Cost of Quality
The cost of quality (CoQ) is the sum of what an organisation spends to make a product conform to its requirements and what it loses when the product fails to conform. The technique sorts these costs into groups: prevention, appraisal, internal failures that the team finds before delivery and external failures that the customer finds. The report shows where the quality money goes and where to move it so that the total falls. The PMBOK Guide lists the technique as a data analysis tool of the Estimate Costs process and defines it over the whole life of the product.
Goal
The PMBOK Guide defines the cost of quality as all costs incurred over the life of the product to prevent nonconformance to requirements and to appraise the product or service for conformance. It adds the costs of failing to meet requirements.
The deliverable is a report of costs by group with a total and the share of each group. It justifies a prevention budget, ranks failures by cost and checks after a change that the total has fallen. The project manager takes the cost of testing, reviews and fixes from it for the estimate. The quality manager uses it to pick improvement projects. Senior management tracks the total as a share of the product's revenue.
Usage
When to use
- Estimating project costs: put testing, reviews and rework into the estimate as cost lines.
- A disputed test or review budget: set it against the cost of the failures these activities prevent.
- Recurring failures in operation: put a figure on support, fixes and warranty work to rank problems by cost.
- Choosing improvement projects: select the most expensive failures that affect an organisational objective.
- After a quality audit or a process change: measure again and check that the total has fallen.
- Suspected "excess quality": check whether the effort exceeds the customer's requirement.
When not to use
- No time or defect records: the figures would be guesses; set up measurement first with metrics and KPIs.
- Judging whether a project is worth its spend: the technique does not measure value; use cost-benefit analysis.
- Explaining a failure: the technique says what a failure costs, not why it occurs; use root cause analysis.
Description
The cost groups
The project incurs prevention costs to stop poor quality from arising. The PMBOK lists training, process documentation, equipment and the time to do it right. In an IT project, requirements reviews and training the team on a new business rule belong here.
The project incurs appraisal costs to check conformance: measuring, inspecting, auditing, testing. The PMBOK places testing, inspections and destructive testing loss here. Appraisal detects what is already wrong.
Failure costs arise from a product that fails to meet stakeholder needs or expectations. The team finds internal failures before the product reaches the customer: rework, scrap, fixing defects found in acceptance testing. The customer finds external failures: warranty work, liabilities, lost business. For Beecroft, the group depends on who finds the failure: the team or the customer. A calculation error that the test team finds costs a fix. When a user finds it, it costs a ticket, an urgent patch, a reissued document and sometimes a customer.
The PMBOK calls the first two groups the cost of conformance. The project spends it to avoid failures. The cost of nonconformance combines internal and external failures. It is spent during the project and after delivery.
| Group | Question to classify an activity | PMBOK examples | Examples in software |
|---|---|---|---|
| Prevention | Does the activity stop a defect from arising? | Training, process documentation, equipment, time to do it right | Requirements review, training on the new occupational pension (BVG) rules, development guidelines |
| Appraisal | Does the activity check a product already made? | Testing, inspections, destructive testing loss | Automated tests, acceptance testing, certification audit |
| Internal failure | Did the team find the defect before delivery? | Rework, scrap | Fixing defects found in acceptance testing, release withdrawn before distribution |
| External failure | Did the customer find the defect? | Liabilities, warranty work, lost business | Support tickets, urgent patches, reissued documents, lost customers |
The project and the product life
The PMBOK definition covers the life of the product. The groups it details cover the project's deliverables.
The project manager pays for prevention, appraisal and internal failures out of the project budget. External failures mostly occur after the product is delivered. Operations, support or sales pay for them. A project that stops its report at delivery can lower its own cost by cutting tests. It then shifts a heavier expense onto operations. The full report covers the life of the product, even when the project budget pays for only part of it. Add a column to the report that names who pays for each line: the project, operations, support or sales.
Two vocabularies for the same costs
Juran treated the cost of quality in his 1951 Quality Control Handbook. Feigenbaum divided quality costs into prevention, appraisal and failure in Total Quality Control. This split is called the P-A-F model (prevention, appraisal, failure). The American Society for Quality Control adopted it in 1970. British Standard BS 6143 Part 2 took it up.
Crosby popularised the subject in 1979 with Quality Is Free. He used only two categories. The price of conformance combines prevention and appraisal. The price of nonconformance combines the failures. In Feigenbaum, in Crosby and in the PMBOK, the two vocabularies name the same amounts.
Running the analysis
- Choose the scope. A project, a deliverable, a product or a process. Also fix the period: a financial year or the duration of the project.
