Cost Of Quality Estimation & Reporting Procedure

Cost of quality is one aspect of any process or project that is always under estimated. The cost of poor quality sometimes puts a company at the risk of bankruptcy. This critical situation can come due to uncontrolled losses associated with cost of rework and cost of rejected products and or materials.

Quality professionals must understand the role of the management in controlling and minimizing the cost of quality. They are the people who can with their expertise and experience convince management for taking necessary actions for monitoring the cost of poor quality.

To better understand cost of poor quality can be divided into 4 different categories:

Prevention Cost: This is the cost that companies have to prevent that the quality of the product or service is affected. It can include process control, quality planning, quality audits, among others.

Appraisal Cost: This is the cost that concerns with equipment testings, audits, inspections, among others.

Internal Failure Cost: This cost refers to the process changes, reworks, scraps, re-inspections redesigns, among others.

External Failure Cost: This cost refers to the returns, revenue loss, warranties, penalties, among others.

Factors Cost Of Quality Relates

There are many factors that must be considered while estimating or making the management aware of the importance of the cost of poor quality like:

• Rework Cost in Term Of time delay: Poor quality impacts the delivery of products and projects which is really a big draw back and impacts cash flow and delay in billing claims etc.
• Rework Cost in term of material: Poor quality causes the rejection of material hence replacing the used materials which is a big burden on the company accounts and if the profit margins are tight rejection may lead a project or product to loss.
• Human Resource Cost including labor cost: When we talk about rejection and rework then comes the question of labor or staff used for the same activity again and again this also adds up in the company overheads hence decreasing the profit margins and if not controlled leading to losses.
• Material Handling & Disposal Cost: When there are rejected material or rework is required for material corrections this causes handling and storage cost to the company which is another cost center for poor quality cost calculations.
• Customer Dissatisfaction Cost: Poor quality makes your customer angry and one angry customer makes 10 more customers to go away from your business, therefore companies must take care of quality because if customer are not satisfied how business will sustain.
• Company Reputation Damage: For reputed companies retaining the integrity of Brand name is very much important. If it is spread in the market that a specific brand has repeatedly failed to deliver a good quality product or project that loss is very difficult to recover and companies pay heavy losses for these kind of situations which should be avoided.
• Loss of business from long lasting clients.

There are many many factors that can be added depending upon the type and size of industry for which you are calculating the copq or quality cost. We have given below a procedure which is mainly for a construction project but can be useful for other industries and professions as well.

Procedure to Estimate Cost of Quality

1. Purpose:

The purpose of this procedure is to determine all cost of quality associated with quality related to incorrect construction or supply.

2. Scope:

This procedure describes the responsibilities of the Project Director in relation to the provision of project quality cost data required for the compilation of the Project Monthly Report. This procedure applies to all projects of the company.

3. References: 

• Management Review
• Non-Conformance Monitoring
• Material Wastage
• Quality Cost Report

4. Definitions and Abbreviations:

• NCR Non-conformance Report
• PQCR Project Quality Cost Reporter

5. Responsibilities

The following personnel have responsibilities mentioned in this procedure:

• Project Director
• Project Quality Cost Reporter
• Material Wastage In-charge

6. Cost of Quality Estimation Procedure

6.1     General

a) The Project Director shall nominate a person to perform the role of Project Quality Cost Reporter (PQCR) to collate quality related costs derived from procedures for Non-Conformance Monitoring and Material wastage.

b) For Non-Conformance Costs relating to wrong construction or supply, the Project Director shall ensure that a copy of all NCRs with associated cost estimates for the previous month are supplied to the PQCR by the end of the first week of each month.

c) For Material Wastage Costs, the person nominated by the Project Director in Material Wastage provides a wastage report with associated cost estimates to the PQCR for further processing.

d) Upon receipt of both the NCR and Material Wastage Data the PQCR compiles a spreadsheet of applicable costs as shown in Project Cost of Poor Quality reports.

e) The completed spreadsheet is then passed to the Project Director for verification and authorization before returning it to the PQCR, who then conducts a quality cost trend analysis using the following formula with results expressed as percentages.

Cost Of Quality Formula

Quality Costs for reporting month (%)= (NCR + Wastage Costs for Element) x100 / Current Construction Cost of Element

Total Quality Cost (%)= (NCR+ Wastage Costs for all Elements to date) x 100 / Construction Cost for all Elements to date

Note: Elements refers to those work elements in Material Wastage.

f) The completed Trend analysis (bar chart/graphs) shall then be appended to the spreadsheet by the PQCR and submitted for final approval to the Project Director who shall include them in the Project monthly report. Potential corrective action shall then be discussed with Senior Management at the Project Monthly Review meeting.

g) Agreed corrective actions are then instructed to his project personnel by the Project Director and results/effects reported at the next

h) A copy of the Project Quality Cost report is submitted monthly to the management representative who compiles the data from all Projects for analysis of This analysis is reviewed and subsequent actions arising are addressed according to Management Review procedure.

7. Related Records

• Non-conformance Reports
• Wastage Reports
• Project Quality Costs Reports
• Project Monthly Reports
• Quality Cost Trend Analysis
• Minutes of management Review Meetings