Quality cost is the sum of all costs a company invests into the release of a quality product. When developing a software product, there are four types of quality costs: prevention costs, appraisal costs, internal failure costs, and external failure costs.

(1) Prevention costs represent everything a company spends to prevent software errors, documentation errors, and other product-related errors. These include requirements and usability analysis, for example. Dollars spent on prevention costs are the most effective quality dollars, because preventing errors from getting into the product is much cheaper than fixing errors later. If there is an error in a requirement or the intended usability, and money is spent on developing the software to the erroneous requirement, the costs of identifying the error, determining how to fix it, and then developing new code to correct it will arise later.

(2) Appraisal costs include the money spent on the actual testing activity. Any and all activities associated with searching for errors in the software and associated product materials falls into this category. This includes all testing: by the developers themselves, by an internal test team, and by an outsourced software test organization. This also includes all associated hardware, software, labor, and other costs. Once a product is in the coding phases, the goal is to do the most effective appraisal job, so that internal failure work is streamlined and well-managed and prevents skyrocketing external failure costs.

(3) Internal failure costs are the costs of coping with errors discovered during development and testing. These are bugs found before the product is released. As we mentioned previously, the further in the development process the errors are discovered, the more costly they are to fix. So the later the errors are discovered, the higher their associated internal failure costs will be.

(4) External failure costs are the costs of coping with errors discovered after the product is released. These are typically errors found by your customers. These costs can be much higher than internal failure costs, because the stakes are much higher. These costs include post-release customer and technical support. Errors at this stage can also be costly in terms of your company’s reputation and may lead to lost customers.

Resource:

http://www.logigear.com/newsletter/understanding_quality_cost.asp