- List the activities. Start from timesheets, invoices, the defect log and support tickets. For a process, draw its flow first.
- Classify each activity into one of the four groups by testing it against each group's question. Write the rule for borderline cases once and apply it at every measurement. A code review can be classified as prevention or as appraisal. Consistent classification from one measurement to the next matters more than the choice. An activity that a defect triggers counts as a failure even if it is a test: testing a patch delivered to the customer belongs to external failures.
- Cost each activity and total each group. Cost time at the fully loaded hourly rate.
- Cost each failure type at standard cost. List the activities that one occurrence triggers, cost each one and add them up. Multiply by the number of occurrences per year. Beecroft describes this method. Applied to an incorrect payslip delivered to a customer, it gives CHF 1'100 per occurrence and CHF 22'000 a year.
- Compare and rank. Calculate the share of each group. Relate the total to a base: the product's revenue, the project budget or the cost of production. Rank failure types by annual cost. Target the ones that affect an organisational objective. The Pareto chart shows the most expensive types.
- Shift spending to prevention where failures cost the most. Cost the effort that removes the cause. Beecroft counts this effort as prevention.
- Measure again after the change with the same classification rules. Only the new measurement shows the effect on the result. According to the PMBOK, correcting the gaps that a quality audit finds should also reduce the cost of quality.
- In a project, carry the result into the cost estimate and the quality management plan.
| Activity triggered by one occurrence | Basis | Cost |
|---|---|---|
| Handle the customer's ticket in support | 1.5 h at CHF 110 | 165 |
| Analyse and fix the calculation | 4 h at CHF 130 | 520 |
| Test and deliver the patch | 2 h at CHF 130 | 260 |
| Reissue the corrected payslip | Flat rate | 155 |
| Cost per occurrence | 1'100 | |
| Occurrences per year | Ticket log | 20 |
| Annual cost | 20 × CHF 1'100 | 22'000 |
Where is the optimum?
The P-A-F model assumes that more prevention and appraisal reduce failures. More prevention also reduces the appraisal needed. The aim is the quality level that minimises the total.
The PMBOK derives an optimum from this: the cost of quality that balances the investment in prevention and appraisal against the failures it avoids. Beyond the optimum, extra prevention or appraisal returns less than it costs.
Crosby and Beecroft take another position. Crosby sums it up in his title: quality is free. Beecroft wants to bring failure costs down to zero and calls appraisal a non-value-added activity. The two positions differ on whether a level of prevention exists beyond which the remaining poor quality costs less than its removal. The report settles it case by case. A prevention expense that cuts failures by more than it costs is justified under both readings.
Variants of the model
The process cost model (BS 6143 Part 1) starts from a process. The analyst draws the flow, classifies each activity as a cost of conformance or nonconformance and then costs it. In this model, the cost of conformance covers all work done correctly. It goes beyond prevention and appraisal. The same term therefore covers a different amount than in Crosby. This model applies to any process and ties each cost to its source. A full process analysis takes longer than a P-A-F report.
| Model | The cost of conformance covers | The cost of nonconformance covers |
|---|---|---|
| P-A-F (Feigenbaum, ASQC, BS 6143 Part 2) | Prevention and appraisal | Internal and external failures |
| Crosby (price of conformance) | Prevention and appraisal | Failures |
| PMBOK Guide Figure 5-3 | Prevention and appraisal | Internal and external failures |
| Process cost (BS 6143 Part 1) | All work done correctly | Fixing failures |
Opportunity cost models add the margin lost when customers leave. Models based on activity-based costing separate the activities that add value from those that do not.
Pitfalls
One term for two scopes. Authors do not agree on a definition of quality costs. The term cost of poor quality sometimes means the whole cost of quality and sometimes only the failures. Beecroft notes this looseness. Write the chosen definition at the top of the report.
Hidden costs. Most measurement systems ignore the costs the customer bears, the customer's dissatisfaction and lost reputation. These costs add to external failures. Most of the report's underestimate therefore falls on the heaviest group. The PMBOK lists lost business without putting a figure on it. A line marked as an estimate is better than a missing line.
Overheads. The P-A-F model offers no recognised method for allocating overheads across the groups. Nor does it tie a cost to its source. Set an allocation basis and keep it from one measurement to the next. The process cost model handles the tie to the source.
Freed capacity left idle. Less rework frees hours. They yield nothing until management assigns them to other work. Beecroft adds that laying off the people whose time the improvement frees destroys the effort.
"Excess quality". Beecroft finds that excess quality most often turns out, on examination, to be work beyond the requirement. This overshoot is waste. The team revisits the requirement or reduces the effort.
