Presentation on the Design of a Prevention, Appraisal and Failure Cost Model at the international 2014 IAMOT conference.

1. 1
IAMOT 2014
WASHINGTON, D.C.
DESIGN OF A PREVENTION,
APPRAISAL AND FAILURE
QUALITY COST MODEL
Dr Hannelie Nel
BIE International, South Africa
Mr Ralph Grenville, Senior Vice-President
BIE International, Houston, USA
Professor Jan-Harm Pretorius
University of Johannesburg, South Africa

2. The BIE Value Statement
The BIE Group operates in over 40 countries worldwide and is an international
and independent third-party company that provides Project Management and
Quality Services from project design to commissioning. BIE also provides
Quality Assurance on manufacturing and installation during project execution;
and offers Quality Costing throughout the project lifecycle.
The BIE Group
BIE Became listed in 1994 on the UNITED Nations Approvals
Scheme for the inspection of commodities and materials deployed
to sensitive international regions of the world.

3. The BIE Group Global Offices
April 13, 2015 3
United Kingdom
Netherlands
Italy
Australia
Taiwan
Singapore
JapanUnited States of America
South Africa
China

4. 4
THE COST OF
POOR QUALITY
TO BUSINESS

5. Cost of Poor Quality: Petrobras
Floating Oil Rig Disaster
5
BEFORE
AFTER
Petrobras has established a new program of
cost cutting on its P36 production facility.
Through an integrated network of facilitated
workshops, the project successfully rejected
the established constricting and negative
influences of prescriptive engineering,
onerous quality requirements, and outdated
concepts of inspection and client control.
11 crew members were killed and one member
of the attending fire-fighting crew fatally injured.
The estimated cost of the accident was $450
million.
Environmental costs: inestimable

6. Cost of Poor Quality:
Toyota Vehicle Recall
6
AFTER
“The company is paying for focusing on
growth and taking its eye off quality”
(James P. Womack New York Times)
“Toyota has adopted a number of measures
in recent months to address its safety
problems. It is sending 40 engineers from
its headquarters in Toyota City, Japan, to
monitor quality issues at technical centres
overseas, auditing parts suppliers and
adding a month to the average four-month
testing time for new vehicles.”(Financial
Times)
Katsutoshi Sakata, manager of a newly
created division overseeing design quality,
said in an interview this week that Toyota
had assigned about 1,000 employees to
new quality-related tasks since the recall
US Government officials say a
possible link to 93 deaths over the
past decade were identified.
Estimated cost on recall: $5,5 billion
Impact on firm reputation:

7. 7
Design of a Prevention,
Appraisal and Failure
Cost Model:
How do we cost Quality?

8. Quality Cost Methodology:
Design of the Study
1. The project was executed at a refurbished electricity power station in South Africa
over a period of one year.
2. The Prevention, Appraisal and Failure Cost (PAF) Model was selected as the quality
cost model for implementation.
3. The processes selected by the project team for the design of the PAF cost model
were: pre-outage, outage and post-outage.
4. Units 1,2 and 5 were selected for the study.
5. The team consisted of relevant functions within
the operation.

9. Quality Cost Methodology
Step 1: Obtain management commitment and support.
Step 2: Establish an installation team.
Step 3: Obtain cooperation and support of users and suppliers of information.
Step 4: Select the processes and process boundaries.
Step 5: Develop the process flow diagrams.
Step 6: Define quality categories and identify cost elements in each category.
Step 7: Develop the quality cost matrix.
Step 8: Determine sources of quality cost information and establish cost collection
procedures.
Step 9: Collect data and establish the reliability and validity of the data.
Step 10: Continuously improve the system.

