The Cost of Safety
October 2002
Setting an organization up to track safety
costs can be a complicated and time-consuming process. Ron Prichard examines
some ways to approach the task.
by Ron
Prichard, P.E. Ph.D.
Aon Worldwide Resources
A common subject at conferences and in a variety of publications these days
is selling safety to management. It is the “quest for the holy grail” of the
safety profession, and all those who support it (vendors and such). One of the
key reasons for this effort is to get “buy-in” from management for the safety
function, so that it becomes a part of the culture of an organization. Often,
however, selling safety is driven by other factors, such as a desire to gain
greater prominence within the organization and as justification for pet programs
and efforts. Regardless of the underlying motivation, selling safety to management
is a challenge.
To successfully market a product, the seller must let the customer know how
much the product will cost and be able to demonstrate the product's value. Once
a customer knows these two elements, a comparison and conclusion can be made
as to whether the value justifies the cost. For safety, management must quantify
dollars spent to prevent accidents and compare it to the amount of benefit or
savings generated by such activity. In this article, we will address the cost
element of the equation.
What Does Safety Cost?
The short answer to the question of what safety costs is always the same,
“It depends.” Therein lies the rub. No two organizations are going to arrive
at the same costs, even if they both choose, measure, and count the same items
as components of safety costs. Also, it is extremely difficult to determine
whether the costs are justified. When done properly, safety efforts prevent
incidents. Over time, the benefit of preempting incidents begins to have a less
obvious cost benefit as incidents become fewer.
Thus, collecting good data in the early implementation phases becomes a factor
in continuing to demonstrate value over time. There are many different ways
to determine an organization's cost of safety. What follows is one basic method.
What Is the Goal?
The first step in determining the cost of safety is to determine the goal.
What does the company hope to achieve by tracking costs? Defining safety costs
to include in construction bids, for example, requires a different degree of
detail than justifying expansion of the corporate safety function. Determining
the goal is crucial because the goal determines the level of effort needed to
accumulate cost data—the degree of detail and preciseness of the data collected.
How Do You Collect the Data?
The next step in determining the cost of safety is to begin accumulating
cost data. There are several typical methods that might be utilized. However,
they only provide an estimate of costs,
not actual costs. A less theoretical approach draws on the existing cost accounting
structure of the organization. After all, expense data is already being accumulated
to price prospective jobs and bill for work in place. A more precise calculation
of safety costs can be achieved with a cost model based on how the organization
actually operates, using real-time cost estimates. This method is addressed
in more detail below.
The first step of this cost model is to define the boundaries of the data
collection search. What costs will be collected and considered? What procedures
for defining costs will be used? How will costs be sorted and categorized? These
boundaries need to be put in writing. Since employees will naturally tend to
justify expenditures to management, it must be made clear that the purpose of
this initial data collection is to form a basis for comparison, against which
all subsequent data will be gauged.
Safety or Nonsafety Costs?
Safety costs can be divided into two categories: the cost of safety-producing
activities and nonsafety costs. Keeping these two principle costs components
separate helps organizations track how they change over time and helps to show
how investments in safety can actually reduce the cost of nonsafety. Safety-producing
activities need to be defined, and can be simple or extensive, depending on
the degree of detail desired in cost data. For instance, in some organizations,
all training is included as a safety-producing activity; in others, only safety-specific
training is included.
Nonsafety costs are those expenditures resulting from a lack of safety, such
as accidents, incidents, and lawsuits. They must be included to gain a complete
picture of safety-related expenses. The range of data collected again varies
according to need as determined by the goal. Some only collect the direct costs
of accidents, while others include the indirect components as well. As an example
of the latter, minor accidents usually have indirect costs, such as lost productivity,
diverted management attention, accident investigation, delays, and such that
amount to around 4 times the direct costs. However, with serious accidents,
these expenses can rise to 10-15 times the direct costs, especially if litigation
ensues. Occupational Safety and Health Act (OSHA) fines and other penalties
are also usually considered nonsafety related expenses.
While these seem like two distinct categories of expense, the separation
between them, and what is collected into them, can become quite blurred. Once
again, determining what is in and what is out, and in which category it belongs,
depends on the stated goal. Often included safety measures include: training,
personal protective equipment, and all costs associated with the safety department,
such as wages, benefits, travel expenses, etc. Some organizations also incorporate
the cost of a risk management department, insurance costs, and other operational
expenses. These cost components can be assigned into separate categories as
well, such as “hard” versus “soft” costs, direct versus indirect, recognized
versus unrecognized, and so on. Thus, the level of detail can range from very
simple to very complex, based on your goal. Thus, it is easy to see how the
costs of safety can vary so significantly from one company to the next.
How Reliable Is the Cost Model?
There are many aspects to consider when evaluating the cost model for effectiveness
in gauging costs. The first is data reliability. This is an embedded element
in the system, placing limits on all the other aspects. Reliability is a measure
of the trustworthiness of the information. The reliability of information can
be placed into one of four classifications:
- Good information/certain conclusion. In
this classification, you can be certain that the information is usable.
- Bad information/certain conclusion. In
this classification, you are certain that the information is unusable.
- Suspect information/uncertain conclusion. In this category you suspect that the information is not good, but cannot
be certain that it is bad.
- "I don't know" or IDK. In this classification,
you do not have enough knowledge of the source to make a determination about
the reliability of the information.
Since the quality of decisions is a function of the quality of information
input, knowing information reliability is vital. Other evaluation elements necessary
for the proper functioning of the cost model include:
- Cost accuracy. This is related to the
reliability of the actual number—a combination of the source of the data
and who actually provides it.
- Timeliness. Feedback loses its value over
time; the further removed from the event being measured, the less significant
the data becomes (since it is superceded by new data). Frequency of reporting
is also a feedback function.
- Comprehensiveness. This is a function
of where the data is gathered, and it can range from project-specific to
company-wide.
The decision about what degree of detail to use to set up the cost model
for these three requirements is again based on the goal. The more precision,
rapid reporting, or specificity desired, the more effort needs to be expended
in gathering it. Basically, this is a function of balancing investment versus
return expected.
Conclusion
Clearly, tracking safety costs can be a complicated and time (and effort)
consuming process. The more you do, the more you can do. It all depends on the
reason for collecting the data in the first place and what you intend to use
it for. So, coming full circle, we arrive once again at the goal. If you are
only trying to get some sense of where, within order of magnitude, your costs
are, then you can use some of the basic “rules of thumb” and arrive at a rough
estimate of costs. Examples include the Stanford study of Levitt and Samuelson
which placed safety costs at 2.5 percent of direct labor costs; the Business
Roundtable study pegged safety costs at .625 percent of total project costs;
and the EIU study set safety costs at 8 percent of payroll.
If, instead, the organization believes in the importance of safety as a cost
driver and sees it as a critical element for increasing profitability, then
a more precise method—such as described in this article—must be crafted.
There is a common theme in management that what gets measured gets managed.
This also applies to the collection of data with respect to safety costs. Once
data collection begins, those providing the data become more aware of these
costs and begin managing them, consciously or unconsciously. This is one of
the synergistic effects of tracking costs. It is this ability to compare—past
to present, one region to another, one group to another—that drives behavior
within an organization. What gets rewarded gets repeated, and how an action
is measured and compared becomes a basis for behavior modification. Thus, the
mere action of measuring costs will drive improvement in those costs. And that
may become the biggest selling point of all.
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