Figure the True Cost of Safety

02/28/07

Having trouble convincing your boss to shell out the bucks needed to improve safety? “Argue for safety based on money,” industrial hygienist Jack Schill advised a group of HR and safety managers at a recent seminar. “That’s sure to get the boss’s attention.”

Schill, of Schill Industrial Hygiene, put the cost of safety in stark terms. Using the best available figures, he noted that the cost of a disabling injury was at least $27,000 when all the direct and indirect costs are figured in. “Most insurers will tell you,” he added, “that the cost of an injury is around five times the direct costs. The direct cost is only the tip of the iceberg.

Indirect costs that impact the ledger include property and/or product damage, and production delays. Those that are uninsured include the cost of replacing a worker either temporarily or permanently, training, and investigations.

Cost Comes Out of Profit
Since expenses of this sort are typically unbudgeted, how are they paid? “Out of profit,” said Schill. And that’s where the money argument becomes compelling. “If your company’s profit margin is 3 percent,” he said, “you need sales of $900,000 to cover the cost of that $27,000 accident. This is the true figure”—i.e, the true cost of that accident.

Watch Your Mod Rate
Schill also pointed to the Workers’ Compensation experience modification rate or “mod rate” as a place you can save a lot of money—and gain a potent advantage over competitors. The mod rate is a multiplier based on your safety record going back a number of years. It’s calculated by looking at workers’ comp claims going four years back, then three years forward. A company with an average safety record will have a mod rate of 1.0. So if your Workers’Comp premium is $50,000 and you have a mod rate of 1, you pay $50,000.

But say you’ve had a string of accidents over the years, and your mod rate is 1.3. Then your cost is $65,000 (1.3 x $50,000). If you have a great safety record and your mod rate is 0.8, then you’d pay $40,000.

In this hypothetical example, then, your great safety record turns into a $25,000 advantage over a competitor. In some industries, this advantage is not theoretical. Construction companies bidding on a job, for example, will have a line item for Workers’ Comp, making a low mod rate something worth working for.

Your insurance agent can tell you your mod rate. Though it may take you a while, do your best to whittle down the figure through improved safety awareness and training. As Jack Schill said, “Workers’ Comp costs can’t be managed passively.”

And when you highlight the cost of an accident in the terms presented here, it’s a lot more likely the boss will approve—and applaud—your efforts to improve safety.