10. Quality Cost Methodology:
Phase One
Step 1: Obtain management commitment and support.
Step 2: Establish an installation team.
Step 3: Obtain cooperation and support of users and suppliers of information.
10
PROJECTMANAGER
Procurement Quality SHE Commissioning
Control and
Instrumenta-
tion
Mechanical
Engineering
Electrical
Engineering
(MV)
Electrical
Engineering
(LV)
Engineering
Projects
Quantity
Surveing
Finance
Secretary

11. Quality Cost Methodology:
Phase Two
Step 4: Select the processes and process boundaries.
Step 5: Develop the process flow diagrams.
Step 6: Define quality categories and identify cost elements in each category.
Step 7: Develop the quality cost matrix.
Training Finance Procurement Design Freeze Manufacturing FAT Tests Installation Operational Checks
Baseline Risk
Assessments
Allcost centres
Finance
manager
Procurement
manager
Engineering
manager
Project
manager
Project, GBE
managers, SHE
C&I manager
Commissioning
manager
Project, SHE
managers

12. 04/13/15 12
Steps 4-5: Develop the Process Flow Diagrams →
Pre-Outage
S1
Training
S2
Finance
S3
Procurement
S4
Design Freeze
S5
Manufacturing
S6
FAT Tests
S7
Installation
S9
Operational Checks
S10
Baseline Risk
Assessments
Allcost centres
Finance
manager
Procurement
manager
Engineering
manager
Project
manager
Project, GBE
and SHE
managers
C&I manager
Commissioning
manager
Project, SHE
managers
S8
Installation
Mechanical
manager
Projection,
plan and
budget
Cashflow
Insurance
BU verification
and approval
of project
transactions
Reporting
project cost
Contract
modifications
due to CPA
Forex
management
Issue load
schedule for
basic design
Detailed
design
Approval of
detail design
Sheet metal
work
Approval of
sheet metal
work
Approval of
general
arrangement
Component
verification
Wiring
verification
Functional
tests
Defect close-
out
Operational
checks
Cable resout
Impulse pipes
Field
instrumenta-
tion
Junction boxes
Cubicle
installations
Slinging routes
Boiler cleaning
Scaffold
planning
Quality control
Component
verification
Wiring
verification
Functional
tests
Defect close-
out
Identification
of all risks
Integrated risk
assessment
Training
operations
Plant exposure
Process
phase
Process
owner
Process
or cost
element

13. Step 6: Define Quality Cost
Categories and Cost Elements
Cost Category Pre-Outage
Prevention
The costs associated with design
freeze, baseline risk assessment,
quality audits and training.
Appraisal
The costs associated with
manufacturing, factory acceptance
tests, approval of detailed design,
quality and safety audits, quality
control plans, inspections test
plans and defect close-out.
Internal Failure
The costs associated with the
interest on late payments, internal
compensation events,
documentation management and
warranty repairs.
External Failure
The costs associated with defects,
repairs and downtime captured as
external compensation events,
warranty payback claimed by
contractors, cost of cover currency
fluctuation, cost price adjustment
and scope changes.
Outage
The costs associated with
decommissioning of old
equipment, daily risk assessment,
non-conformance detection and
waste removal.
The costs associated with
installation of new equipment, cold
commissioning, hot
commissioning and unit light-up.
The costs associated with the
interest on late payments, internal
compensation events,
documentation management and
warranty repairs.
The costs associated with defects,
repairs and downtime captured as
external compensation events,
warranty payback claimed by
contractors, cost of cover currency
fluctuation, cost price adjustment
and scope changes.
Post-Outage
The costs associated with waste
removal, site clearance,
documentation and lessons
learned.
The costs associated with risk
review, product measurement and
optimisation.
The costs associated with defect
detection and repair during
optimisation.
The costs associated with defect
repairs after hand-over; as well as
penalties to contractors.

