Whether it’s a car crash in a company vehicle or an employee’s fall from a ladder, when an accident occurs, your company has lost one of its most important assets—the employee. Workplace safety planning and programs are too often centered around the upfront financial costs of an accident, and not on the indirect costs associated with the loss of employee productivity. Knowing how to calculate the total costs of an accident is a critical first step in developing effective safety and loss prevention programs.
It’s time, then, to take a look beyond the immediate dollars and cents spent on medical bills and insurance premiums, to the hidden costs of an injured employee and the related impact on your business. Consider the cost of hiring and retraining an employee to replace the injured team member. Factor in lost revenue caused by production and manufacturing delays. These are just some of the costs that can do damage to your brand, business and bottom line.
Before we get into the cost factors that create loss due to a workplace accident, let’s take a step back and first consider: What exactly constitutes an accident? What gets measured gets managed. Therefore, it’s important to carefully define the type of incidents that will be documented.
Here at Sentinel, we strongly encourage our clients to count not only the accidents that did happen, but the ones that almost happened, as well. Those near-miss incidents are red flags calling attention to potentially unsafe conditions.
Next, let’s ensure we are counting all the direct costs associated with an accident. Direct costs are those that can be easily quantified, and they include:
- Medical Costs
- Employee compensation
- Insurance premiums and deductibles
- Permanent disability and sick pay
- Insurance premiums and deductibles
- Building damage
- Tool and equipment damage
- Production and material damage
- Government fees and penalties
- Legal fees
The hidden, indirect costs of a workplace accident can run anywhere from four-to-10 times the amount of direct costs. In some cases, indirect costs can be 20 times higher. But indirect costs are often not counted correctly, and sometimes not at all, because they are harder to quantify.
Consider how you would quantify loss in the following areas:
- Loss of experience and expertise
- Cost of hiring and/or training replacement staff
- Overtime to cover the work/shifts of an injured worker
- Extra supervisory time
- Lowering of morale, goodwill, image, etc.
- Production delays and down time
- Cancelled contracts
- Increased insurance premiums
- Investigation time
- Time spent to process Workers’ Comp forms
- Loss of product/process material damaged during accident
- Change in incident rates, ERM, etc.
To calculate the financial impact of these costs, we can use the amount of sales that must be generated to pay for a single incident. The more narrow a company’s profit margins, the more sales that must be generated. To put this in perspective, think about the things that come from the company’s profits—jobs, new and better equipment, reinvestment into company, company benefits, and pay raises and bonuses, among others.
There are several rates that are used to measure a company’s loss performance, such as Enterprise Rate Modifier (ERM), and the Days Away, Restricted or Job Transfer (DART). These rates can be used in bidding for contracts, to determine OSHA inspection priorities and insurance premiums.
As with other indirect costs, they have long term impacts on profitability. The ERM is a benchmark tool used to compare a company’s actual losses to their expected losses. 1.00 is an average ERM. Lower than 1.00 is better than average; higher than 1.00 is worse than average. It measures dollars, not number of claims. Additionally, it is based on a rolling three years (see chart below). This factor or rate is used as a multiplier for insurance premium calculation. There is tremendous financial benefit to consistently focus on keeping a low ERM, including lower premiums, ability to obtain contracts, and lower workplace incidents.
Incident rates are a mathematical calculation that describes the number of incidents per 100 full-time employees in any given time frame. There are several rates used in injury tracking, including the (DART) rate, Lost Workday (LWD) rate, and severity rates. The formula for calculating the rates is (Number of Injuries and illnesses X 200,000) / employee hours worked.
Another aspect to consider is the cost of total worker health. In discussing cost of accidents, we look at direct and indirect cost immediately associated with the injury. However, what if an employee is injured off the job? This type of injury will not show up on loss runs or OSHA logs; they have no effect on incident rates. However, the company still pays for this injury. This employee is still a lost asset. The direct costs are simply filed under employee health benefits as opposed to worker’s compensation, and many of the same indirect costs still apply.
Once the financial impact of an incident is realized, the value of safety can be truly understood. A good safety culture can have long-lasting results, and implementing a good safety program can have a tremendous return on investment. For example, a robust self-inspection program can find hazards before they occur, reduce the potential for and severity of injuries, and reduce potential of an OSHA citation. Additionally, demonstrating that the company cares about employee safety positively impacts employee morale.