Project Quality Management: Cost of Quality

Cost of quality is a significant concept in the project quality management knowledge area. However, it's also misinterpreted by several PMP credential exam-takers. A strong understanding of this concept can help increase a participant's score as there're very few questions on the exam based on it.

Let's take a quick and profound journey into the cost of quality concept.

If a product meets/exceeds its design features and is null-defect, it's said to have a top-notch conformance quality. So, for example, if a steel watch has zero defects, it can have a high conformance quality as a zero-defect diamond-studded watch. The steel one may not be attractive or expensive as the diamond, but you can expect it to be free of defects.

The prevention, identification, and handling of defects incur costs of quality. The term indicates total costs incurred to prevent product defects or costs that result from product defects.

Quality costs don't just relate to manufacturing but all the tasks from research and development (R&D) to customer services. So, the whole product life-cycle is included while deriving quality costs.

The quality cost is reviewed as a part of project management to make crucial decisions on how much to invest in quality.

When it comes to the definition of quality cost, there are two categories:

Cost of Conformance

These costs are incurred to maintain defective products from falling into customers' hands. The cost of conformance is made of:

1. Appraisal Costs

These are also known as inspection costs incurred to determine defective products before they're shipped to consumers. However, performing appraisal tasks doesn't prevent defects from happening. Most managers realize that keeping a team of inspectors isn't an effective way to control quality.

A better method is to ask employees to be responsible for their quality control, followed by creating designs for how to manufacture a zero-defect product. This method enables quality to be built into the product, rather than depending on inspections to determine defects.

2. Prevention Costs

These costs include all those expenses incurred for tasks mainly designed to prevent the low-quality product from occurring. It's much less expensive to prevent an issue than to identify and rectify the problem after its occurrence.

Prevention costs are incurred for activities that minimize the defects number. Companies employ several practices to prevent them, including statistical process control, quality engineering, and training.

Cost of Non-conformance

These costs are incurred due to defects generated despite efforts by a company to prevent them. Hence, these costs are also called costs of poor quality. These failure expenses are incurred when a product fails to conform to its design properties.

The non-conformance costs consist of 2 categories:

1. Internal Failure Costs

These costs result from defects found before they are shipped to consumers. They are determined within the project scope. Internal failure costs include rejected products, downtime, and reworking detective systems caused by quality issues.

It also includes costs if an organization has to reject and throw units of their project work, called scrap. If the company's appraisal activities are productive, it has a good chance of identifying defects internally; thus increasing the internal failure cost level.

2. External Failure Costs

These costs are an outcome of delivering a defective product to the consumer. The external failure costs include many sales arising from a poor-quality reputation, repairs and replacements, product recalls, warranty, and liabilities arising from legal action against a firm. Such expenses can even reduce a business's profit.

These costs also give rise to intangible expenses. For example, a company may lose its future venture with its existing consumer for delivering a poor-quality product. These expenses aren't there on the balance sheet; instead, they significantly impact the income statement.

The best method a company can follow amid these scenarios is to ensure the defective products never reach the consumer.

By minimizing internal loss, one can ensure they don't slip through to become external failures. Even if they have an external failure, one should act quickly and resolve the customer problem. This is the benchmark of good customer service.

Hence, the cost of quality includes costs of conformance and non-conformance. This method helps us estimate the amount we spend to assure quality. It also involves looking at the conformance and non-conformance costs of the project and creating a suitable balance.