14. Step 7: Develop the Quality
Cost Matrix
PREVENTION COSTS
Process Phase Quality Cost Elements per Process Phase Source of Data and Information Process Owner
S1: Training Training Every department has a record of costs for
training
All process owners
S2: Finance Insurance – as a preventative measure Cost of Cover Finance manager
S2: Finance Reporting actual project cost SAP reports Finance manager
S2: Finance Project projection, planning and budgeting SAP reports Finance manager
S2: Finance Cash flow SAP reports Finance manager
S2: Quantity
Surveying
Pre-contract placement SAP reports Finance manager
S4: Design Freeze Basic design in design freeze. Engineering and consultants (GBE) Engineering manager
S4: Design Freeze Detail design in design freeze All costs for design in engineering
department.
Engineering manager
S4: Design Freeze Load Schedule (Planning and scheduling) Planning Engineering manager
S4: Design Freeze Approval of detail design in design freeze All costs for design in engineering
department.
Engineering manager
S1 – S10: All Process
Phases
Resource Costs: Manpower, Skills and Experience From Engineering Manager: Engineering
Labour Recovery
All process owners
S10: Risk
Assessment
(Baseline)
Identification of all risks Site Risk Committee SHE manager
Project manager
S10: Risk
Assessment
(Baseline)
Assessment of Safety, Health, Environment (SHE)
and Quality risks
Site Risk Committee SHE manager
Project manager
S1 – S10: All Process
Phases
Quality Assurance Detail of activity - costs linked to names of
personnel in quality
Quality manager
S1 – S10: All Process Audits Detail of activity - costs linked to names of Quality manager

15. Quality Cost Methodology:
Phase Three
Step 8: Determine sources of quality cost information and establish cost collection
procedures.
Determine existing cost systems and examine depth of available cost data.
Examine suitability of different types of cost collection methods.
Identify sources of data and information and establish procedures for collection:
 Collection of costs by account.
 Collection of costs by whole person.
 Collection of costs by labour hours.
 Collection of costs by defect type.
 Collection of costs by personal log.
Step 9: Collect data and establish the reliability and validity of the data.

16.  Validation of process diagrams and cost element allocation by process teams.
 Relevant financial document - and procedural study.
 Alignment of site organogram, SAP cost centres and General Ledger accounts.
 Meetings and discussions with colleagues in planning, cost control, finance,
quantity surveying, engineering – confirming data, systems and processes.
 Relevant document and procedural study.
 Independent data validation by Group Capital Quality.
 Process diagrams validated by Engineering Manager.
 Data triangulation.
 Data collection by cost centre was adopted as the most efficient cost retrieval
method.
 Principle: use the existing costing systems (SAP) as far a possible. Kriel SAP is
organised by cost centres.
 Individual cost data collection and input methods (e.g. Cost controller and QS) are
complex, individualised, and high volume – and finally entered on SAP.
 The level of transactional information captured on SAP does not allow detailed
extraction of data.
Quality Cost Methodology:
Phase Three → Process/Data Validation

17. Quality Cost Methodology:
Phase Three → % Allocatoin
Cost
Category
Process
Phase
Process Owner
Prevention Design Freeze Eng Manager
Installation C&I, Elect and
Mech Managers
Finance Finance Manager
Baseline RA Project and SHE
Managers
Training All cost centres
Appraisal Manufacturing Project manager
Installation C&I, Elec and
Mech Managers
Design Freeze Eng Manager
Operational
Checks
Comm Manager
Finance Finance Manager
Procurement Procure Manager
Cost Centre % Allocation
Pre-Outage, Unit 5
Engineering
Prevention 100%
Appraisal 0%
Commissioning
Prevention 80%
Appraisal 20%
C&I
Prevention 65%
Appraisal 35%
Mechanical
Prevention 30%
Appraisal 70%

18. Quality Cost Methodology:
Phase Four → Quality Cost Reports
COST OF QUALITY SUMMARY REPORT
BASED ON OPERATING EXPENDTURE
TIME PERIOD: MARCH 2007 – JULY 2010
Total Prevention
and Appraisal Cost
as a % of TQC
48%
Total Failure Costs
as a % of TQC
52%
Total Quality
Costs as % of
Operating
Expenditure
27%
Quality Costing Benchmark for an efficient
QMS:
Failure costs as a % of TQC: 8%-10%
TQC as a % of Operating Expenditure: 20%

