Should-Cost And Clean-Sheet Negotiation

The following discussion illustrates a project that is well suited to the capabilities of an independent consultant in the Umbrex Shipbuilding & marine systems Practice. This is an illustrative example. Umbrex consultants adapt their methodology, timeline, and deliverables to the specific needs of each client.

1) Client Situation

The client operated a portfolio of naval ship programs with a complex, defense-unique supply base spanning hull steel plate, fabricated structures, piping assemblies, valves and pumps, propulsion and auxiliary systems, electrical distribution and cable harnesses, HVAC modules, coatings, and mission system integrations. The procurement organization had targeted ambitious purchase price variance (PPV) reductions, yet lacked an institutionalized should-cost and clean-sheet negotiation capability to anchor supplier dialogues, compress variance-to-standard costs, and expand supplier-led value engineering (VA/VE) across new construction and availability/overhaul scopes. Program material EAC (Estimate at Completion) trended unfavorable versus baseline, and supply chain volatility in metals, alloys, and electronics further complicated contracting strategies within DFARS/CAS requirements. We supported the client in developing part- and assembly-level should-cost and clean-sheet models to anchor negotiations, compress PPV, and stimulate supplier-led value engineering on naval ship programs.

• Operational pain points: Production schedules depended on long-lead items (e.g., castings, forgings, propulsion components) with limited cost transparency. Material-related schedule risk translated to re-sequencing and elevated direct burn hours. KPIs underperformed: on-time material availability fell below plan; work package schedule adherence and direct labor efficiency variances widened due to part shortages and out-of-sequence work.
• Technical pain points: Engineering changes (ECOs) propagated late into the build cycle without a clean, costed digital thread. BOM-to-CAD misalignment and revision control issues hindered manufacturability reviews. Key indicators lagged: percentage of BOM lines with complete manufacturability attributes was low; first article inspection (FAI) rework rate exceeded tolerance.
• Commercial pain points: A high proportion of sole/single-source categories reduced competitive leverage. Negotiations frequently defaulted to list pricing and escalation clauses indexed to generic PPIs rather than process-based cost drivers. KPIs underperformed: PPV exceeded target in strategic categories; percent of spend under long-term agreements (LTAs) with structured cost breakdowns was limited.
• Regulatory/compliance pain points: Suppliers varied in Cost Accounting Standards (CAS) maturity and Truthful Cost or Pricing Data (TINA) readiness. Internal CPSR (Contractor Purchasing System Review) findings highlighted inconsistencies in cost/price analysis files and inadequate documentation of negotiation rationales. KPIs reflected risk: percentage of files meeting CPSR standards on first pass underperformed; audit cycle times elongated.
• Data/technology pain points: ERP (SAP) purchasing history, PLM (Teamcenter) engineering data, and MES routings were not harmonized to drive automated cost models. Part master data suffered from inconsistent units of measure, duplicated vendor part numbers, and incomplete attribute sets (e.g., weld inches, paint coverage). KPI gaps included low percentage of BOM cost covered by should-cost models and long cycle times to produce cost models for critical parts.
• Financial pain points: Material EAC variances were rising due to escalations, re-quotes, and change orders. The lack of standardized escalation formulas tied to material and labor indices created budget uncertainty. KPI gaps: cost estimate accuracy at gate reviews deviated from thresholds; standard cost updates lagged commodity movements.
• Supplier development pain points: Few structured VA/VE pipelines existed with Tier-2 fabricators and system integrators. Supplier improvement efforts were reactive, focusing on delivery expedites rather than joint cost take-out. KPIs showed minimal number of implemented VA/VE ideas and low supplier participation rates in collaborative design-to-cost workshops.
• Risk management pain points: Obsolescence in electrical components and cybersecurity requirements (CMMC) increased suppliers’ overhead rates and lead times without a clear decomposition of impacts. KPIs flagged elevated supply risk scores and extended lead-time variance beyond contracted norms.
• Governance and capability pain points: Cost engineering resources were scarce and dispersed. Negotiation playbooks were inconsistent across categories and programs, creating variability in outcomes and audit documentation. KPIs indicated inconsistent negotiation cycle times and variable adherence to internal approval thresholds.

