPIs before modelling, then document a model Scope with Delivery, Data and QA Plans.
4. 4Use the SCM within the delivery model assessment to compare in-house, expected market cost and mixed economy options.
5. 5Refer any bid more than 10 percent below the average of other bids or the SCM estimate to the Continuous Commercial Improvement Team.
6. 6Decide early whether to disclose the SCM to bidders: only a disclosed model can be used in formal evaluation.
7. 7Keep the model alive after award as the cost baseline for open book contract management and performance review.
8. 8Assign named roles, including a Model SRO, and keep model builders separate from quality assurers.