AI considerations
An assistant reads the labels in timesheets, tickets and the defect log, then proposes a group for each line. On an export of several thousand lines, this sorting replaces the first manual classification. It groups tickets by failure type, counts occurrences and drafts the list of activities that one occurrence triggers. It also flags to the team the lines that no rule classifies.
It does not set the rule for borderline cases. The team decides that rule, writes it down and checks a sample of the assistant's classifications. Nor does the assistant estimate lost business: sales management owns that figure and answers for it. Support tickets for payroll software contain personal data and salaries. Before it loads these tickets into an online service, the team checks the organisation's policy and the FADP.
Examples
Concept illustrated: the report by group shows each group's share of the cost of quality. A Fribourg vendor of payroll software for SMEs records one year of cost of quality for its product.
| Group | Item | Amount | Share of total |
|---|---|---|---|
| Prevention | Training the team on the new BVG rules | 12'000 | |
| Requirements reviews with a partner accounting firm | 18'000 | ||
| Documenting the release process | 6'000 | ||
| Subtotal | 36'000 | 10.8% | |
| Appraisal | Automated tests and their maintenance | 45'000 | |
| Acceptance testing of each release | 30'000 | ||
| Swissdec certification audit | 15'000 | ||
| Subtotal | 90'000 | 26.9% | |
| Internal failures | Fixing defects found in acceptance testing | 54'000 | |
| Release withdrawn and re-tested before distribution | 8'000 | ||
| Subtotal | 62'000 | 18.6% | |
| External failures | Support tickets caused by defects | 48'000 | |
| Urgent patches delivered to customers | 36'000 | ||
| Incorrect payslips corrected and reissued (20 × CHF 1'100) | 22'000 | ||
| Lost customers (estimated annual margin) | 40'000 | ||
| Subtotal | 146'000 | 43.7% | |
| Total cost of quality | 334'000 | 100% | |
| Share of product revenue | 13.9% | ||
External failures weigh four times as much as prevention. The lost-customers line is an estimate from sales management. Without it, external failures remain the largest group.
Visualisations
The vendor in the example measures again the following year. It has added CHF 24'000 of prevention: a specification of the BVG rules that it validates with the accounting firm before the development of each release. Fixing defects found in acceptance testing goes down. Internal failures fall from CHF 62'000 to CHF 58'000. External failures fall from CHF 146'000 to CHF 98'000. The drop comes from tickets, urgent patches and reissued payslips, which together fall from CHF 106'000 to CHF 58'000. The lost-customers estimate stays at CHF 40'000. The total falls from CHF 334'000 to CHF 306'000.
Cost
| Phase | Level | Justification |
|---|---|---|
| Preparation | Medium | Set the scope and the classification rules, then obtain the timesheets, invoices and tickets. |
| Execution | High | Classify and cost each activity, then calculate the standard cost of each selected failure. The first measurement takes days. |
| Documentation | Medium | Keep the report by group, the standard costs and the classification rules. Each measurement reuses them unchanged. |
Tooling
A spreadsheet is enough for the report by group and the standard cost of a failure. It also draws the Pareto chart of failure types.
The measurement repeats at low cost when time entry carries a code per group. The cost accounting of an ERP such as Abacus or SAP receives these codes. A defect log in Jira or Azure DevOps counts internal failures. A support tool such as Jira Service Management or ServiceNow counts external failures. A dashboard tool such as Power BI tracks the share of each group from one measurement to the next.
Sources
- Project Management Institute, A Guide to the Project Management Body of Knowledge (PMBOK Guide), 8th edition, PMI: the cost of quality as a data analysis tool of the Estimate Costs process (§2.4.2.2, Figure 2-28); the definition, the cost groups, Figure 5-3 and the optimum (section 5, Tools and Techniques, entry Cost of quality (CoQ)); the link with quality audits (section 5, entry Audits).
- G. Dennis Beecroft, Cost of Quality, Quality Planning and The Bottom Line, ASQ Quality Management Division Forum, 2000: the groups with their examples, the distinction between internal and external failures, the history from Juran to Crosby, the standard cost method for a failure, hidden costs and the improvement strategy. A practitioner article without peer review.
- N. M. Vaxevanidis, G. Petropoulos, J. Avakumovic, A. Mourlas, Cost of Quality Models and Their Implementation in Manufacturing Firms, International Journal for Quality Research, 3(1), 2009: the attribution of the P-A-F model to Feigenbaum, its adoption by the ASQC and in BS 6143, Crosby's model, the process cost model, the other variants and their limits.