Smart Solutions

The Impact of Safety on Profitability

What is the first thing that comes to mind when the word “safety” is mentioned in a meeting or on a jobsite? Perhaps you imagine superintendents reminding employees to wear their personal protective equipment (PPE). You may picture a checklist of all the necessary precautions to be completed prior to starting a job. It is often perceived that safety slows an operation down, when safety should be associated with profitability. In an Engineering News-Record survey, 63 percent of contractors believe safety has no effect on profitability.

Why Invest in Safety?

Safety impacts profitability in ways that too often get overlooked. Without an effective safety program, the following ramifications may occur:

  • Insurance costs can sky rocket.
  • Productivity can be lessened.
  • Efficiency can lack.
  • Corporate reputation can be damaged.
  • Bidding opportunities can be fewer.

A study sponsored by the Construction Industry Work Force Foundation has shown proactive implementation of safety and training systems in construction firms results in a:

  • 17-percent increase of productivity,
  • 9-percent reduction in turnover and absenteeism, and
  • a decrease in workers losing interest in their jobs.

How Can Safety Save You Money?

One way to have a direct effect on profitability is your workers’ compensation (WC) insurance cost. A factor used by insurance companies to develop the premium for WC coverage is called the Experience Modification Factor, or E-Mod. This is developed by the National Council of Compensation Insurance (NCCI), a U.S. rating and data collection bureau specializing in WC. Typically, if your E-Mod is 1.0 and your WC premium is $200,000, you would not see a difference in your premium.

To break it down, let’s say a company has a good safety record and has an E-Mod of 0.8. If that company’s typical WC premium is $200,000, it would pay $160,000, or 20 percent less. That saved $40,000 could help the company buy new equipment, pay better salaries, and bid more jobs. However, if a company has a poor safety record and an E-Mod of 1.4, its WC premium would be $280,000, or 40 percent higher. The loss of $80,000 impacts the ability to bid jobs aggressively as the contractor now has possibly lost the ability to bid on state or federal work. These entities want companies with E-Mods below 1.0, which shows a higher standard of job safety.

Another way to look at safety and its impact on company profits is the cost of a claim. Direct costs of claims include medical and compensation or indemnity payments. These are paid by the insurance company. Indirect or hidden costs include but are not limited to lost time of a supervisor investigating a claim, loss of efficiency due to breaking up a crew, and time for hiring a new employee.

Let’s look at this example. If an accident has direct costs of $20,000, the indirect costs can range from four to 10 times, or $80,000 to $200,000. Indirect costs come out of the bottom line of a company. Because they are not insurable, they have a negative impact on profitability.

Good contractor safety and performance records are no longer preferred—they are considered a necessity for survival. Not only is safety a smart investment, but good performance gives companies a competitive advantage.

For more profitability improving tips, check out MCAA thanks CNA for being a benefactor of MCAA 2016.