During the operation of external gear machines (EGMs), the friction between the internal components results in the loss of hydro-mechanical (or torque) performance of these units. However, current EGM simulation models either do not consider these losses or have significant limitations in their approach. This paper presents a novel methodology for modeling the hydro-mechanical losses in EGMs. The sources of torque losses considered are the friction at the gears’ tooth tips, lateral surfaces, shafts, and meshing interfaces. The friction models are developed for each of these sources considering the effects of micromotion of the gears and bushings. Further, the effects of elastohydrodynamic lubrication (EHL) are considered in the modeling of meshing friction. The friction models are integrated in a lumped parameter simulation tool, and the operation of a commercial gear pump is simulated. From the simulation results, the meshing friction is determined to be the dominant source of torque losses. Further, the hydro-mechanical efficiencies predicted by the model are found to match those observed in the experiments indicating the validity of the model developed in this work.