19.  Complexity and volume of existing data capture systems precludes manual
data collection and becomes unsustainable.
 The lack of detailed quality transactional data in traditional accounting and cost
engineering systems disables accurate and reliable quality cost data collection.
 Incorrect application of quality cost methodologies.
 Time-consuming retrieval of cost reports.
 Exclusion of overhead costs.
 Exclusion of intangible or hidden costs.
 Inaccessibility to SAP and required data prolongs the process.
Quality Cost Methodology:
Challenges & Critique
DESIGN OF AN AUTOMATED QUALITY COST
SYSTEM:

20. • QTrack is a suite of products intended to
assist industry in managing their process
cost of quality - and supported by lessons
learned. QTrack comprises four individual
and flexible modules including:
• QTrack for Projects
• QTrack for Manufacturing (both continuous
manufacturing and batch production)
• Lessons Learned.
• QTrack promotes accurate quality costing,
risk mitigation and continual improvement.
Automated Quality Costing:
QTRACK

21. 23
Lessons Learnt:
QTRACK
PROCESS FLOW
DIAGRAM
QP15_Risk Analysis and lessons le

22. The contribution of QTrack is the design of an
automated quality cost program that can
identify and expose the allocation of
resources for prevention and appraisal of
quality; recognize ineffective investment in
quality and motivate more efficient processes.
The ultimate value of QTrack lies in the
conversion of Quality costing data to Lessons
Learnt through a risk management system –
which enables improved business and cost
management for companies, waste reduction
and continual improvement.
24
Quality Quality
Lessons Learnt:
QTRACK

23. (e.g. ISO compliance
Programme)
(e.g. Quality Control
Inspection
Programme)
QUALITY COSTING DRIVES COST SAVING AND CONTINUAL IMPROVEMENT
Before introduction of a QMS After introduction of a QMS
Before introduction of a QMS
Investment
in Prevention
Investment in
Appraisal
Savings/Profit
Savings/Profit
Investment in
Appraisal
Investment in
Prevention
Cost of
Non-Conformance Cost of
Non-Conformance
Net increase in Prevention & Appraisal costs < Reduced Costs of NC
TotalBudget(/BalanceSheet)
25
The Value of Quality Costing:
QTRACK

24. 26
The Value of Quality Costing:
Continual Improvement
Crosby QM
Maturity Model
Measurement
Categories
Stage 1 :
Uncertainty
Stage 2 :
Awakening
Stage 3 :
Enlightenment
Stage 4 :
Wisdom
Stage 5 :
Certainty
Cost of Quality as
a % of sales
Reported:
Unknown
Actual: 20%
Reported: 3%
Actual: 18%
Reported: 8%
Actual: 12%
Reported: 6.5%
Actual: 8%
Reported: 2.5%
Actual: 2.5%
Quality
improvement
actions
No organized
activities. No
understanding of
such activities.
Trying obvious
‘motivational’
short-range
efforts.
Implementation of
multi-step
programs with
thorough
understanding and
establishment of
each step.
Continuing the
multi-step program
and starting other
pro-
active/preventive
quality initiatives.
Quality
improvement is a
normal and
continued activity.

25.  Total Quality Costs may constitute 8% - 15% of total construction costs.
 An average contractor is estimated to spend between 5% - 10% of the project
costs on rework.
 Spending 1% more on prevention costs reduced failure costs from 10% to 2% of
construction costs.
 Total construction costs can be reduced by approximately 25% with the
implementation of a sound quality management system.
Cost of Quality Benchmarking
Global Benchmarks
27April 13, 2015 BIE International Engineers (Pty) Ltd

26. 28
Thank You for your
Attention.
The BIE Group www.biegroup.com
PACE Services www.paceservices.co.za
University of Johannesburg www.uj.ac.za
Hannelie Nel
BIE International, South Africa
hannelie.nel@bie.co.za
+27 11 82 924 6059