29 Jan 2008

The Value of Safety

November 2002

by Ron Prichard, P.E. PhD.

In today’s world of construction, the struggle for attention of senior managers is growing in intensity as competing demands multiply with the complexity of projects. Safety is but one need, and often relegated to secondary importance, especially if things seem to be going well. Thus, the “holy grail” for safety professionals everywhere is: “how do I ensure that that safety gets on and stays on the radar screen of the firm’s principals?” One of the semantic struggles in this “battle for the high ground,” is the debate about safety being a priority or a value. For a long time, safety was neither. Those who put safety as a priority recognize that this is an important step in gaining management commitment to safety. Those who favor the “safety as a value” proposition have given the “safety as an over-riding priority” proposition a try, and come up short. The purpose of this article is to address some points as to why safety deserves placement in an organization as a value, and some of the obstacles to be overcome in gaining this status.

What Is Value?

In this article, “value” refers primarily to relative worth, utility, or importance. In demonstrating that safety can be shown to have value in the sense of having importance, it can then be more easily shown to have value in the sense of worth.

In trying to demonstrate “value,” the most common inclination is to gravitate toward economics. This is done on the general basis that decisions in business are principally based on the finances involved, with the objective to gain an economic advantage from taking an action. While this is the primary orientation of people in trying to make their case, an examination of the issues involved will show why this is difficult, and should be only one of several means to demonstrate worth.

In the strict sense of worth, one must first understand the evaluated (or “real”) economic value of safety. This is a net financial measure, generally based on the costs of two elements. The first element is the cost of nonsafety—a financial measure of the losses. At a minimum, this number is a function of accident costs, direct and indirect, plus the additional costs of workers compensation insurance above unity (based on a premium with an EMR of 1.0). In the event that there are lawsuits, fines, and increasing general liability premiums as a function of nonsafety, these costs might also be added in. This number must be combined with the costs of providing safety functions—a measure of the prevention of losses. This aspect was covered in detail in a previous article. What it might total, and how these numbers are used to arrive at a net worth depends upon the detail to which the costs are seen as real, the selected basis of comparison, and other decisions with regard to computing the costs.

Putting a Price on Value

As a result, the “value” from an economic standpoint, can be quite fungible. Therein lays the quandary faced by most safety professionals, in trying to convince management that safety should be a value. Dollars are seen as a “hard” measure of worth, but with regard to safety they are a function of so many variables, that it is tough to make a purely economic case. In addition, numbers, no matter how well supported, are necessary, but insufficient to make the case until they are converted into a term more recognizable by management. In this case, return on investment (ROI), payback method, or the net present value method are the primary financial measures most often used to gauge the economics of a decision. The choice depends upon what is most typical in your enterprise, and that choice will drive the method of selecting and computing costs.

Now, while creating a set economic value for safety is a difficult challenge, there are a variety of other intangible methods of calculating value which are worthy of consideration. Under some circumstances, these benefits, while difficult to assign an economic value to, may be worth far more than any financial measures. When the benefits of these additional factors are combined, they show a significant worth for working safety, and making it a part of the culture of the enterprise. Each of these factors will be addressed briefly. The first set describes financially related benefits, and can be worked into the economic worth of safety. The second set defines more indirect benefits. In addition, some of the value of safety is a function of comparison to the consequences of nonsafety. Elements in this later category will also be described.

Financial Benefits. What gets measured gets managed; it is a truism of all human activities. In addition, who gets measured drives the accountability chain. Thus, without accurate financial measurement, it is not possible to gauge actual cost, and without actual cost, it is impossible to accurately gauge ROI.

Safety records tie into insurance premiums for both workers compensation and general liability. Workers compensation premiums are billed against each labor hour, at the rate of the particular trade, and modified by the safety performance. General liability premiums are related to type of work, value of work in place, and losses. In both cases, safety performance plays into the cost of the insurance, and the insurance plays a cost role in the hourly wage rates on projects. Thus, safety is a major cost driver within the labor component of project costs. Project costs, a function of bidding and managing work, are thus tied to safety. Good records mean better profitability. It can also mean the difference between winning work, or not.

Accident costs have two components: direct and indirect. Only direct costs are insurable. Unfortunately, they are only a fraction of the full, actual cost of accidents. Indirect expenses are generally a multiple of direct costs, and depend upon the severity of the particular event. The more severe an incident, the higher the associated indirect expenses. The difference to the recoverable costs of accidents and the true total cost can only be paid out of company profits.

Lawsuits are generally an outcome to be expected when accidents occur, as people are dissatisfied with the worker’s compensation benefits as a sole remedy. In the event that the accident involves a third party—either a subcontractor employee or a member of the public—nonsafety most likely will involve participation (with all associated legal expense) in lawsuits as those parties seek additional financial recovery.

OSHA inspections and fines will often result in the event of nonsafety. In this case nonsafety can be an incident with multiple injuries or a fatality, which leads to an event-trigger for an OSHA site visit. Alternatively, nonsafety can be an event-trigger for a complaint inspection, or a scheduled OSHA site visit. In all three of these cases, failure to be in full-compliance with OSHA requirements (a component of non-safety) can lead to citations and fines. The full cost of an OSHA fine, generally thought to be the value of the actual fine, is like an accident. There are also indirect costs related to diversion of management to deal with the issues, the cost of legal counsel in the process, and numerous other indirects.

Intangible Benefits. Accidents lead to reactive management. In a post-accident situation, management is focused on dealing with the fallout of the event, and reacting to the outcomes. When they are thus engaged, their talents are being squandered with regard to what they were specifically hired to do: run projects. Safety looks forward to prevention of negative events. This frees up management attention to advance the job.

In addition, negative publicity is always attendant with accident, often attracting media attention. The greater the calamity, the more attention generated. This will undermine the effects of marketing. It is one factor in determining reputation of performance (and another factor in owner selection).

Safety, however, is an outcome, a function of the interaction of methods, means, materials, manpower, and the plans. It is not something you do; it is something you get. As a result, good safety means that projects are also running well, and other key objectives are also being satisfied. Safety involves people. Good safety records mean that the work is managed well, and things are done properly. It also means that those actually performing the work, and exposed to the chance for personal injury, are going home intact at the end of each day. This factor can attract, and help retain a quality workforce. In today’s world, this becomes a valuable asset.

Safety is a precursor for completed operations exposures and a “red-flag” warning for failures of construction management methods. Safety just shows up early, as the failures have no “time lag” or latency period. Safety happens (or not) as the work is being performed. Quality issues have variable latency periods, before their effects manifest themselves. These results are being used increasingly as a discriminator in selection of winners in bidding for construction projects. Owners typically are placing selection hurdles on safety performances measures to screen out average or below average performers.

Safety can be shown to have a straight economic value, if one is willing to go to the trouble to compute it. However, as the elements just discussed show, there are many more significant benefits from safety. In trying to convince people as to why they should care, it is these items, not the financial measures, which should dominate the discussion.

Copyright © 2002. IRMI.com

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