Using the Cost of Quality (CoQ)

Whenever products are recalled or there are lawsuits based on product claims that have not been met, the costs associated with the product or service rise. These costs are known as the Cost of Quality (CoQ). Therefore, CoQ can be defined as the costs associated with not creating a quality product. In project management, CoQ needs to be consider while estimating costs and performing Life-Cycle Costing (LCC).

CoQ comprises of:

1. External Failure Costs. These are associated with problems found in the product or service after the customer has received it. For
   

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   example, technical support calls, investigation of customer complaints, product refunds and recalls, lost customer goodwill, warranty costs, and liability costs.
2. Internal Failure Costs. These are associated with defects that have been found before giving the product or service to the customer. For example, bug fixes, regression testing, wasted resource time, and rework.
3. Appraisal Costs. These are associated with finding quality problems. For example, inspection, testing, and audits.
4. Prevention Cost. These are activities that are performed to prevent poor quality. For example, process reviews, quality improvement team, training, usability analysis, and collecting requirements.

Many of these costs arise from the development life-cycle processes you follow. Most organizations have set processes and procedures that each project needs to follow. Many of these procedures are developed to mitigate risks. For example, before a project is begun, the team is trained on the technology or soft skills. Depending on the organization's processes, this may be mandatory for all projects. Similarly, there'll be other costs, such as project status reviews after every release or conducting iteration retrospectives.

The total CoQ is the sum of all the costs listed above:

Total Cost of Quality = External Failure + Internal Failure + Appraisal + Prevention Costs

Let’s see what this means with a simplified example. Suppose, you have the following costs associated with developing a product:

• Training: $ 25000
• Usability Analysis: $ 12000
• Testing and Audits: $ 10000
• Regression testing: $ 2000

The total CoQ is the sum of all the costs listed above: $ 49000.

Suppose, after the product is launched, you rake in a profit of $ 10000 a month and you spend $ 2000 on technical support calls. The total CoQ increases by $ 2000 every month. Now, if there is a product recall, then that would drastically add to the total cost of quality. External Failure costs directly result in an increase in the LCC of the product. Therefore, CoQ is an important consideration when you apply LCC.

Ultimately, a high total cost of quality negatively impacts your break-even point.