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A simple cost-benefit analysis

A simple cost-benefit analysis assumes that there is a reasonable expectation that a disabling injury is likely in the foreseeable future (five years) when employees are exposed (place themselves within a danger zone) to a workplace hazard. The object is to contrast the relatively high cost/low benefit if the hazard is not eliminated, with the low cost/high benefit if the hazard is eliminated.

The analysis answers the following questions:

  • What are the potential costs to the company if the hazard is not eliminated?

  • What are the potential costs to the company if the hazard is eliminated?

  • How soon will the corrective action pay for itself?

  • What is our return on investment (ROI) if corrective actions are taken?

Example: If, during a safety inspection, you notice that an elevated platform area in a warehouse does not have a proper guardrail. You note that several workers work on the platform each day, and a well-used walkway passes directly under the platform. To construct a cost-benefit analysis for this situation you would answer the above questions as follows:

What are the costs to the company if the hazard is not eliminated?

According to the National Safety Council, which considers all industries nationally, the estimated average direct and indirect costs of a lost time injury is about $34,000, and a fatality averages $1,150,000.

Indirect costs, according to the NSC figures above average 1.5x direct costs. However, it's important to understand that indirect costs may amount to much more than this multiple with any single claim. Indirect costs can be as much as 2x to 50x direct costs...or more. A few things to remember in when estimating indirect costs:

  • The lower the direct cost, the higher the ratio between the direct and indirect costs. For instance, if someone suffers only minor injury requiring a few hundred dollars to close the claim, the indirect/direct costs ratio may be much higher than the NSC average.

  • Capital intensive operations, where large sums have been invested in facilities, realize higher and average indirect/direct cost ratios. For example, if someone is seriously or fatally injured on a oil-drilling rig, resulting in operations shutting down for a day or so, many thousands of dollars in lost production will result. In capital intensive work processes, the expected indirect costs may be as high as 50x direct costs...or higher.

  • Labor intensive operations, where more investment is made in labor than capital assets, realize lower indirect/direct cost ratios. Someone may suffer a serious injury, but operations are not as likely to be significantly impacted. In labor intensive operations the expected ratio between indirect and direct costs may be as much as 10 to 1.
You can use these figures to demonstrate the benefits of taking corrective action.

What are the estimated costs to the company if the hazard is eliminated?

Costs: $1,500 needed to purchase and repair guardrail.

How soon will the corrective action pay for itself?

If a disabling injury occurs within the next 5 years, using National Safety Council figures we can estimate a direct/indirect cost to the company of approximately $28,000. Given the cost to purchase and repair the guard rail of $1,500. The corrective action will pay for itself in just 3.3 months ($1,500/($28,000/60 months)).

What is our return on investment (ROI) if corrective actions are taken? The ROI over the five year period will be $25,500 or 1,800 percent!

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