Across programs, we observed underperformance in procurement KPIs central to should-cost and clean-sheet practices: PPV versus standard costs trended unfavorable; percentage of addressable BOM under modeled should-cost lagged target coverage; average delta between supplier quote and modeled should-cost lacked a disciplined root-cause analysis; cycle time to generate cost models exceeded bid windows; and the rate of supplier VA/VE proposals per $100M of spend was below the strategic procurement benchmark.

2) Project Objective

Primary objective: We established a rigorous should-cost and clean-sheet negotiation capability for naval ship programs that anchored supplier engagement in process-based cost transparency, enabling PPV compression, disciplined material EAC management, and an expanded pipeline of supplier-led VA/VE within DFARS/CAS-compliant procurement processes.

Secondary objectives:

• Performance: Increased coverage of modeled should-cost at the part and assembly level across priority categories and long-lead items, with target lead-time reductions in negotiation cycles.
• Economics: Implemented standardized escalation formulas and cost indices to improve predictability of material EAC and mitigate inflationary risk through structured LTAs.
• Compliance: Strengthened CPSR readiness and TINA support through consistent cost/price analysis files, cost breakdown templates, and documented negotiation rationales aligned to CAS.
• Customer impact: Improved schedule adherence by reducing material-driven delays through earlier visibility of cost and manufacturability risks at design gates.
• Digital/data enablement: Integrated ERP/PLM/MES data to auto-generate parametric and bottom-up cost models leveraging a canonical cost taxonomy and a governed analytics layer.
• Capability building: Developed an internal Cost & Value Engineering Center of Excellence (CoE), negotiation playbooks, and training for category managers and cost engineers.
• Supplier ecosystem: Launched structured supplier collaboration mechanisms, including value engineering sharelines and open-book workshops, to drive recurring cost take-out.
• Risk management: Embedded obsolescence, cybersecurity, and export control considerations into cost models and contracting strategies to de-risk supplier overhead and lead-time assumptions.

3) Methodology and Approach

We executed an integrated set of workstreams tailored to Should-Cost And Clean-Sheet Negotiation within Procurement & Strategic Sourcing for shipbuilding and marine systems. Each workstream connected analytics, data architecture, stakeholder engagement, and governance to enable faster time-to-value and risk reduction without compromising regulatory compliance.

Workstream 1: Spend Segmentation, Category Diagnostics, and Cost Baseline

We segmented program spend by category, procurement channel, and risk, focusing on hull structures, piping and valves, pumps and rotating equipment, electrical distribution and cabling, HVAC modules, coatings, machined parts (castings/forgings), composite and aluminum assemblies, and mission system interfaces. Using ERP line-item PO histories, supplier-level PPV trends, and program material EACs, we built a cost baseline and prioritized categories for should-cost modeling.

• Activities: Mapped top 80% of addressable spend; classified sources as sole/single/competitive; captured contract types and escalation clauses; benchmarked PPV trends vs. commodity indices (e.g., steel plate, nickel, copper, epoxy resins); and identified top cost drivers by category (e.g., weld inches, cut length, bend count, coating mils, machining hours).
• Tools/frameworks: Kraljic matrix for risk vs. value prioritization; total cost of ownership (TCO) decomposition; commodity index mapping; and variance tree analysis for PPV and EAC deltas.
• Stakeholders: Category managers, program supply chain leads, finance (EVMS), commodity managers, and engineering representatives. This ensured the diagnostic aligned with material budgets, schedule drivers, and design constraints.
• Designed outcomes: A prioritized pipeline for should-cost models and clean-sheet negotiations with a clear “critical path” of long-lead items, enabling focused effort on high-value, high-risk suppliers and components.

Workstream 2: Should-Cost Model Development (Parametric and Bottom-Up)

We developed a library of should-cost models at part and assembly levels, grounded in manufacturing process physics and supplier cost structures. For fabrication-heavy categories, we built bottom-up models using weld inches, plate thickness, heat input, fit-up complexity, and coating coverage. For machined parts and valves/pumps, we used feature-based machining, tolerances, material removal rate, and assembly labor standards. For cables and harnesses, we modeled conductor size, terminations, routing complexity, and test cycles.

