Should Cost Models in Public Procurement: How to Build a Useful Whole-Life Cost View

Purpose: What a Should Cost Model is, how it differs from a simple budget estimate and how to build one proportionately.

What a Should Cost Model is, how it differs from a simple budget estimate and how to build one proportionately. This matters because public procurement decisions are rarely isolated events. A choice made during planning can affect competition, affordability, service quality, supplier behaviour and the ability to manage the contract later. The strongest approach is therefore to use the source guidance as part of an end-to-end commercial process, with clear ownership and evidence rather than as a document that is completed after the key decisions have already been taken.

Quick summary

• The guidance defines an SCM as a forecast of what a service, project or programme should cost over its whole life.
• For public services, modelled options can include in-house delivery, expected market cost and a mixed economy.
• The model should include relevant risk and uncertainty and use appropriate data and analytical techniques.
• SCMs can range from a simple spreadsheet to a complex financial model.
• The level of complexity should be proportionate to the complexity and criticality of what is being sourced.

What the guidance means in practice

The source material gives several anchors for that process. The guidance defines an SCM as a forecast of what a service, project or programme should cost over its whole life. For public services, modelled options can include in-house delivery, expected market cost and a mixed economy. The model should include relevant risk and uncertainty and use appropriate data and analytical techniques. These are not interchangeable statements: some describe statutory or policy requirements and others describe recommended commercial practice. Teams should identify which category each requirement falls into, apply it to the organisation and procurement in scope, and keep a record of the judgement. Where guidance from 2021 or 2023 predates the Procurement Act 2023, its commercial principles can remain useful, but current legislation, regulations and current statutory guidance take precedence on legal process.

The practical value becomes clearer when the remaining guidance is read alongside the project lifecycle. SCMs can range from a simple spreadsheet to a complex financial model. The level of complexity should be proportionate to the complexity and criticality of what is being sourced. Decision makers should understand what costs are included, how they are treated and the limitations of the model. In day-to-day terms, this means the buyer should be able to answer three questions at any approval point: what outcome are we trying to achieve, what evidence supports the proposed commercial approach, and what will need to be managed after the decision is made? If those answers are weak, more analysis is normally more useful than adding another layer of narrative to an approval paper.

A practical process to follow

A proportionate process can be built into existing governance. The steps below are deliberately practical. They are not a substitute for the detailed source guidance, legal advice or local standing orders, but they provide a useful structure for a procurement or commercial team.

1. Step 1. Start with the decision the model needs to support and the options being compared. Record any assumption that could change the conclusion and when it will be reviewed.
2. Step 2. Define the whole-life period, service scope, volumes, cost drivers and risk assumptions. Keep the analysis proportionate to the value, risk, novelty and criticality of the requirement.
3. Step 3. Identify reliable data sources and separate facts from assumptions. Capture the source evidence and name the person accountable for the next decision.
4. Step 4. Choose a model structure proportionate to the decision. Record any assumption that could change the conclusion and when it will be reviewed.
5. Step 5. Test and quality-assure the model before important approvals or evaluation use. Keep the analysis proportionate to the value, risk, novelty and criticality of the requirement.
6. Step 6. Update the model as requirements and market evidence improve. Capture the source evidence and name the person accountable for the next decision.

What good looks like

Good practice is visible in the decision trail, not only in the final document. A reviewer should be able to follow the line from the service need, through market and cost evidence, to the route, evaluation, contract terms and management arrangements. Where several functions contribute, the file should show who owns each decision and where challenge occurred. The same principle applies to handover: useful assumptions, models, KPI definitions, risks, supplier information and approval conditions should move into mobilisation and contract management instead of being left in the sourcing archive. This continuity is particularly important for long-running public services, where staff can change but the organisation remains accountable for the outcome.

Recommendations for procurement teams

The following recommendations are suitable for teams that want to embed the topic into normal ways of working rather than create a parallel compliance process:

• Keep a clear book of assumptions and data sources.
• Model the same scope when comparing internal and external options.
• Include transition and lifecycle effects where they are material.
• Use sensitivity analysis on the assumptions that drive the result.
• Involve finance, commercial, operational and technical specialists.
• Explain uncertainty rather than hiding it behind a single precise number.

Common pitfalls to avoid

The most common problems are usually process failures rather than a lack of templates. Watch particularly for the following:

• Building the model before agreeing the service definition.
• Comparing supplier cost with an in-house estimate that covers a different scope.
• Treating the SCM as a fixed budget.
• Assuming a more complicated model is necessarily more accurate.

Easy-to-read takeaway

For should cost models in public procurement: how to build a useful whole-life cost view, the core discipline is to start early, connect the analysis to a real decision and preserve enough evidence for the next stage of the lifecycle. The source material should help teams make better decisions, not merely produce more paperwork. Before acting on a live procurement, confirm the current version of the Procurement Act 2023, regulations, Procurement Policy Notes and any organisation-specific approvals or delegations. This is especially important for thresholds, notice duties, exemptions and policy requirements that can change over time.

Source basis

Primary source used: Should Cost Modelling Guidance Note, May 2021. Related articles in this collection also draw on the other supplied Cabinet Office, HM Treasury and Procurement Act materials where the topics overlap.

This article is general procurement support content. It should be read alongside current legislation, statutory guidance and your organisation’s own governance and legal advice.