Expert Commentary

The Cost of Safety

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.


Construction Safety
October 2002

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:

  1. Good information/certain conclusion. In this classification, you can be certain that the information is usable.
  2. Bad information/certain conclusion. In this classification, you are certain that the information is unusable.
  3. Suspect information/uncertain conclusion. In this category you suspect that the information is not good, but cannot be certain that it is bad.
  4. "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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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