• Activities: Created cost breakdown structures (CBS) and cost estimating relationships (CERs); mapped process routings (cutting, forming, machining, welding, NDT, blast/paint, assembly, test); calibrated labor standards (DBI hours) and machine rates; incorporated overhead and G&A per CAS disclosures; and embedded learning curves for rate production.
• Tools/frameworks: aPriori and SEER-MFG for feature-based and parametric estimates; Facton EPC for enterprise cost management; regression models for CERs; Wright’s law for learning; and escalation models tied to PPI/CRB indices for metals, chemicals, and labor.
• Data architecture: Integrated PLM (Teamcenter) CAD attributes (geometry, thickness, volume), ERP standard costs, MES routings, and supplier-provided cost data into a managed analytics workspace. Implemented a canonical cost taxonomy for materials, labor, overhead, and profit to align clean-sheet templates with CAS-compliant categories.
• Stakeholders: Cost engineering, manufacturing engineering, supplier quality, program finance, and legal/compliance (for TINA/CAS alignment). This cross-functional design improved auditability and accelerated model acceptance in negotiations.
• Designed outcomes: Repeatable, data-driven should-costs with traceable assumptions, enabling faster negotiation cycles and measurable coverage expansion across the BOM.

Workstream 3: Clean-Sheet Negotiation Playbook and Execution Support

We operationalized clean-sheet negotiation protocols that moved supplier discussions from list pricing to transparent, process-based cost drivers. We tailored cost breakdown templates and discussion scripts to each category and supplier maturity level, embedding value engineering prompts and escalation logic.

• Activities: Built supplier cost breakdown templates (materials, direct labor by operation, machine time, scrap/yield, QA/NDT, overhead, G&A, profit); prepared negotiation “fact packs” with should-cost printouts, sensitivity analyses, and competitive benchmarks; drafted escalation clauses tied to specific indices; and defined standard value engineering sharelines for savings allocation.
• Execution: Ran pre-negotiation “red team” rehearsals; facilitated joint cost reviews with suppliers; conducted value stream mapping at select suppliers to identify shared improvement opportunities; and documented the cost/price analysis memos to CPSR standards.
• Stakeholders: Category managers as leads, supported by cost engineers, legal/contracts, supplier quality, engineering (for DFM/DFA implications), and compliance. Supplier executives, costing managers, and plant engineers engaged in structured sessions to validate process assumptions.
• Designed outcomes: Anchored ZOPA around a defensible should-cost, reduced contentious cycles by focusing on facts, and established a repeatable cadence for supplier-led VA/VE ideation embedded in the negotiation flow.

Workstream 4: Data Integration, Analytics, and Digital Thread Enablement

We addressed data fragmentation by building an analytics layer that connected ERP (SAP), PLM (Teamcenter), MES, and the cost modeling tools. The goal was to auto-ingest BOMs, routings, CAD features, and historical PO data into the should-cost engine, with lineage tracking for CPSR and EVMS linkages.

• Activities: Defined data pipelines from SAP (purchase history, standard costs, vendor master), Teamcenter (BOMs, drawings, CAD attributes), and MES (work centers, routings); established master data governance for part numbers, units of measure, and revision control; and implemented role-based access to protect ITAR and CUI data while enabling collaboration.
• Tools/frameworks: Data lake ingestion with validation rules; semantic layer for cost drivers; metadata lineage; and dashboarding for coverage, cycle time, and negotiation pipeline metrics.
• Stakeholders: IT/data architecture, PLM admins, procurement operations, cost engineering, cybersecurity (CMMC), and export control. Governance ensured compliance while enabling rapid model generation.
• Designed outcomes: Reduced cycle time to build models through automation, improved data quality, and ensured that cost assumptions were traceable to source systems for audit and EVMS alignment.

Workstream 5: Supplier Collaboration, VA/VE, and Capability Development

We expanded supplier-led value engineering by creating structured collaboration mechanisms and capability-building programs. The emphasis was on manufacturability optimization, alternative materials/components, and process improvements within NAVSEA and classification requirements.

• Activities: Conducted supplier workshops on open-book costing; co-developed DFM/DFA guidelines specific to shipboard installation (e.g., modular outfitting, ergonomic constraints, corrosion protection); established VA/VE pipelines with idea intake, triage, and benefit sharelines; and created supplier readiness checklists (CMMC, CAS maturity, configuration control).
• Stakeholders: Supplier engineering, plant leadership, procurement, naval architects, systems engineers, supplier quality, and program managers. Structured governance aligned ideas with program change control boards to prevent scope creep and schedule risk.
• Designed outcomes: Increased throughput of qualified VA/VE ideas, improved manufacturability feedback loops early in design gates, and built a partnership model that reinforced cost transparency.

