Bleeding money: how much does safety really cost?

The unsafe workplace costs a lot of money. The financial magnitude of expenses incurred in operating an unsafe workplace must be understood. This examination of the true costs associated with poor safety uncovers how far they extend beyond simply counting the cost of safety glasses or wages paid to the safety department.

A dangerous thought may cross your mind in this world of economic uncertainty: What if we cut back on safety expenditures? You may conclude that your organization is spending too much on preventing injuries that may never happen.

It’s not a bad question: Does it really make sense to spend $100 to prevent $10 worth of injury costs in a lean manufacturing environment?

Continuous Improvement involves a function called “Cost of Quality” (COQ) that, on the surface, might appear to be counter-intuitive because it doesn’t refer to the money you must spend making certain that your products and services are delivered at the highest possible quality. Instead, COQ deals with the money that manufacturers lose by screwing things up.

You might wonder why those who coined the phrase didn’t just call it “Cost of Defects” or “Cost of a Lack of Quality.” But the term, as misleading as it may seem, dives past the surface of direct costs attached to yield, scrap material and rework and into the deeper layer of indirect costs related to the loss of faith on the part of the customer. Far more complex than a handful of metrics, COQ attempts to paint a fuller picture of the true costs associated with poor quality.

Safety professionals can learn a lot from this. If, for example, you examine the true costs associated with poor safety in “Cost of Safety” (COS), you’ll discover they extend far beyond simply counting the cost of safety glasses or wages paid to the safety department.

Instead, COS refers to the real costs inside an unsafe workplace that go much deeper than obvious expenses tied to treating injuries. The financial impact of not working safely can be calculated by tracking both the direct and indirect costs associated with not just injuries (including first aid cases and near misses), but also the ancillary costs within the infrastructure that is required to react to the problems that so often accompany an unsafe workplace.

Any responsible safety professional should understand the magnitude of the costs incurred from operating an unsafe workplace.

Direct costs

These expenses include the obvious accounts that are easy to calculate and tend to be associated with the immediate, or close to immediate, reaction to an incident. They include:

Medical Treatment. When workers get hurt the injuries must be treated. Spiraling medical costs are at the forefront of most businesses and yet, strangely, few connect injuries with medical costs. The cost of medical treatment for injuries generates an easily quantifiable effect on the company bottom line, yet many companies fail to see the connection. Everything from Band-Aids and aspirin to surgeries, casts and crutches should be included in this calculation.

Fines. As much as manufacturers want to do the “right thing” to protect workers (and in some industries their customers), regulatory fines have the most pronounced influence on whether or not hazards are corrected in a timely manner. Fire code violations, governmental citations, and fines associated with injuries all fall under the umbrella of “fines.” Each should be tabulated into the overall cost of injuries.

Wages for Medical Personnel. A significant cost of an unsafe workplace involves the wages to plant nurses and doctors, or the annual fees paid to clinics for those facilities without on-site medical departments. These expenses are often incurred whether or not any medical care is actually provided. That said, the more unsafe the workplace, the larger the medical infrastructure.

Record Keeping and Paperwork. Injuries require a high volume of paperwork and record keeping. Every page generated has some form of clerical or administrative wage associated with it.

Workers’ Compensation Costs. Workers’ Compensation payments are determined by the cost of worker injuries, but often these figures are treated as independent overhead costs. It is mind-boggling how many company controllers jealously guard these figures from safety professionals and operations leadership. In too many organizations, Workers’ Compensation is seen as a problem of fraud or poor case management.

Downtime and/or Loss of Production. Time is money and any organization must keep the machine running. Injuries can cause major disruptions that result in the wasteful and expensive loss of work.

Scrap. Damage, corruption or contamination of material that renders it useless for sale.

Wages paid to first responders. Emergency response professionals are seldom the first responders to workplace injuries. Instead, coworkers and supervisors are typically the first on the scene and when they deal with injuries they are not performing the work for which they are paid.

Legal Fees. Where there’s an injury there is typically a legal fee: Whether the fee paid to an attorney to defend against a lawsuit or fees paid to case managers, the cash outflow in response to worker injuries is often sizable. In some municipalities, corporate officers can face criminal charges for worker deaths and the company must pay to defend them.

Wages Paid to Investigate the Injuries. Workplace injuries must be investigated, an exercise that can consume considerable resources. Again, time is money. The more serious the injury, the more likely the injury will be time consuming and expensive.

Increased insurance rates. An unsafe workplace makes insurance companies worry about higher risk, which projects higher cost claims, which ultimately leads them to raise their rates.

Indirect costs

Indirect costs are far more difficult to calculate and quantify because they include things like:

Difficulty In Recruiting. Television shows like “Deadliest Catch” and “Ice Road Truckers” might make for entertainment, but workers today are more acutely aware of the safety of a prospective job than ever before. Safety really does matter, and promises of adventure and high wages are balanced against the risk of injury or death.

Companies spend millions on marketing and advertising only to have their good names smeared because of a high profile safety incident. Recruiting costs correlate to this smeared reputation. When an organization becomes known for its poor safety record, job candidates become increasingly reluctant to join the ranks of a bad corporate citizen.

Damage to the Corporate Image or Brand. The public increasingly links a safety record with being a good corporate citizen. More people are choosing to do business with companies whose politics, values, and ethics align with their own. Nobody wants to tarnish their own reputation through association with a corporate villain.

Crisis Communication and Public Relations Recovery. The branding impact mentioned above also includes bad PR. High profile injuries negate marketing efforts: Millions spent crafting a corporate image to attract customers and talent can be wasted if the company is a central figure in a high profile injury or fatality. Examples include Union Carbide, Exxon and other highly recognized manufacturers whose safety records became the center of media scrutiny and were forced to spend millions more repairing their images.

Increased Worker Turnover Costs. Injuries sap morale. When an employee is injured the entire company suffers to some degree, especially in cases involving a fatality or serious injury where family members and friends may actively lobby employees to leave that company before a similar fate befalls them.

Organizations with high injury rates tend to have higher turnover rates than their safer competitors. The costs of increased employee turnover – finding, recruiting, training, retaining new workers – are significant and well documented. Furthermore, this expensive process inherently exposes the company to even greater risk.

Increased absenteeism. People who don’t feel safe at work tend to be absent a lot and create a vicious circle: injuries lead to absenteeism that, in turn, places those workers who do report to work at greater risk of injury.

Lower efficiency. Efficiency is calculated by determining the number of hours it takes to produce goods or deliver services. Because time is lost to worker injuries, an unsafe workplace that hurts more workers is less efficient than those who hurt fewer workers.

Bringing it all together

The unsafe workplace costs a lot of money, but some safety management systems require such high upkeep costs that any savings associated with their successful implementations are essentially a wash. Many safety professionals make the mistake of spending more on prevention than anyone could ever hope to recoup.