Cost of Conformance vs Cost of Non-Conformance: Concept, Examples


Cost of Conformance vs Cost of Non-Conformance

Conformance is a term used in the project management world to define the money spent on taking action to meet project requirements. For example, a project manager may have to spend a part of the budget on buying the right equipment for a particular project. The money he spends on doing this is an investment he has made to conform to that project’s requirements.

In contrast, non-conformance refers to times when you fail to act upon something or when you break by making a decision that takes you away from what was previously decided. This article explores the cost of conformance and cost of non-conformance including what they are and best practices for using them. It also highlights their differences and examples.

What is Cost of Conformance?

Cost of conformance refers to the overall Cost of ascertaining that the quality of a product is good. It entails quality assurance cost of activities such as processes, training, and standards; and the overall Cost of quality control activities such as audits, testing, inspection, and reviews.

Cost of conformance entails the total lifecycle of a product which the product creates. It gives details on the comprehensive resources that a product requires to ascertain the quality of a project’s target and quality requirements.

The Cost of conformance practically comes with the characteristic of a diminishing marginal utility. It means that the first dollar an organization spends will rapidly accelerate the project deliverables, and the curve flattens with each extra dollar added.

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In simple terms, the bang of the buck is relatively high at the start and reduces with the increase in the Cost of conformance. In establishing the Cost of conformance curve, a project manager needs to know the standards and requirements for the product or process.

In other words, they must know what the performance standards are for their product or process. When expectations are not clear, there will be problems because employees will be working at different speeds and with various quality.

The Cost of Conformance has Two Components

1.    Prevention Cost

Prevention cost entails the total cash used on materials and actions, which ensures the quality deliverable. It primarily entails all the resources that are basic in creating the quality of a product. The examples of prevention measures according to PMBOK are training, equipment, documentation, and sufficient time.it may also include other aspects such as:

  • Excellent employees for the job
  • Market intelligence and prior lesson relating to the project
  • Creating spikes aimed at testing various approaches and selecting the right one
  • Any relevant activity which increases output quality

2.    Appraisal Cost

Refers to the financial and non-financial resources used to ascertain the quality of deliverables of a particular project. It includes all the money invested and quality assurance of activities that indicate the quality issues. Thus, a project manager incorporates corrective actions to fix the problems that arise in the project.According to PMBOK, the examples of appraisal cost include:

  • Testing process
  • Quality checks or inspections
  • Destructive testing loss refers to testing the durability of a product, which may lead to the loss of money the organization spent on manufacturing the project.
  • External quality audits
  • Evaluation of quality indicators
  • Mystery shopping refers to the testing service or product from a customer’s perspective

The two types of costs differ in different organizations, and the cost should primarily cover any resource consumption related to the quality assessment during a project.



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What is the Cost of Non-Conformance?

The cost of non-conformance is also referred to as failure cost.it entails the resources needed to fix failures and incorporate corrective actions, however to indirect the outcomes from quality issues, i.e., the negative impact of a business.

The amount of money an organization uses on the cost of conformance determines the level of quality. However, the cost of non-conformance refers to the function of this level of quality.

According to the thumb rule, non-conformance costs reduce when the quality of a product is high. The cost of non-conformance is also referred to as the incremental cost a business incurs when it doesn’t meet its products’ quality requirement standards.

The saved non-conformance cost per quality reduces when the quality is high and is also subject to diminishing marginal utility, which indicates the flattening of a curve. The cost of non-conformance has two elements:

1.    Internal Failure Cost

Entails the failures that an organization or a project recognizes by themselves. It links to corrective actions the organization takes to fix the failures they identified. According to PMBOK, scrap and rework are examples of internal failures.

An example is the construction project where the project manager may not know that all the fire prevention necessities haven’t been met. Another example is the IT projects which may encounter some problems. These two examples would lead to rework, which incorporates additional resources that are the internal failure cost.

2.    External Failure Cost

It entails the costs used to cover the client’s complaints on the deliverable or quality of a product. It also looks into the indirect effects such as the overall business and the negative impact on sales. These costs may be substantial if the outcome is the company losing its customer. It is fatal if the customers are loyal to the company’s product. The external type failures in non-conformance cost according to PMI methodology include:

  • Warranty Work

Refers to the costs that an organization faces while reworking on the defective product which is under warranty

  • Liabilities

Refers to the money and materials a company uses to rework the product that they produced and failed.

  • Lost Business

Refers to the losses that occur when customers fail to conduct business with a company regarding the previous quality issues. External failure cost is usually hard to measure and predict. However, an organization should use the COQ concept to work on the project since external failures generally have massive impacts in case they happen.

Most customers appreciate it when the quality of a product is high. An organization with quality issues would lower the reputation of its product or service, which results in a decrease in sales which in turn reduces the revenues and price of the product.