Workstream 6: Compliance, Auditable Files, and Risk Controls

We embedded DFARS, TINA, CAS, Buy American, and cybersecurity requirements into the process. Negotiation files were structured to withstand CPSR scrutiny, and cost models reflected supplier accounting logic to avoid disconnects in overhead and G&A application.

• Activities: Standardized cost/price analysis templates; mapped supplier cost breakdowns to CAS-compliant pools; validated escalation formulas against contract clauses; integrated counterfeit parts and material traceability requirements; and reviewed export control flags for part-level data sharing.
• Stakeholders: Contracts, compliance, legal, internal audit, and category managers. Coordination ensured the clean-sheet process improved, rather than complicated, audit readiness.
• Designed outcomes: Consistent, defensible negotiation records, faster audit cycles, and reduced risk of procurement system findings.

Workstream 7: Program Controls and EVMS Alignment

We aligned should-cost with program material budgets and EVMS metrics. Material cost baselines, control accounts, and change orders reflected negotiated cost structures and escalation logic.

• Activities: Mapped modeled should-costs to work packages and control accounts; set variance thresholds and triggers for material cost deltas; synchronized standard costs and escalation tables with program EACs; and defined monthly cadence between procurement, finance, and program management to reconcile model updates and negotiation progress.
• Stakeholders: Program finance, CAMs (Control Account Managers), procurement, estimating, and PMO. This alignment supported decision gates and budget updates without late surprises.
• Designed outcomes: Improved predictability of material EAC and a transparent linkage between negotiated costs and EVMS performance measures.

Workstream 8: Change Management and Capability Build-out

We built a repeatable internal capability through training, playbooks, and an operating model centered on a Cost & Value Engineering CoE.

• Activities: Delivered training on model building, negotiation techniques, and CPSR-compliant documentation; ran live simulations with supplier personas; instituted a governance forum to prioritize modeling efforts; and set KPIs for coverage, cycle time, and VA/VE pipeline health.
• Stakeholders: Procurement leadership, cost engineers, category managers, engineering, legal/compliance, and HR/L&D.
• Designed outcomes: Institutionalized practices, reduced reliance on ad hoc experts, and created a sustained roadmap for continuous improvement.

4) Data Request

To execute the should-cost and clean-sheet negotiation capability, we defined the following data needs by domain, with horizon, granularity, and quality considerations:

• Commercial/contracting:
  • PO line-item histories (3–5 years), including unit prices, quantities, delivery dates, escalation clauses, and change orders.
  • Supplier contracts and LTAs, including price adjustment formulas, raw material pass-through terms, and value engineering sharelines.
  • Quotation packages and supplier cost breakdowns (materials, labor hours by operation, machine rates, scrap, QA/NDT, overhead/G&A, profit).
  • Terms and conditions, INCOTERMS, payment terms, liquidated damages, warranty provisions.
  • Pitfalls: Missing linkage between quotes and PO lines; inconsistent vendor codes; outdated escalation tables; and unstructured attachments not OCR’d.
• Operational/manufacturing:
  • Routings and work center definitions for internal and supplier processes (cutting, forming, machining, welding, heat treat, NDT, blast/paint, assembly, test).
  • Standard times, labor grades, crew sizes, and utilization/efficiency assumptions.
  • Yield/scrap rates by operation; rework rates; first-pass yield.
  • Pitfalls: Incomplete routing steps, mixed units of measure, and lack of standardized operation codes across plants and suppliers.
• Financial/costing:
  • Overhead pools, G&A rates, fringe, and burden allocations per CAS disclosure statements (for internal reference and supplier mapping).
  • Standard costs, variance analyses, and material EAC baselines by control account.
  • Commodity index references used historically for escalations (PPI, CRB, custom indices).
  • Pitfalls: Partial visibility into supplier overhead structures; lagging updates to standard costs; currency conversions not aligned to contract dates.
• Technical/engineering:
  • CAD models (STEP/Parasolid), 2D drawings, and GD&T; material specifications (ASTM, MIL-SPEC), coatings systems, and welding procedures.
  • BOM structures with effectivities and revision control; configuration baselines approved by NAVSEA or equivalent authority.
  • Critical-to-quality features: tolerance bands, pressure ratings, NACE compliance, corrosion allowances.
  • Pitfalls: Incomplete attribution of manufacturability drivers (weld inches, paint coverage, machined features); drawing rev mismatches to BOM effectivity; missing neutral CAD for supplier sharing due to export control flags.
• Regulatory/ESG:
  • DFARS clauses in scope (TINA, Buy American/Berry, counterfeit avoidance, cybersecurity), CAS disclosure statements, CPSR findings and corrective actions.
  • Environmental requirements for coatings/solvents; hazardous materials and disposal practices.
  • Pitfalls: Unclear applicability of clauses by contract; supplier misunderstandings of flow-down requirements affecting overheads and lead times.
• People/governance:
  • Procurement org charts, category responsibilities, approval thresholds, and delegation of authority.
  • Negotiation file templates; current cost/price analysis formats; training records for CPSR readiness.
  • Pitfalls: Inconsistent templates across programs; undocumented practices; unclear RACI for model approvals.
• Systems landscape:
  • ERP (SAP/Oracle/IFS) modules in use (MM, CO, PP), SRM/eSourcing tools; PLM (Teamcenter/3DEXPERIENCE); MES (Siemens Opcenter/Aveva).
  • Data lake or warehouse schemas; existing analytics and dashboards; MDM status for part/vendor master data.
  • Pitfalls: Duplicate part numbers, inconsistent UoM, multiple vendor codes for the same entity, and limited API/ETL documentation.

