The Intersection of Safety and Finance

By John Welches posted 08-05-2021 16:44

  

For all the right reasons, safety is a central theme in the construction industry. For crews in the field, safe practices can literally be a matter of life and death. For the accountants and financial planners back at the office, safety is important, too: not just because they also care about the wellbeing of their coworkers, but also because safety incidents drive up costs.


Finance professionals working in the construction industry can add value to their organizations by becoming part of the safety conversation. Among other things, helping executives and field supervisors understand the “business side” of their safety efforts can give them added context. Budgeting can be more accurate if the true cost of incidents can be baked in. And spending on safety programs can be easier to justify if the financial return on investment is well understood.


Key financial impacts of safety programs


Safety programs can be expensive. Professional trainers may charge thousands of dollars to evaluate best practices and contribute to the development of better processes. Equipment like PPE can be a significant cost, especially with global supply shortages driving up prices. Pulling crews off jobs to spend the day studying safety takes them away from revenue-generating work. 


Despite the costs, most businesses are eager to invest in their safety programs. A well-executed program drives substantial savings, especially over a period of years. These costs can be broken down into several categories:


  • Workers’ compensation costs

Insurance risk can undermine the profitability of a business, in part because recovering from a bad record can take years. Every state’s workers’ compensation system differs in important ways, but they generally follow a standardized approach for calculating premiums. First, the insurer calculates a base premium based on the business’s size and the specific jobs of each employee. The base premium likely won’t vary much from business to business in a particular industry.

An experience modifier is applied to the base premium to determine the actual premium. Sometimes shortened as “ex-mod” or “EMR,” the experience modifier is calculated by a third-party rating bureau using the business’s claims history. The EMR takes into consideration the severity and frequency of losses over the prior three years, with special emphasis given to frequency. A pattern of incidents will drive up premiums more quickly than a single large event. 


The key thing to understand about how workers' comp premiums are calculated is that one bad year will create a drag on the company’s bottom line for several years to come—even if a robust safety program is put into place tomorrow.

  • Employment and administrative expenses

The cost of work injuries goes well beyond workers’ comp. When an employee is injured on the job and can no longer work, a cascade of related expenses typically follows. Finding a suitable replacement for skilled people is never easy. In this labor market, a replacement hire may simply be unavailable. That forces the rest of the team to pick up the slack, or schedules to slip. The consequence can be greater injury risk and higher labor costs.


Businesses devote substantial resources to administering the post-injury process. An entire industry has grown up around the management of workers’ compensation claims. A business that plans to stand by its employee needs to be prepared to understand the byzantine world of claims management so it can best protect it’s employee’s interests, while also protecting itself.


Beyond claims management, an injury incident raises numerous other drivers of administrative cost. Managers need to understand their legal obligations to make accommodations under disability laws. New hires may need to be trained. In some situations, employees may need counseling. 


Quantifying the cost of safety incidents


The financial professional’s role in all this is to ensure that the organization has a sound understanding of the fiscal consequences of an injury. A properly executed analysis supports the finance team’s role in several ways:


  • Reliably forecast actual costs of safety incidents based on real numbers and prior experience.
  • Measure the areas where additional investments in safety programs will yield the greatest returns.
  • Bring a new depth of understanding to negotiations with insurance carriers.

Smaller firms with relatively stable incident histories may be able to conduct the analysis on their own. Most firms will benefit from working with a third-party consultant who specializes in this field. The goal should be to develop a model that can be used every year to keep the executive team informed.


Tap into the resources of CFMA


Safety is a great example of an issue that every CFMA member has in common. By pooling our expertise and resources, we can find solutions to challenges like these as a group. The result is better outcomes for the businesses we serve.


Would you like to hear more about safety in upcoming meetings? Start a conversation in our discussion forum or on LinkedIn.

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