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Cost of Nonconformance in Project Management

Cost of quality is an important concept to understand when managing projects. Specifically, cost of nonconformance which refers to the costs incurred when project deliverables fail to meet quality standards.

As a project manager, having a solid grasp on nonconformance costs is crucial, as quality issues can negatively impact your project budget, schedule, and stakeholder satisfaction.

In this post, we’ll explore the ins and outs of the cost of nonconformance from types of costs to real-world examples, as well as tips on handling questions on this topic in the PMP exam.

What is Cost of Quality (COQ) in Project Management?

Cost of Quality (COQ) refers to the total costs incurred by a project to ensure quality requirements are met. As defined in the PMBOK Guide, it’s the sum of the cost of conformance and cost of nonconformance.

Cost of conformance includes costs for preventive actions to avoid defects and costs to evaluate product conformance through inspections and testing. On the other hand, the cost of nonconformance encompasses the costs of failures, both internal and external.

Internal failure costs arise from defects found before product delivery, like rework and scrap. External failure costs occur after product delivery, like liabilities, lost business, and reputation damage.

As a project manager, you should aim to optimize COQ, and while investing in preventive quality steps adds cost, it reduces failure costs later. The optimal point is where the total COQ is minimized.

What is Cost of Nonconformance in Project Management?

As earlier explained, the cost of nonconformance in project management refers specifically to the costs incurred when project deliverables fail to meet the required quality standards.

This includes internal costs like rework and material waste to fix defects, as well as external costs like legal liabilities and loss of reputation with customers due to poor quality.

As a project manager, you want to minimize nonconformance events and costs as they negatively impact your project budget, schedule, resource utilization, and stakeholder satisfaction.

Understanding the various nonconformance costs will help you make proper provisions in plans and budgets. It also helps determine if more investment in preventive quality control upfront is needed to avoid failures later.

Types of Cost of Nonconformance in Project Management

Cost of nonconformance consists of two main types of failure costs:

Internal Failure Costs

These are costs incurred to fix defects discovered before the product is delivered to the customer. Examples include:

  • Rework: This is the effort to repair or re-do defective work. This adds additional time and resource costs.
  • Material Waste: This covers scrapped defective materials that cannot be repaired or reused.
  • Unplanned Downtime: This covers production stoppages to fix quality issues, resulting in lost capacity.

External Failure Costs

External failure costs occur after product delivery when customers experience failures. Examples are:

  • Liability Costs: These are expenses from customer injury, loss, or legal claims due to product defects.
  • Lost Sales: These cover revenue losses from reduced or lost sales due to reputation damage.
  • Repair/Return Costs: These are the costs of fixing or replacing defective products under warranty.
  • Customer Support: This is the time and effort spent to respond to customer complaints.
  • Recalls: Costs of recalling sold products with safety or quality defects.

Understanding these nonconformance costs is vital so you can plan your quality management activities more effectively as both internal and external failure costs can impact your project significantly.

Importance of Nonconformance Costs in Project Management

Here are some reasons why understanding nonconformance costs is crucial :

Impacts Budget and Schedule

Rework and other activities to fix quality defects can grow project costs and duration. If not accounted for properly in planning, this could lead to budget overruns and missed deadlines.

Affects Resource Utilization

Time and effort spent on rework and scrap is non-value adding and it takes resources away from performing value-generating project work.

Influences Stakeholder Satisfaction

Delays, defects, and other quality issues caused by nonconformance can dissatisfy stakeholders like sponsors and customers which risks future business and reputation.

Provides Insights for Improvement

Analyzing the root causes of failures guides future preventive actions like training and process changes which helps improve quality management.

Enables Informed Decision-Making

Understanding different nonconformance costs allows you to make smart quality-related decisions to optimize project tradeoffs.

Examples of Cost of Nonconformance

Let’s look at some examples to understand nonconformance costs better:

  • A software project team develops a new client portal with defects that get discovered during user acceptance testing. This requires significant rework to fix the issues before launch with the unplanned effort leading to cost overruns.
  • An engineering design project delivers prototype units that fail safety tests. Consequently, the prototypes must be scrapped and rebuilt, incurring material waste costs and the project timeline gets extended.
  • A building construction project uses defective concrete that cracks prematurely after construction. Liability lawsuits and costs are incurred related to injury from falling debris, and the reputation of the construction company is damaged.
  • A pharmaceutical company’s drug fails clinical trials due to quality issues in manufacturing or study design leading to the loss of millions of dollars of research investment. Also, regulatory approval delays lead to missed market opportunities.
  • An automotive company issues a recall of thousands of cars due to a faulty part causing potential safety issues. Huge costs are incurred to notify customers, handle repairs/replacements, and manage public communications. Furthermore, the brand image declines.
  • A retailer selling electronics delivers products with quality defects not caught through testing which leads to numerous customer returns. The support costs to manage returns and exchange products reduce profit margins.

Cost of Nonconformance PMP Exam Tips

For PMP candidates, understanding the cost of nonconformance is key to answering exam questions on quality management.

The PMBOK Guide 6th Edition covers this in the Quality Management knowledge area as one of the tools and techniques for the Plan Quality Management process.

For the exam, be able to identify the various types of nonconformance costs like rework, warranty claims, lost sales, etc. Know the difference between internal and external failure costs.

Also, study the Cost of Quality concept and its components which are cost of conformance and nonconformance.

Analyze how to optimize COQ during planning. Questions may test your grasp of the impacts of quality issues and how to reduce nonconformance through preventive methods like quality audits, training, and process improvement.

Use your experience to relate to real-life examples of failure costs. Understanding the practical implications of poor quality will make PMP exam questions more intuitive.

Final Thoughts on Cost of Nonconformance

Cost of nonconformance is a significant concern for project managers as failure to meet quality standards leads to added costs through rework, defects, delays, liability claims, and more.

By understanding the various types of nonconformance costs and learning to optimize quality management activities, you can reduce failures and create successful projects.

Use the concepts covered here to make informed plans and decisions around preventing quality issues. With diligent effort, you can deliver high-quality project outcomes and maximize value for your stakeholders while minimizing nonconformance costs.

David Usifo (PSM, MBCS, PMP®)
David Usifo (PSM, MBCS, PMP®)

David Usifo is a certified Project Management professional, professional Scrum Master, and a BCS certified Business Analyst with a background in product development and database management.

He enjoys using his knowledge and skills to share with aspiring and experienced Project Managers and Business Analysts the core concept of value-creation through adaptive solutions.

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