5) Questions for Client

• What is the targeted PPV compression by category and program phase, and how are thresholds set in alignment with EVMS material budgets?
• Which categories are strategic for clean-sheet negotiations in the next two quarters, considering schedule criticality and sole/single-source exposure?
• What is the acceptable level of supplier cost transparency (operation-level detail, overhead pools, profit) under current DFARS/TINA constraints and NDA frameworks?
• How should escalation formulas be standardized across contracts, and which indices (materials, labor) are preferred for predictability versus risk-sharing?
• What value engineering shareline structure will be used to incent supplier-led VA/VE while preserving program change control discipline?
• How much internal cost engineering bandwidth is available, and what balance is desired between parametric and bottom-up modeling across categories?
• What CPSR observations or internal audits identified gaps in cost/price analysis files and negotiation documentation that must be addressed first?
• How will should-cost models tie into gate reviews, design freezes, and engineering change control to prevent late-cycle cost surprises?
• What level of PLM/ERP/MES integration and automation is expected for feeding CAD/BOM/routings into cost models within the bid/negotiation window?
• Which suppliers are ready for open-book discussions, and where will we need to phase-in transparency (e.g., start with material and labor splits before routings)?
• What constraints exist around Buy American/Berry, cybersecurity (CMMC), and export controls that may shape supplier options and overhead impacts?
• What tolerance exists for multi-year LTAs with indexed adjustments, and how should risk-sharing mechanisms (e.g., index bands, true-ups) be structured?
• How will material EAC updates from negotiations be ingested into EVMS baselines and reported to customers to maintain alignment?
• What decision rights and approval thresholds will govern target cost setting, negotiation strategies, and exceptions to clean-sheet protocols?
• What training and change management investments are planned to sustain a Cost & Value Engineering CoE beyond the initial rollout?

6) Interview Guide for Subject Matter Experts

Category Manager – Hull Structures and Fabrications

• Which fabrication cost drivers (e.g., weld inches, position, process, number of passes) most influence quotes, and how consistently do suppliers provide that data?
• How do you currently structure escalation for plate and shape steel, and what index correlations have proven stable over the last 24 months?
• What are the known drivers of variation in coating costs (blast/paint cycles, environmental controls), and how do you evaluate supplier proposals?
• Where have supplier lead times diverged from contracted norms, and what process constraints (cutting capacity, fit-up bays) are cited?
• What negotiation approaches have been effective with sole-source fabricators, and where have transparency efforts stalled?
• Which VA/VE ideas (e.g., modularization, standardization of subassemblies) have traction, and what barriers exist at design approval boards?

