Is Safety Worth the Cost?

Posted in: Features, May/June 2014

Safety needs to be a high priority for all construction contractors because of its direct impact on productivity and profitability. Based on the latest data available in the United States, the construction industry alone accounted for 16 percent of all fatal work injuries in 2012, according to the Occupational Safety and Health Administration (OSHA). The construction industry is, by most statistical rankings, among the top 10 most dangerous work environments in the United States often just behind logging, commercial fishing, or aircraft operations.

Most construction site fatalities in America are caused by four common occurrences, also known as the Fatal Four: falls, being struck by an object, electrocution, and being caught in/between objects. These Fatal Four alone accounted for 56 percent of all construction worker deaths in 2012. Having proper safety procedures can not only save lives, livelihoods, and productivity costs, but having safe work sites can also present significant cost savings per project for all construction contractors. By eliminating these Fatal Four, the construction industry would have helped save 435 workers lives and their associated annual productivity.

Construction Accidents by the Numbers

Accidents that gain headlines are typically the fatal ones, and although these can happen randomly and without warning, there are signs that could have prevented the accident entirely, according to theory attributed to H.W. Heinrich (1886-1962), an American workplace safety pioneer. Heinrich was the former Assistant Superintendent of the Engineering and Inspection Division of Travelers Insurance Company who wrote Industrial Accident Prevention: A Scientific Approach and developed a theory called “Heinrich’s Law.” This law, based on investigative research and accident reports, concluded that for every 300 injury-free accidents that occur, there are 29 minor injury accidents and one major injury accident, and often, the root causes are related. With each accident having associated loss of productivity and project profit, the impact of this formula on the construction industry is considerable.

In today's terms, based on Heinrich's theory, for each of the 435 lives lost to construction's Fatal Four in 2012, plug each of those deaths into Heinrich’s formula as a major accident. That becomes 12,615 minor accidents and 130,500 injury-free accidents that occurred in the American construction industry in 2012, each representing lost productivity and lost margins. For a contractor, knowing that there were over 140,000 accidents with associated costs occurring as recently as 2012 is jarring. Whether injury-free, minor, or major, a number that high is enough to impact insurance premiums, workers’ compensation claims, bonding risks, and other business expenses across the entire industry sector. That alone can startle contractors into reviewing hazard awareness and existing safety procedures on their work sites.

Construction Accidents By the Dollars

How expensive can an accident be? According to OSHA, the average cost of an eye injury is $1,463. This would fall into the category of minor injuries according to Heinrich’s Law; if every minor accident was said eye injury, which would be approximately $18,455,745 in costs for minor accidents in construction in 2012 alone.

What exactly drives this cost? There would be obvious direct costs such as worker’s compensation claims covering medical costs and indemnity payments while the employee is unable to work. The next overlooked group of costs are considered indirect costs, which could range in price anywhere from the same as direct costs or upwards to 20 times the direct cost. The indirect costs would include administration time and medical care for the injury, rises in insurance and workers compensation costs, replacing the hours lost by that employee by either training another employee or hiring a new one, the loss of reputation, poorer customer relations, and potential fines. Many of these factors may not seem so obvious, but any contractor who’s been involved in a major accident knows the impact on professional reputation, whether they are at fault or not. 

It is said that the lower the direct costs of an accident, the higher the ratio of indirect to direct cost occurs. In order to make up for any injury costs (and maintain the profitability of a project), a contractor will need to generate additional revenue to offset this loss. Take the previous eye injury example – if a contractor’s normal profit margin is 10 percent, then this contractor will need to generate $14,630 ($1,463 x 10 percent) in revenue just to offset against this loss and maintain their margin.

Accident Prevention Tactics

What could be done to prevent these accidents from occurring, and how much will it cost me? The best news is that it is can be as expensive or inexpensive you want it to be. The primary cost will be your time. All accidents, whether injury free or not, should be reported, fully documented, tracked, and analyzed to determine if there are trends or common core issues that could lead to major injuries. Remember, according to Heinrich’s Law, every 300 non-injury accidents could lead to one major accident. Having the ability to catch the trend of the accident or root cause at the 10th or 20th non-injury accident could go a long way in saving injury expenditures (direct and indirect costs) as well as preserving the safety and productivity level of an employee and the profitability of a project.

The next step is communication. From the project managers all the way down to the staff, keeping everyone involved in the reporting and follow-through processes is crucial. The forms of communication can include training sessions, reporting processes, meetings, accident awareness programs, and ongoing open communication about hazards and safety issues. Keep everyone involved and engaged in safety awareness. These are just a few examples and steps that can be taken, each helping to save money, profitability, productivity, and most importantly – saving lives.

Basically, with no second thought required, safety awareness and accident elimination on construction sites is well worth the cost – in hard dollars, in productivity, and in industry reputation. By any measure, the cost of increasing safety levels on work sites is far less than the direct and indirect costs of an accident. By following Heinrich’s Law, a contractor can work proactively to limit major and even minor accidents from occurring.

Although Heinrich’s Law may seem outdated (it was developed in 1931), time cannot change the core meaning of the Law or its ratios: a rash of non- injury and minor accidents does NOT constitute a safe work environment; it is a sign of hazard and directly increases the risk of a major accident ahead. Safety is a smart business decision, period. Contractors need to take notice and proactively prioritize safety throughout their operations. To do otherwise, to be reactive, is a cost not only to competitiveness, profitability, and productivity but also an incalculable risk to one’s business, livelihood, and reputation.

Alex Hearn, CPA, is a Construction Accounting Specialist with VonLehman. He can be reached at e-mail ahearn@vlcpa.com. Founded in 1946 and with offices in Kentucky, Ohio, and Indiana, VonLehman is a leading full-service CPA, business advisory, and business turn around firm with a national reputation in construction accounting. VonLehman provides forward-thinking accounting, tax, and strategic business advice to closely-held businesses, not-for-profits, and governmental entities. See www.vlcpa.com for more information.