External failure cost may be fatal for a company whose projects are sustained by regulatory and legal requirements. Examples are products that are restricted from consumption due to non-compliance with regulatory and legal requirements. In some cases, the government may take the company’s license, and the business commences.

How to Calculate the Cost of Quality in Projects?

The formula for calculating COQ is simple and straightforward despite the challenging evaluation and prediction of quality cost. The procedure is thus:

COQ = Cost of Conformance + Cost of Non-Conformance

The cost of conformance = sum of appraisal and prevention cost

The cost of non-conformance = sum of internal and external failure cost

Interpretation and Optimization of Quality Cost in Projects

According to PMBOK, the quality cost is subjected to cost-benefit analysis. The project manager needs to evaluate the optimal balance between the cost of conformance during the project and the cost of conformance, which is valid for a project’s lifecycle to optimize the general cost of quality.

The project manager optimizes COQ at the value of the smallest sum of failure cost and cost of conformance. Optimum refers to the point at which the cost of quality is lowest. The addition of a dollar on the conformance, at this point, restores the non-conformance cost by a dollar or less, and the marginal turns to be negative.

The numbers are difficult to compile due to some components’ unpredictability, mainly the external failure cost. The process of optimizing COQ is relevant to many projects, even though it requires some sources for it to function efficiently.

Example of Cost of Conformance and Cost of Non-Conformance

Example 1

In a data processing IT company, the project manager aims at stabilizing the data flows, cost of documenting interfaces, and the predicted long-term effect of not performing them. His estimates emerged as follows:

  • It would require 90 person-days to verify all the relevant modification to the system
  • According to the previous experience on a similar project, it requires additional 20-30 days per year to add detailed documentation which is unavailable
  • Basis documentation requires an extra effort of 4 person-days while detailed documentation won’t require further efforts
  • For the current project, the total cost of the basic documentation would be 20-man days
  • The entire estimated lifecycle of the IT project would be eight years.

The conformance cost in this project refers to establishing the documentation, while the non-conformance costs are the additional efforts that will occur in the future.

Cost of conformanceCost of conformanceCost of non-conformance
Total documentation900
Basic documentation2040
No of min documentation0200
No of max documentation0300

 Interpreting the Cost of Quality

The cost of quality refers to the sum of non-conformance and conformance costs. In this case, the essential documentation would be the most preferred choice. With a total of 60 person-days, it has the lowest cost of quality.

The Basic Documentation

It needs 20 person-days (cost of conformance) for its creation and 40 person-days for the cost of non-conformance, which accumulates for over eight years. The sum of the cost of quality is 60 person-days, and the failure cost is decreased by 160 to 260 person-days throughout the solution’s lifecycle.

The establishment of detailed documentation needs 90 person-days, which yields 0 costs of non-conformance. The above project is an example of a diminishing marginal utility of conformance cost since the failure cost is zero. Still, the overall cost is generally more significant than the basic documentation point.

The Detailed Documentation

It saves the company 200-300 person-days failure cost, unlike the no-documentation scenario throughout the data processing company. However, this is only 40 person-days more savings compared to the basic documentation scenario.

The total benefit of the basic documentation is 140 to 240 person-days (160 to 260) respectively, less 20 person-days for the creation, and the significance of the detailed documentation would be 120 to 220 person-days (200 to 300 person-days saved for 80 person-days spent).

In the meantime, the efforts are incurred as the project progresses, and the significance of a well-crafted COQ is noticed after the end of the project. The example illustrates why these preferences are always assigned to portfolio management rather than in one project’s direction.

Example 2

The other example is of a company producing revision materials. The company will go through various activities such as research on the most examined questions, proofreading the materials, and engaging examiners to find more details.

The whole process will cost a fortune. There will be massive testing of the material to ensure it is according to the exam set standards. There may be a change in the exam syllabus. The producer may decide to hurry the production process. In the hurry, he may omit some important details and have some printing errors in the answers given to the material’s questions.

Since the candidates are in a hurry to purchase revision material, they may buy the materials in bulk, and due to the errors in them, they may fail in their exam.

The candidates will go to the company’s website and post negative reviews concerning the company and inform other students of the poor quality of the revision material. The company will drastically lose value and its reputation. However, the producer will learn the importance of patience and researching keenly to avoid future errors.

Conclusion

A precise and exact balance between conformance cost and non-conformance cost is the primary means of giving a project sustainable and consistent success beyond its lifecycle. It’s evident that external failure costs in non-conformance costs are difficult to predict, yet they are fatal to an organization.

The cost of conformance is vital for every organization as they help it complete various activities that support the organization to meet its quality to avoid failing. Therefore, a project manager should use the cost of conformance to detect problems early and save the time and cost of future defects.

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