Cost Engineer/Estimator – Mechanical and Piping Systems

• What CERs are most predictive for valves, pumps, and piping assemblies (e.g., pressure class, material grade, NDT requirements), and how are they calibrated?
• How do you treat machining complexity in should-costs (features, tolerances, setup counts), and what machine-hour rates and burden assumptions are used?
• What assumptions govern NDT (RT/UT/MT/PT) and test protocols for critical components, and how do they scale cost with size/pressure?
• How are learning curves applied for repetitive assemblies, and what is the typical break-in volume for stable cycle times?
• Which elements of CAS mapping (overhead pools, G&A) commonly create disconnects in negotiations, and how do you reconcile them?
• What sensitivity analyses are most useful in negotiations (material utilization, labor efficiency, scrap), and how do you present them?

Supplier Quality/Manufacturing Engineer

• Where do first pass yield and rework concentrate in supplier processes, and how do those quality risks translate into cost premiums?
• How consistent are welding procedures (WPS/PQR) across suppliers for the same spec, and what evidence supports cycle time and heat input assumptions?
• What is the typical delta between quoted and observed run-at-rate performance, and how does that inform negotiation targets?
• How do suppliers handle traceability, material certification, and counterfeit avoidance, and what are the cost implications?
• What process controls and SPC measures correlate with stable cost performance in high-variance categories?
• How can VA/VE be embedded without compromising quality gates and classification society approvals (ABS/DNV)?

Program Finance/EVMS Control Account Manager

• How are material budgets established by control account, and what cadence is used to update EAC based on procurement negotiations?
• Which thresholds trigger variance analysis for material, and how should should-cost deltas inform management reserves or undistributed budget decisions?
• How do escalation policies interface with EVMS reporting, and what conventions are used to separate price vs. usage variances?
• What dependencies exist between material deliveries and direct labor plans that amplify schedule cost risk?
• How are change orders and engineering changes reflected in material baselines, and what cycle time is typical for rebaselining?
• What EVMS metrics (CPI/SPI) are most sensitive to material performance in the next two quarters?

Engineering/Design Authority – Naval Architecture and Systems

• Which design features most affect manufacturing cost (e.g., weld access, part count, tolerance stack-ups), and how early can we influence them?
• What standards (NAVSEA SCDs, MIL-SPECs) are non-negotiable, and where do alternatives exist that maintain compliance while reducing cost?
• How are modularization and pre-outfitting opportunities identified and approved, and what decision gates are critical?
• Where are the highest churn rates in engineering changes, and how can manufacturability criteria be embedded to reduce late-cycle ECOs?
• What data (CAD attributes, annotations) can be reliably extracted to drive automated cost models without manual interpretation?
• How should VA/VE proposals be routed through change control to minimize schedule disruptions?

Contracts/Compliance – DFARS/CAS/CPSR

• What recent CPSR findings require remediation in cost/price analysis files and negotiation documentation?
• How are TINA thresholds and disclosure requirements managed across suppliers, and what gaps exist in certified cost/pricing data collection?
• Which DFARS clauses most commonly affect supplier costs (e.g., cybersecurity, counterfeit avoidance), and how are they priced and negotiated?
• What standards govern escalation formulas, and how should deviations be approved and documented?
• How is export-controlled information flagged and shared with suppliers to enable clean-sheet discussions without compliance risk?
• What internal approvals are required for value engineering sharelines and deviations from standard terms?

IT/PLM/ERP Data Architect

• What interfaces exist between ERP, PLM, and MES, and how can BOM, CAD, and routing data be synchronized for automated cost modeling?
• Which master data issues (UoM, part duplication, vendor codes) most disrupt analytics, and what remediation is planned?
• What role-based access controls and data segregation are required to handle ITAR/CUI in the analytics environment?
• How will cost model outputs be versioned and linked back to source data for traceability in audits and EVMS updates?
• What is the preferred dashboarding and reporting stack, and how will KPIs be refreshed at the desired cadence?
• What SLAs are feasible for data ingestion and model refreshes during active negotiations?

7) Timeline

We executed a 12-week plan with clearly defined phases, outcomes, and decision gates aligned to Should-Cost And Clean-Sheet Negotiation.

