Lifecycle Cost of Quality

Lifecycle Cost of Quality
In Major and Mega Projects and Turnarounds

Poor project quality can cost its owners billions of dollars on a single project – and that is just to get it completed.  Post-project costs from poor project quality can plague a facility for its entire lifetime.  Using the Lifecycle Cost of Quality model, these costs can be calculated, trouble spots identified, and steps taken to ensure they do not occur on future projects.  When possible, leading indicators are identified so that issues can be addressed on projects that are underway.

Owner Cost of Poor Project Quality

No project is immune to issues and the larger the project, the larger the potential issues.  Although smaller in scale, turnarounds suffer the same issues but are more sensitive to schedule delays.  Owners hire good engineering and construction contractors to perform the work and the project team purchases equipment from qualified vendors – yet issues persist, and the costs are almost always paid by the owner.  Money paid for overruns provides no benefit to the owner, impacts future investments, and causes reluctance to start new projects.  The cost of poor project quality can be so large it impacts corporate stability and regional economies.  Research shows that:

  • 86% of infrastructure megaprojects have cost overruns. Overruns average 30% of the estimated cost.
  • 64% of oil and gas megaprojects have cost overruns. Overruns average 59% of the estimated cost.
  • 67% of power and utilities megaprojects have cost overruns. Overruns average 35% of the estimated project cost.

Megaproject schedule performance is also poor and results in actual and opportunity costs, with:

  • 90% of infrastructure megaprojects overrunning schedule targets by an average of 20%
  • 73% of oil and gas megaprojects overrunning schedule targets by an average of 30%
  • 54% of power and utilities megaprojects overrunning schedule targets by an average of 2-3 years.

Only 35% of oil and gas megaprojects meet forecast production and operating cost targets, creating opportunity costs and lower Returns on Investment (ROI) (McKinsey Global Institute, 2017; Merrow, 2011).  Only 10% of infrastructure projects meet forecast usage and operating targets, and when combined with cost and schedule performance, only 0.8 % of megaprojects are successful (Flyvbjerg, 2014). These costs and post-project costs attributed to quality are all captured in the Lifecycle costing process.

Project Litigation As A Solution

Some owners believe that they can be compensated for project issues by taking legal action, but project litigation is not an effective remedy.  For example, an oil project in Alberta, Canada was forecast at $4B, was years behind schedule, and after many delays was producing 25% of its target capacity.  Its completion estimate was $10 B, but there is uncertainty as to whether it will every get close to its target production levels.  It is unlikely that any construction company has the financial depth to compensate the owner for even a small portion of their cost overruns, opportunity costs, and post-project costs.  It is also unlikely that any court or arbitration panel would award a sum large enough to compensate for even small percentage of the damages.

Lifecycle Cost Of Quality

The full measure of what owners pay for poor quality requires a trip to records from past projects.  If a project is treated like a piece of equipment, it is expected to be delivered on time, cost the agreed price, and have the mechanical performance agreed to in the data sheet specification.  The further a project is away from any of these targets, the lower the quality.  In addition to cost and schedule overruns, projects with low quality may produce less than expected, require debottlenecking projects, produce off-spec outputs, and have operating and maintenance costs far higher than expected – all of which are post-project costs and part of the owners cost of poor project quality.

Developing a baseline of past costs associated with poor project quality can help you to spot trends and optimize where you invest your quality budget during a project.  The lifecycle cost formula can also help you right-size your quality team and provides a dollar-based metric that can be used to measure improvement.

  1. What is project Lifecycle Cost of Quality?
    The sum of what is spent to achieve quality during the project (the Price Of Conformance – POC) plus the costs associated with poor quality during and after the project (the Price Of Non-Conformance – PONC). The goal is to find a balance between POC and PONC that reduces total costs associated with quality.
  2. How does Lifecycle Cost of Quality (LCoQ) differ from typical Cost of Quality (CoQ) measurements?
    LCoQ is a holistic measure undertaken by owners of a good, service, or project to determine all their costs associated with the quality of the purchase whereas CoQ is the total of providers (manufacturer, service provider, contractor, etc.) costs associated with quality.  Good quality costs less than poor quality for the owners and providers.
  3. Why are post-project costs considered part of the cost of poor project quality?
    Many of the issues experienced by an operating facility were built into the facility during the project phase.  For example, underpowered equipment or pipe stresses due to construction errors can cause ongoing issues for the facility including downtime and repairs.  These costs would be attributable to project quality.
  4. How can studying past project outcomes improve current and future projects?
    By identifying issues from past projects, steps can be taken to ensure they do not happen again.  It may also show where a small additional planned investment can save major costs later in the facilities life – helping to reduce overall costs associated with quality.
  5. Will this increase the quality team budget for a given project?
    A LCoQ analysis will right-size the POC budget.  The overall goal is to reduce POC along with PONC.  Analyzing past projects provides clear areas for improvement and the value of that improvement.  If LCoQ shows that increasing the quality team’s budget in an area will likely generate a strong return on investment, that would be a recommendation along with specific information on where their efforts should be targeted.
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