• Weeks 1–2: Discovery and Data Foundation
  • Outcomes: Confirmed scope and priority categories; secured data access to ERP/PLM/MES; baselined PPV, material EAC, and contract terms; and finalized governance cadence.
  • Critical path: Data extracts; NDA refresh with key suppliers for cost breakdown sharing; compliance alignment on TINA/CAS considerations.
  • Decision gate: Approval of prioritized category list and data ingestion plan.
• Weeks 3–4: Diagnostics and Cost Driver Mapping
  • Outcomes: Spend segmentation with risk/value mapping; commodity index correlation analysis; and draft cost breakdown structures and CER hypotheses by category.
  • Critical path: Access to BOMs/CAD attributes; confirmation of routing structures; initial supplier cost breakdown templates.
  • Decision gate: Sign-off on category-specific CBS/CER frameworks and pilot supplier list.
• Weeks 5–7: Model Development and Calibration
  • Outcomes: Parametric and bottom-up models built for pilot parts/assemblies; labor standards and machine rates calibrated; learning curve assumptions defined; and escalation formulas drafted.
  • Critical path: Supplier data for validation; internal overhead/G&A mapping; MES routing alignment.
  • Decision gate: Approval of should-cost model library v1.0 and negotiation anchors per pilot category.
• Weeks 6–8: Negotiation Preparation and Fact Packs
  • Outcomes: Clean-sheet negotiation playbook finalized; supplier-specific fact packs prepared with sensitivity analyses; and value engineering shareline proposals tailored.
  • Critical path: Legal/contracts review of templates; executive alignment on target costs and walk-away positions; compliance review for CPSR documentation standards.
  • Decision gate: Authorization to engage suppliers with clean-sheet protocols.
• Weeks 8–10: Pilot Negotiations and Supplier Workshops
  • Outcomes: Conducted joint cost reviews; captured supplier feedback to refine models; identified VA/VE opportunities; and documented cost/price analysis files.
  • Critical path: Supplier availability; secure collaboration environment for sensitive data; engineering/DQA support for manufacturability questions.
  • Decision gate: Model refinements and go/no-go for broader rollout based on pilot learnings.
• Weeks 10–12: Governance, Integration, and Handoff
  • Outcomes: Embedded model outputs into procurement workflows and EVMS updates; launched dashboards; trained category teams; and stood up the Cost & Value Engineering CoE with operating rhythms.
  • Critical path: IT integration for data refresh; L&D scheduling; finalization of escalation and VE shareline policies.
  • Decision gate: Acceptance of capability, KPI targets for ongoing management, and roadmap for continued category expansion.

8) Deliverables

• Category Diagnostics and Prioritization Pack: Detailed spend segmentation, supplier risk profiles, PPV and EAC variance trees, commodity index mapping, and prioritized pipeline for should-cost coverage.
• Should-Cost Model Library: Parametric and bottom-up models by category with documented assumptions, CERs, routings, labor standards, overhead/G&A mapping, learning curve logic, and escalation parameters; includes model user guides.
• Clean-Sheet Negotiation Playbook: End-to-end protocols, cost breakdown templates, negotiation scripts, sensitivity analysis formats, red-team checklists, and documentation standards aligned to CPSR and TINA requirements.
• Supplier Fact Packs: Supplier-specific cost build-ups, gaps versus should-cost, indexation proposals, and VA/VE opportunity summaries; structured for efficient executive reviews.
• Value Engineering Framework and Shareline Policy: Governance for idea intake, triage and approval, savings attribution rules, and contract language templates to formalize joint cost take-out.
• Escalation and Indexation Policy: Standardized escalation formulas, approved indices for materials and labor, true-up mechanisms, and guidance for multi-year LTAs.
• Data Architecture and Integration Blueprint: Source-to-model data flows, canonical cost taxonomy, data quality rules, lineage tracking, access controls for ITAR/CUI, and integration points with ERP/PLM/MES and analytics.
• EVMS Alignment Guide: Mapping of should-cost to control accounts, processes for updating material EAC, variance thresholds, and monthly reconciliation cadence between procurement and finance.
• Training Curriculum and Simulation Pack: Modules on should-cost modeling, clean-sheet negotiation techniques, CPSR-compliant file creation, and supplier collaboration; includes case-based simulations and evaluation rubrics.
• KPI Dashboard Suite: Coverage by BOM cost, model cycle time, negotiated anchor variance tracking, VA/VE pipeline health, PPV by category, and audit readiness metrics; with data refresh protocols.
• Supplier Capability and Compliance Profiles: Assessments of CAS/TINA readiness, CMMC posture, quality certifications, process capabilities, and cost transparency maturity to inform negotiation strategy.
• Roadmap for Scale-Up: Phased plan to expand should-cost coverage, integrate additional categories, enhance automation, and evolve governance and CoE staffing over 6–18 months.

9) Industry Insights

Shipbuilding and marine systems procurement operates under unique constraints: defense-only specifications (NAVSEA SCDs, MIL-STDs), limited competitive alternatives in critical categories, and stringent compliance obligations (DFARS, CAS, TINA, CPSR, CMMC). Against this backdrop, should-cost and clean-sheet negotiations serve as a practical mechanism to regain cost control and predictability while enabling supplier partnerships that withstand audit scrutiny.

• Market dynamics: Naval program backlogs and multiyear procurements create sustained demand, yet the supplier base has consolidated in key specialties (e.g., large castings/forgings, high-pressure valves, advanced coatings). Commodity volatility in steel, nickel alloys, copper, and epoxy chemistries interacts with labor market pressures, causing quote variability and frequent escalations.
• Technology shifts: Digital thread adoption (PLM-integrated BOMs, model-based definition) and feature-based costing tools (aPriori, SEER-MFG) are enabling faster, more accurate should-cost estimates. In fabrication, automation (CNC cutting, robotic welding) and advanced NDT are altering cost structures. Additive manufacturing and advanced coatings emerge in selective applications but must pass rigorous qualification in the naval context.
• Ecosystem patterns: Tier-1 integrators and system OEMs often manage proprietary designs with limited price transparency. Tier-2 fabricators and machine shops vary widely in CAS maturity. Successful buyers differentiate by creating open-book frameworks with clear mapping between supplier processes and cost drivers, paired with credible escalation logic and VA/VE sharelines that make continuous improvement investable.
• Regulatory/standards: DFARS clauses on cybersecurity and counterfeit parts, Buy American/Berry Amendment provisions, and export controls introduce real overhead and lead-time effects that need to be explicitly costed. CPSR expectations continue to emphasize traceability in cost/price analyses, negotiation documentation, and flow-down compliance. CAS consistency is critical for apples-to-apples discussions about overhead and G&A.
• Buyer behavior: Primes and shipyards that institutionalized should-cost practices built stronger positions in sole-source negotiations by presenting operation-level logic (e.g., weld inches, pass count, NDT cycles) rather than generic benchmarks. Negotiation credibility increased when models were calibrated using supplier plant visits, observed cycle times, and calibrated machine rates, paired with fair profit and indexation frameworks.
• What “good” looks like: Mature organizations typically cover a substantial portion of BOM cost with validated should-cost models, use standardized clean-sheet templates across categories, and maintain a live dashboard linking model coverage to PPV and material EAC. Negotiation cycle times are managed to bid windows through automation of CAD/BOM ingestion. VA/VE pipelines are consistently fed by joint workshops and governed through clear sharelines, with changes controlled to avoid schedule risk. Escalation policies are standardized and tied to transparent indices.
• Near-term disruptions to watch: Continuing materials inflation volatility, electronics obsolescence, cybersecurity requirements raising supplier overheads, and workforce shortages affecting supplier capacity. Environmental regulations impacting coatings and solvents may shift process costs. Supply chain reshoring motivated by Buy American/Berry can reconfigure supplier networks and cost bases. These factors reinforce the need for dynamic should-cost models with robust escalation logic and supplier-specific risk profiles.
• Implications for clients: Investing in should-cost and clean-sheet capabilities is not solely a savings exercise; it is a risk management and compliance imperative. Integrating cost modeling with EVMS, establishing governance for escalation and VE sharelines, and creating a digital backbone for data ingestion and model traceability equip procurement teams to navigate audits, schedule pressures, and supplier constraints. The organizations that scale these practices do so by building a cross-functional CoE, institutionalizing playbooks, and aligning incentives with suppliers to sustain transparency and improvement over the life of the program.

Through this approach, we built a pragmatic, auditable, and scalable capability for Should-Cost And Clean-Sheet Negotiation within Procurement & Strategic Sourcing in Shipbuilding & marine systems, aligning cost transparency with regulatory compliance and supplier collaboration on naval ship programs.